California Tax Board Tries Again to Toss Out Chip Inventor’s Suit

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By Laura Mahoney

The California Franchise Tax Board is trying one more time to end microchip inventor Gilbert P. Hyatt’s Nevada lawsuit against the tax agency stemming from a 25-year-old residency dispute.

California is asking the U.S. Supreme Court to revisit its 4-4 split in April 2016 on the question of whether Nevada has jurisdiction over lawsuits brought in its courts against other states. Because the Supreme Court justices split on the issue, a lower court ruling allowing such lawsuits stood.

Now that the Supreme Court has nine justices—with Justice Neil Gorsuch joining the bench after Justice Antonin Scalia’s death in February 2016—the state tax agency is seeking a majority opinion to overturn the court’s own 1979 ruling in Nevada v. Hall that allows one state to be sued in the court of another. California wants Hyatt’s case against the FTB in Nevada dismissed, arguing that all states should be immune from such actions.

“The State of California has been subjected to an astonishing intrusion on its dignity by being forced to defend the conduct of a core sovereign activity—its assessment of state taxes—in the courts of another State,” the FTB said in its petition for review filed March 12. “Other states should not be put to the burdens the FTB has faced here—two decades of litigation and the need to fight off a verdict in the hundreds of millions of dollars—before the Court has another chance to decide the question presented.”

Hyatt’s response to the petition is due April 13.

Third Time Around

If the Supreme Court agrees to review the case, it would be the third time that Hyatt’s marathon fight with the FTB reaches the justices. Hyatt sued the FTB in Nevada in 1998, claiming the tax agency violated his privacy and abused its authority during audits into his residency. A 2008 trial court award of $490 million for fraud, invasion of privacy, emotional distress, and punitive damages was thrown out in various stages. Most recently, in December 2017 the Nevada Supreme Court capped Hyatt’s damages at $50,000 following the U.S. Supreme Court’s 2016 ruling to set aside punitive damages exceeding the state’s own cap of the same amount.

Although the Supreme Court set aside the damages in a 6-2 ruling, the justices split on the question of whether to overturn Nevada v. Hall and block one state from being hauled into another state’s court.

Sovereign Immunity

Given the Nevada Supreme Court’s judgment, a lower Nevada trial court only needs to enter a final judgment against the FTB, determine which party is the prevailing party, and entertain requests for costs and attorney’s fees, according to the FTB’s petition for review.

So that if the Supreme Court recognizes the FTB’s claim of sovereign immunity, the case finally will be dismissed, according to the FTB.

“If the U.S. Supreme Court were to overturn Nevada v. Hall, that would likely be the end of the litigation in Nevada,” an FTB spokesman told Bloomberg Tax March 19.

Citing the Federalist Papers, the Eleventh Amendment to the U.S. Constitution, and court rulings from 1781 and 1793, the FTB said Nevada v. Hall “stands in sharp conflict with the Founding-era understanding of state sovereign immunity.” Supreme Court rulings since the 1979 ruling also repudiate the holding in that case, the FTB said.

A Long Saga

The saga of the Nevada case is one of several lawsuits, appeals, and jury verdicts that have produced a mixed bag of rulings for both sides stemming from FTB’s claims that Hyatt was a resident in California, not Nevada, when he earned $80 million in patent licensing agreements on computer chips invented in 1991 and 1992. The FTB has appealed its administrative loss before the State Board of Equalization on its residency claims in August 2017 to the new California Office of Tax Appeals.

In another venue, a federal appellate court in California said in September 2015 that Hyatt couldn’t claim he’s been denied a “plain speedy and efficient” remedy if he didn’t exhaust his administrative options by taking his underlying tax appeal before the SBOE. Hyatt also filed suit in New York along the way in an attempt to block subpoenas the FTB issued to obtain licensing records tied to U.S. Philips Corp.

The case is Cal. Franchise Tax Board v. Hyatt , U.S., 17-1299, petition for review filed 3/12/18 .

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

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

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