Supreme Court Vacates Nevada Damages Against California FTB

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By Laura Mahoney

April 19 — Nevada's award of $1 million in damages to inventor Gilbert P. Hyatt in his 22-year income tax fight with the California Franchise Tax Board was a hostile act that created an improper, discriminatory rule because it applied only to a sister state, the U.S. Supreme Court said.

In a 6-2 ruling, the court set aside the Nevada Supreme Court's award to Hyatt of $1 million in damages for fraud that far exceeded the state's own $50,000 cap on damages against a Nevada state entity. The high court set aside the damage award after splitting 4-4 on the issue of whether Nevada has jurisdiction over lawsuits brought in its courts against other states. Because of the split, the lower court ruling allowing such lawsuits stands.

The U.S. Supreme Court rejected the Nevada court's explanation that it departed from its own cap on damages because California's system of controlling its state agencies gave Nevada citizens inadequate protection. If left standing, the Nevada court's ruling could create “chaotic interference by some states into the internal, legislative affairs of others,” Justice Stephen G. Breyer said in writing for the majority.

“Such an explanation, which amounts to little more than a conclusory statement disparaging California’s own legislative, judicial, and administrative controls, cannot justify the application of a special and discriminatory rule,” Breyer said.

Nevada's policy of hostility toward California violates the U.S. Constitution's requirement that “Full Faith and Credit shall be given in each State to the public Acts, Records and judicial Proceedings of every other State,” the court said.

Second Time Around

The ruling is the second in Hyatt's marathon fight with the FTB stemming from his claims that the state tax agency violated his privacy and abused its authority during its audits. His underlying $55 million dispute over his 1990 residency and income tax liability on royalty payments from microcomputer chip patents is still pending before the State Board of Equalization, as well as federal appellate court (Hyatt v. Yee, 9th Cir., No. 15-15296 )  (52 DTR K-1, 3/18/15).

In Hyatt's first trip to the Supreme Court, he won a ruling in 2003 that Nevada didn't have to provide California with full immunity from damages that California has under its laws, but could choose to provide California with Nevada's lesser protections.

By the time Hyatt's case reached the U.S. Supreme Court the second time, the Nevada Supreme Court had already thrown out most of the $490 million in damages a trial court had awarded to him but upheld the $1 million in damages for fraud. The Nevada court sent his claims for intentional infliction of emotional distress back to the trial court without a cap, and the FTB appealed.

The FTB said in a prepared statement April 19 that the U.S. Supreme Court took the reasonable position that all government agencies be treated equitably in the courts of other states.

“We believe today’s decision shows an ‘end in sight’ to this 17-year-old litigation which has crossed state lines multiple times and gone before the United States Supreme Court twice,” the FTB said.

Roberts Dissents

In a dissent, Chief Justice John G. Roberts said Nevada had a sufficient policy interest in applying its laws, rather than California's, to protect Hyatt from the harm he alleges the FTB inflicted on him while he lived in Nevada.

If the majority is correct that Nevada doesn't have a policy justification for applying its immunity law, then California law applies and the board is entitled to full immunity, Roberts said. Or, if Nevada has a sufficient policy reason to apply its own law, the board is subject to full liability.

Instead, the court's decision requires a new, hybrid rule that gives the FTB partial immunity, the justice said.

Justice Clarence Thomas joined Roberts in the dissenting opinion.

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

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

For More Information

Text of the decision is in TaxCore.