Chip Inventor Wins $55 Million California Tax Fight

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By Laura Mahoney

Computer chip inventor Gilbert P. Hyatt’s 24-year fight with the California Franchise Tax Board paid off for him with the State Board of Equalization ruling late Aug. 29 that he doesn’t owe most of the $55 million the FTB claimed he did.

The five-member elected board ruled in Hyatt’s favor that he was a resident of Nevada, not California, in late 1991 and early 1992 when he earned millions of dollars from patent licensing agreements. The board also abated $5.7 million in fraud penalties sought by the FTB ( Appeal of Gilbert P. Hyatt, Cal. Board of Equalization, 435770, 446509, 8/29/17 ).

The board made one ruling against Hyatt that his earnings in 1991 were California-source income because the activity to produce the income occurred in California. But earnings in 1992 weren’t generated in the state, the board said.

Rather than owing $55 million in taxes, penalties, and interest that has accrued since 1992, Hyatt owes $1.9 million in tax for 1991 and the interest on that amount.

Hyatt earned tens of millions of dollars from patent licensing agreements with U.S. Philips Corp., Fujitsu Ltd., Hatachi Ltd., Matsushita Electrical Industrial Co. (now Panasonic Corp.), NEC Corp., and Sony Corp.

Frugal Inventor

Now almost 80 years old, Hyatt has fought the FTB since it first asked in 1993 whether he was a California resident when he earned millions for patent licenses in the previous two years, taking his fight to the U.S. Supreme Court twice. Hyatt spoke for himself for the entire 10-hour hearing before the board despite having a lawyer, accountant, and former SBOE member at his side to represent him.

Calling himself a “frugal inventor” who furnished his homes with garage sale finds, Hyatt persuaded the board to vote 3-2 to set Oct. 20, 1991, as the date he became a Nevada resident. That was the date he rented an inexpensive apartment in Las Vegas that was partially subsidized by the U.S. Department of Housing and Urban Development. He bought a home in Las Vegas April 3, 1992, and still lives there.

The Oct. 20 residency date is three weeks later than the Sept. 26 date Hyatt claimed he moved from the Los Angeles town of La Palma, but was a victory nonetheless. Hyatt repeatedly told the board members the FTB auditors fabricated evidence and had a vendetta against him as they insisted he didn’t move to Nevada until April 1992.

“The auditor said she was going to get me, and the FTB spent the last 20 years or so trying to get me,” he said.

Documents v. Witnesses

The FTB maintained that Hyatt falsely claimed that he moved to Nevada within days of learning he would earn at least $80.5 million from licenses on his microprocessor patents.

FTB Deputy Chief Counsel William C. Hilson unsuccessfully argued that contemporaneous documents, including mail, faxes, and multimillion dollar contracts showing he continued to live and conduct business out of his Los Angeles-area home between Sept. 26, 1991, and April 3, 1992, outweighed the hundreds of affidavits Hyatt’s lawyers obtained from witnesses to back his story that he moved to Las Vegas. Many of the witnesses offered their testimony 20 or more years after the events in question.

“The documents may not possess a human voice, but they speak loudly, clearly, and with infallible memory,” Hilson said.

Multiple Votes

SBOE Chair Diane Harkey (R) and member Jerome Horton (D) voted with member George Runner (R) in favor of his motion to set Hyatt’s Nevada residency date as Oct. 20, 1991, saying the affidavits were credible. Horton faulted the FTB for failing to impeach the affidavits more thoroughly.

Member Fiona Ma (D) and State Controller Betty T. Yee (D) voted against Runner’s motion, saying the evidence showed Hyatt was in Nevada only for transitory purposes during the disputed period and was still running a business in California.

Ma voted with Horton, Runner, and Harkey to relieve the fraud penalties FTB had imposed on Hyatt for both tax years at issue. Those amounts were $1.4 million for 1991 and $4.3 million for 1992.

With the residency question resolved, the board turned to the FTB’s argument that the millions he earned from patent licenses in 1991 and 1992 were still California-source income that should be taxed in the state. The FTB argued the meetings, communications, contracts, and other evidence showed the activities creating the income occurred in California in both years.

California Source

In separate actions, the board voted 3-2 to find that Hyatt’s 1991 income was sourced to California, then voted 3-2 that his 1992 income wasn’t sourced to California. Horton was the swing vote, siding with Yee and Ma that the income was taxable in 1991 and voting with Runner and Harkey that it wasn’t taxable in 1992.

Yee argued that Hyatt continued the same business practices in 1992 that resulted in his income being sourced to California in 1991, such as meeting with lawyers and executing patent license contracts in California. The other board members agreed with Hyatt that he wasn’t engaged in a California business in 1992, and the income he received that year was tied to business activity that occurred in 1991.

The board’s rulings on sourcing mean Hyatt owes $1.9 million in tax plus interest for 1991, but doesn’t owe $5.7 million in tax or interest on that amount for 1992.

Hyatt thanked the board for its rulings in his case after the members cast their final votes at about 10:30 p.m. Aug. 29. Hyatt’s hearing before the board began at 9:30 a.m., with a few breaks during the long day.

Tort Lawsuit

The SBOE’s rulings cap Hyatt’s odyssey against the FTB that includes two U.S. Supreme Court rulings stemming from a tort lawsuit he filed in Nevada against the FTB. In those rulings 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. Hyatt 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.

Because the amount in dispute is more than $500,000, the SBOE will issue a written ruling explaining its actions within 90 days. The ruling will come back to the board for a final approval.

Hyatt is represented by Edwin P. Antolin with Antolin Agarwal 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 summary for 1991 is at http://src.bna.com/r0L.

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

The webcast of the hearing is at http://src.bna.com/r0O.

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