Individual Income Insights: SCOTUS Grants Cert in California FTB v. Hyatt III

On June 28, 2018, the Supreme Court granted certiorari to hear the latest appeal in Franchise Tax Board of California v. Hyatt. Ongoing for nearly three decades, the case, which concerns principles of state sovereignty, will be making its third trip to the Supreme Court.

The facts of the case involve a taxpayer, Gilbert P. Hyatt, who had moved from California to Nevada in September 1991. Upon conducting an audit, the Franchise Tax Board claimed that Hyatt had moved during April 1992 after licensing a lucrative microprocessor patent and thus owed over $10 million in taxes, penalties, and interest. While California’s sovereign immunity law shields California state agencies from lawsuits based on actions taken during the course of collecting taxes, Hyatt sued the Board in Nevada state court, seeking damages for abusive audit and investigative procedures. Hyatt alleged that audit agents had sifted through Hyatt’s personal mail and garbage and had examined his personal activities at his place of worship.

Nevada v. Hall, a 1979 Supreme Court case, previously held that the Constitution allows Nevada’s courts to assert jurisdiction over California in a lawsuit brought by private citizens despite California’s lack of consent. California argued that state sovereign immunity, as granted by the Full Faith and Credit Clause, required Nevada to apply California’s sovereign immunity law to the Hyatt case. However, the Nevada Supreme Court rejected California’s claim, holding that, as a matter of comity, Nevada courts would immunize California to the extent Nevada law would similarly immunize its own agencies. Hyatt’s first victory in Hyatt I came when the Supreme Court unanimously upheld the Nevada Supreme Court’s decision that the Full Faith and Credit Clause did not require Nevada to apply California’s immunity law.

On remand, a Nevada jury awarded Hyatt $400 million in damages, which the Nevada Supreme Court reduced to approximately $1 million and not to the $50,000 cap that would apply in a similar suit against a Nevada agency under Nevada law. Then, in Hyatt II, the Supreme Court vacated and remanded the case with instructions to restrict damages to the $50,000 statutory limit. A majority of the court found that the Nevada court’s damages ruling violated the Full Faith and Credit Clause because it reflected a “‘policy of hostility to the public Acts’ of a sister State.” However, the justices were divided four against four on the first question presented—whether to overrule the court’s prior decision in Hall that the Constitution grants no state sovereign immunity in states’ courts.

The Supreme Court’s grant of certiorari in Hyatt III again presents the question—whether Nevada v. Hall, which permits a state to be haled into the court of another state, should be overruled. While the Full Faith and Credit Clause is based on laws of comity intended to encourage jurisdictions to respect judgments passed by courts in other jurisdictions, most often, the clause relates to choice of law disputes, where one jurisdiction applies the law of another jurisdiction. If interpreted literally, however, the Full Faith and Credit Clause would result in state courts obliged to enforce the laws of other states but not its own. The constitutional controversy in Hyatt I, II, and III, which has spanned nearly three decades so far, is exemplary of just how enigmatic the concept of state sovereignty can be.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Should the Supreme Court overrule Nevada v. Hall?

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