Individual Income Tax Insights: Decades-Long Audit Saga Now Focused on California FTB’s Immunity


For the second time in a 22 year-long saga, the California Franchise Tax Board (FTB) filed a petition for writ of certiorari with the U.S. Supreme Court on March 23 in regard to its battle with Gilbert Hyatt, an inventor of computer technologies, over an audit.

The FTB is again arguing before the high court that it should enjoy complete sovereign immunity from Hyatt’s intentional tort claims stemming from its long-lasting audit of Hyatt. Complicating matters is that the tax agency is seeking to apply California’s sovereign immunity protection in a Nevada court proceeding.

Background

The case stems from Hyatt’s residency over two decades ago.

The facts — as recounted to various Nevada courts over the past 22 years — begin in 1993, when an auditor with the FTB read a newspaper article about Hyatt’s financial success. The article led him to look at Hyatt’s past income tax returns.

For the 1991 taxable year, Hyatt filed a part-year resident return, claiming that he moved and became a resident of Nevada on Oct. 1, 1991. The auditor noted upon inspection that Hyatt reported only a small fraction of his taxable income for the year and did not deduct moving expenses on his 1991 return, prompting an audit.

The audit began with an informative notice, asking Hyatt for information regarding his connections to California and Nevada, and it included a request for contact information of family members and friends. The FTB sent over 100 letters containing his social security number and address to various third parties. Hyatt’s estranged family members were contacted for information about his whereabouts during the audit period.

The FTB ultimately found that Hyatt stopped being a California resident on April 3, 1992 and imposed $10.5 million in penalties on him for civil fraud. Hyatt protested the FTB’s assessment through the proper administrative process, and it dragged on for 11 years. Hyatt currently is still challenging the audit conclusion in federal court, as reported by Laura Mahoney in Bloomberg BNA’s Daily Tax Report.

Lawsuit against the FTB

The saga does not end there. While Hyatt was waiting in 1998 for the FTB to handle his administrative protest, he filed a lawsuit for various torts against the FTB in a Nevada district court. Hyatt’s claims, among others, included: fraud, intentional infliction of emotional distress, invasion of privacy, breach of confidential relationship and abuse of process.

In Franch. Tax Bd. of California v. Hyatt, 538 U.S. 488 (2003), the FTB sought to avoid any tort liabilities and first brought its case before the U.S. Supreme Court, arguing that the Full Faith and Credit Clause required Nevada to “give full faith and credit to California’s statute providing its tax agency with immunity from suit.” The court held that the U.S. Constitution does not prohibit Nevada from refusing to apply California’s sovereign immunity statute.

The jury trial for the tort case resumed after the U.S. Supreme Court decision. After concluding that the FTB was liable to Hyatt for seven different intentional torts, the jury awarded Hyatt $139 million for tort damages and $250 million for punitive damages.

The FTB appealed the district court’s final judgment. In September 2014, the Nevada Supreme Court only affirmed the judgments for Hyatt’s fraud and intentional infliction of emotional distress claims. The court also upheld the damages for the fraud claim, but reversed the intentional infliction of emotional distress damages and remanded for a new trial as to damages.

Petition for Certiorari

The FTB continues its fight for sovereign immunity under California law by petitioning for writ of certiorari.

In its petition for cert, the FTB argues the following: 1.) government defendants who commit intentional torts or bad-faith conduct are immune under the federal discretionary-function immunity rule, 2.) a state may not refuse to extend to sister states haled into its courts the same immunities it enjoys in those courts, and 3.) a state should not be sued without its consent in the courts of another state.

Since the FTB filed its petition on March 23, the saga continues onward as the FTB challenges the Nevada Supreme Court’s decision and reasoning.

Continue the conversation on Bloomberg BNA’s State Tax Group’s LinkedIn page: Should the Supreme Court grant cert in California Franch. Tax Bd. v. Hyatt?

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