Individual Income Tax Insights: U.S. Supreme Court Hears Arguments Over Sovereign Immunity, Full Faith and Credit, and Comity – What Would the Founding Fathers Do?


Hear ye, hear ye – although the 18th century has long passed, the U.S. Constitution’s formation in 1787 was largely the topic of discussion in the Dec. 7 oral arguments before the U.S. Supreme Court in California Franchise Tax Board v. Hyatt.  

A case that originated from alleged tax evasion in 1991 turned into constitutional analysis of the Founders’ intentions in 1787, as the U.S. Supreme Court heard arguments yesterday analyzing centuries of sovereign immunity discussions. This was the second time the court examined sovereign immunity with regard to this specific case.

It’s just like a tax dispute to drag on for over 20 years, and so it is with the alleged tax evasion and subsequent jury award of close to $500 million dollars for Gilbert P. Hyatt.  The real issue, however, is whether the U.S. Constitution allows a state and its agencies to be sued in the courts of another state, and if so, should other states be awarded the same immunity a state gives itself?  According to the Constitution and Justice Breyer during yesterday’s oral arguments, “Full faith and credit shall be given in each state to the public acts of other states.”

During oral arguments, most of the hour was spent discussing the issue of sovereign immunity and the original intention of the Founding Fathers trying to protect states from being haled into court for war debts during the 18th century. The concern of a state being haled into court against its will seems just as prevalent today as it did two centuries ago, as evidenced by the 45 states supporting the Franchise Tax Board as amici in this case.

It appears the Justices are confronted with the choice of either overruling Nevada v. Hall , which held a state’s immunity from suit in the courts of another state is not a constitutional right and is not anything more than a matter of comity, which is a voluntary agreement, or, in the alternative, leave states to decide such matters amongst themselves, possibly through compact agreements—only some of which require Congressional approval. The idea of states making such agreements between one another that could potentially oust, harm and cause unequal treatment of other states seemed displeasing to Justice Kennedy when he noted the possibility and stated, “That’s not part of our constitutional tradition at all.”

Of course, there are also some practical concerns for tax enforcement at stake. The Multistate Tax Commission noted in its amicus brief that adhering to Hall is likely to result in taxpayers essentially forum shopping to get the most favorable tax result, thus delaying states’ tax enforcement processes and interfering with states’ taxation cooperation.

With a significant amount of the oral arguments analyzing early American jurisprudence, the Framers' understanding of law with foreign nations and the Federalist Papers, it is likely safe to say that not much in the U.S. Supreme Court's history stays in the past.

What started as a tax dispute between Mr. Hyatt and California regarding residency and tax evasion, has transitioned into a major constitutional decision for the U.S. Supreme Court Justices with the potential of having a significant impact on state tax agencies and taxpayers alike.

Who knew state taxes could be so interesting?

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Does the U.S. Constitution provide protection from a state being sued in the courts of another state against its will?

For more information regarding this case, see “Justice Kennedy May Be Deciding Vote in Spat Between States” by Nicholas Datlowe in The Daily Tax Report.

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