Business & Real Estate

California wins a round in epic tax fight with Nevada inventor

Former Orange County inventor and entrepreneur Gilbert Hyatt, holding a microprocessor in a 1990 file photo, has been fighting with state officials for more than 20 years about his California income taxes.
Former Orange County inventor and entrepreneur Gilbert Hyatt, holding a microprocessor in a 1990 file photo, has been fighting with state officials for more than 20 years about his California income taxes. Associated Press file

California’s tax collectors have been fighting with inventor and entrepreneur Gilbert Hyatt for 22 years, demanding he pay tens of millions of dollars on the income he earned after winning a patent for computer chips.

It’s been an epic fight, drawing the attention of constitutional scholars and the U.S. Supreme Court. Hyatt, who moved from Southern California to Las Vegas after obtaining his patent, won a nearly $500 million judgment seven years ago over how he’s been treated by investigators from the California Franchise Tax Board.

But he’s been unable to shut down the investigation itself, and a federal judge in Sacramento has just ruled that California can proceed with its case.

The judge dismissed a lawsuit by Hyatt demanding that the Franchise Tax Board and the state’s other tax agency, the Board of Equalization, halt their efforts to collect $55 million that California officials say he owes. The FTB collects state income tax, while the Board of Equalization handles taxpayers’ appeals of FTB decisions and is overseeing Hyatt’s protest.

Hyatt’s suit accused the state of conducting a “20-plus-year vendetta” against him. Because the investigation had dragged on for so long, with witnesses dying and memories going fuzzy, he said getting a “full and fair hearing” is impossible. Hyatt, 76, also suggested that California officials were stalling so he’d die before the matter was resolved, figuring it would be easier to deal with his heirs. The state argued that the delays were mainly Hyatt’s fault, not California’s.

U.S. District Judge Garland Burrell Jr. sided with the state, saying Hyatt didn’t prove he couldn’t get a fair shake. The judge said Hyatt’s motives are obvious: “to void the tax or taxes assessed against him.”

Hyatt’s lawyers, including noted constitutional expert Erwin Chemerinsky of the UC Irvine School of Law, are appealing. Chemerinsky said he’s working on the case free of charge because of the “unfairness” of how Hyatt has been treated.

“I think it’s a real injustice,” Chemerinsky said. “He’s been denied due process.”

The ruling represented a rare setback for Hyatt, who so far has gotten the best of California authorities.

After moving to Las Vegas, he sued the Franchise Tax Board for violation of privacy and emotional distress, saying auditors rifled through his mail and trash, leaked details of his private life and told business partners he was under investigation. When California tried to get the suit dismissed, the U.S. Supreme Court took the case in 2003 and ruled that Hyatt had a right to go to trial.

Five years later, a Las Vegas jury awarded Hyatt a stunning $388 million, including $250 million in punitive damages. With interest, the total judgment came to $490 million.

The verdict turned the world of tax law upside down. When the Franchise Tax Board appealed to the Nevada Supreme Court, the attorneys general of 19 other states filed a brief on California’s behalf, saying the jury verdict was having a chilling effect on tax investigators across the land. California’s lawyers said the investigators did nothing improper and called the verdict “flagrantly excessive.”

Nevada’s Supreme Court threw out much of the verdict last fall, except for $1.2 million awarded for fraud, according to the Franchise Tax Board. The court said Hyatt is entitled to damages for emotional distress, but ordered a new trial on the amount of money he deserves (the original jury gave him $85 million).

Despite the Nevada court’s ruling, the case is seen as a major rebuke to the Franchise Tax Board, which has a reputation for aggressiveness.

“He brought out many important issues in his trial about how taxpayers are treated by the FTB,” said David Kline, spokesman for the California Taxpayers Association. “The behavior that he alleged and brought up in the Nevada court case – it was shocking.”

Hyatt was already a controversial figure when California began digging into his finances. In 1990, Hyatt, who mainly worked from his home near Los Angeles, was awarded the patent on the microprocessor, the guts of the personal computer. It was a shocker in the computer world, where it was widely assumed that the microprocessor had been invented at Intel Corp. and Texas Instruments.

Even as many in the industry reacted with scorn, Hyatt turned the patent into gold. He earned $350 million in royalties, according to the Franchise Tax Board.

The tax dispute soon followed. Hyatt said he moved to Nevada, which has no state income tax, in September 1991. California officials said Hyatt lied about his residency and didn’t really move until the following April.

That seven-month difference became the foundation of the dispute. The Franchise Tax Board declared that Hyatt owed California about $7.4 million for income earned during that window of time. With interest and penalties, the sum has grown to more than $55 million over the past two decades.

Call The Bee’s Dale Kasler, (916) 321-1066. Follow him on Twitter @dakasler.