Taxpayer dispute with CA Franchise Tax Board heads to Supreme Court

In July, the U.S. Supreme Court agreed to hear California Franchise Tax Board v. Hyatt, a case that has its origins in a tax dispute dating back to the early 1990s.

The dispute's origin is a 1993 news article about inventor and entrepreneur Gilbert Hyatt. The article profiled Hyatt and tells the story about a micro-chip patent he was awarded in 1990 while living in the Los Angeles, California, area. Among other things, the article discussed the royalties Hyatt had received, an amount a California Franchise Tax Board (FTB) auditor discovered to be at odds with Hyatt's reported income for 1991 and 1992. According to the FTB, to date Hyatt has received more than $350 million in royalty payments on the patent, but the only royalty income at issue dates to tax years 1991 and 1992. At issue is whether, for tax purposes, Hyatt was a resident of California during those periods.

The FTB disputes Hyatt's claim that he has been a resident of Nevada, a state where there is no personal income tax, since September 1991. The FTB asserts that Hyatt was a resident of California until April 1992 and assessed state income taxes based on that date. For the 7-month period from September 1991 to April 1992, the FTB says Hyatt's income was $7.4 million for which he now owes roughly $55 million including interest and penalties. The unpaid taxes are still in dispute.

Incident to the FTB's investigation, Hyatt sued the FTB in Nevada for various torts including violation of privacy and emotional distress based on the FTB's behavior which included searching his trash, contacting potential business partners to alert them to the investigation and releasing his name, address and Social Security number.

On these claims a jury found that the FTB "misrepresented the audits' processes" and awarded Hyatt $139 million in damages, including $250 million in punitive damages. On appeal, the court lowered the award substantially holding that no invasion of privacy recovery was appropriate because Hyatt's name, address and Social Security number were already publicly available, that no breach of confidential relationship occurred and that there was no abuse of process. With respect to Hyatt's emotional distress claim, the court said it was substantially proven but reversed the award citing problems with certain evidentiary and jury-instruction rulings. Further, the court held that punitive damages were not appropriate. The remaining award consisted of "special damages" of $1 million for the FTB's fraud and $2.5 million in costs. On appeal the Supreme Court will determine whether the California FTB has immunity and cannot be sued in Nevada courts.

Speak to a tax litigation lawyer

Disputes with California state tax authorities or the IRS can quickly become complicated and time-consuming. If you have questions about or need help in matters involving federal or California taxation law, contact The Tax Litigation Law Office of Scott Kauffman today to schedule a consultation.