$55M Tax Dispute Heads to California Board After 24 Years

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By Laura Mahoney

Computer chip inventor Gilbert P. Hyatt’s odyssey to block the California Franchise Tax Board from levying income tax on his patent license earnings is set for an Aug. 29 hearing that is 24 years in the making.

Hyatt has been to the U.S. Supreme Court twice since the FTB first asked in 1993 whether he was a California resident when he earned millions for licenses on his patents in the previous two years. The Supreme Court rulings stemmed from his lawsuit in Nevada against the FTB where he won, then lost, a $490 million jury award for his claims that the agency violated his privacy and abused its authority by, among other things, rooting through his garbage. He also filed suit in New York in an attempt to block subpoenas the FTB issued to obtain licensing records tied to U.S. Philips Corp.

A federal court judge in California said in 2015 that Hyatt can’t claim he’s been denied a “plain speedy and efficient” remedy if he hasn’t exhausted his administrative options by taking his underlying tax appeal before the State Board of Equalization. He has appealed that federal ruling and is also waiting for resolution of his Nevada tort claims.

Even with cases still pending in other venues, the 24-year prelude of lawsuits, appeals, jury verdicts, and a mixed bag of rulings for both sides, the tax dispute could come to a conclusion when the SBOE hears Hyatt’s appeal. It could be the highest profile case the five-member elected board will decide before its appellate duties shift to a new Office of Tax Appeals in January ( Appeal of Gilbert P. Hyatt, Cal. Board of Equalization, 435770, 446509, hearing scheduled 8/29/17 ).

$55 Million at Issue

At issue is tax of $1.9 million for 1991 and $5.7 million for 1992, along with fraud penalties of $1.4 million and $4.3 million for the same years, respectively, according to the case summaries for 1991 and 1992 prepared for the board by the SBOE Appeals Bureau. Accruing interest brings the total to more than $55 million, according to Hyatt’s court filings in other venues.

The case is old enough that some of the arguments turn on whether Hyatt was regularly sending and receiving faxes from California or Nevada. Some witnesses offered affidavits for Hyatt more than 20 years after the events in question, prompting the SBOE appeals staff to suggest in its hearing summaries that board members consider the passage of time between the events and the affidavits when making their decision.

The FTB is claiming that Hyatt was a California resident from Sept. 26, 1991, through April 2, 1992. Hyatt claims he moved to Las Vegas on Sept. 26, 1991, partly motivated by an invitation from investor, casino owner, and Republican mega-donor Sheldon Adelson to work for him.

The SBOE must decide whether Hyatt was a resident of California during the months at issue, and if he wasn’t, whether the income is still taxable as California-source income. The board also must weigh whether the FTB properly imposed the fraud penalty and whether Hyatt has a legal basis to argue that interest should be abated.

$80.5 Million in Payments

By Sept. 25, 1991, Hyatt knew he would receive $80.5 million in licensing contracts with firms including U.S. Philips Corp., Fujitsu Ltd., Matsushita Electrical Industrial Co. (now Panasonic Corp.), NEC Corp., and Sony Corp, according to the FTB. He began receiving millions of dollars in payments in October, just after he claimed he moved to Las Vegas.

Hyatt claims he moved from his home in the Los Angeles-area city of La Palma on Sept. 26, 1991, driving his 1977 Toyota Celica and pulling a trailer of his belongings after selling the home to friend and work associate, Grace Jeng.

The FTB claims the sale wasn’t recorded until June 1993, when Hyatt had a notary backdate documents to claim an Oct. 1, 1991 sale to Jeng. Hyatt also failed for five years to say where he was for the three weeks after Oct. 1, and ultimately claimed he stayed at a Las Vegas hotel that had since closed. No records remain from the defunct hotel.

Hyatt claims that after staying in the hotel, he rented an inexpensive apartment for six months before buying a house in Las Vegas. The FTB claims that he was still living in La Palma, serving as the Grand Marshal of the La Palma Day Parade on Nov. 9, 1991, and meeting numerous times with attorneys, doctors, and other associates in Los Angeles.

Daily Commute

According to the hearing summary, Hyatt changed his position that he wasn’t in California on dozens of days in question after the FTB obtained evidence such as billing reports from his lawyer showing that he was in Los Angeles on those days. He then said he traveled back and forth between Las Vegas and Los Angeles on most of those days.

The FTB claims he hasn’t submitted receipts or other documentation to show that he traveled back and forth. The SBOE staff notes it would take 8 or 9 hours to drive back and forth in one day.

Hyatt has submitted more than 220 affidavits on more than 150 topics along with more than 10,000 pages of exhibits to support the declarations. He created 27 deposition tables with more than 800 excerpts, produced 15 tables of documents related to the Philips license agreement, and provided more than 15,000 pages of Philips documents well before the FTB subpoenaed them, according to the hearing summary. He claims the FTB’s exhibits have 2,000 falsehoods that he has identified, explained, and corrected with eyewitness and documentary evidence.

Immeasurable Evidence

The evidence he has submitted “is so extensive that it is virtually immeasurable,” the staff summary quotes from his briefings to the SBOE.

Hyatt also faults the FTB for delay and lack of organization in the many years it has taken to resolve the case. The FTB, for its part, claims it needed to put the underlying tax dispute on hold at different times over the years depending on what was happening in the many other venues in which Hyatt was challenging the tax agency.

“It will be up to the judgment of the board, as the finder of fact, to weigh the totality of the evidence,” the SBOE Appeals Bureau said in the case summary prepared for the board.

Hyatt is represented by Edwin P. Antolin with Antolin Agarwal & Chatterjee LLP in Walnut Creek, Calif.; Michael W. Kern with certified public accounting firm Piercy Bowler Taylor & Kern in Las Vegas; and former SBOE Member Bill Leonard (R).

The FTB is represented by Deputy Chief Counsel William C. Hilson Jr. and tax counsels Scott DePeel and Ann Hodges.

To contact the reporter on this story: Laura Mahoney in Sacramento, Calif. at LMahoney@bna.com

To contact the editor responsible for this story: Jennifer McLoughlin at jmcloughlin@bna.com

For More Information

The hearing will be webcast at 9:30 a.m. Aug. 29 at http://src.bna.com/r0O.

The hearing summary for 1991 is available at http://src.bna.com/r0L.

The hearing summary for 1992 is available at http://src.bna.com/r0M.

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