California tax fight headed to U.S. Supreme Court

A nasty, 24-year-old fight between California’s tax collectors and a computer-chip entrepreneur living in Nevada is headed to the U.S. Supreme Court – for the second time.

The court agreed Tuesday to hear the California Franchise Tax Board’s appeal of a Nevada jury verdict awarding entrepreneur Gilbert Hyatt a nearly $500 million judgment over how the tax collectors treated him. The judgment was later reduced to $1.2 million, although Nevada courts said Hyatt could collect additional damages if he can prove emotional distress.

California appealed the entire case, and the Supreme Court agreed to take up the matter at its next term starting in October.

The arguments will focus on a fairly arcane legal issue: whether Hyatt can use the Nevada courts to sue the state of California.

In their petition to the Supreme Court, California’s lawyers argued that “sovereign immunity does not allow a sovereign state to be placed at the mercy of foreign juries. ... FTB should have never been subjected to suit in the Nevada courts in the first place.”

The Hyatt case dates to 1990, when Hyatt, an inventor working from his home outside Los Angeles, won a crucial patent on the computer microprocessor.

In September 1991, Hyatt said, he moved to Nevada, which doesn’t tax personal income. California officials said Hyatt didn’t really move until April 1992.

The dispute over those seven months formed the basis of the fight. The Franchise Tax Board said Hyatt earned $7.4 million in patent royalties during that time. (Eventually, his royalty income would top $350 million, California officials say.)

The case has gone back and forth for years. Hyatt sued the tax board for violation of privacy and emotional distress, saying investigators went through his trash and told potential business partners he was being investigated. In 2003, the U.S. Supreme Court ruled that he had the right to take the California agency to court in Nevada state court. A jury in 2008 awarded him $490 million, including $250 million in punitive damages.

Now the Supreme Court will essentially rehear the same arguments about whether California can be sued in the Nevada court.

Meanwhile, the other half of the fight continues to rage. In February, a federal judge in Sacramento dismissed a separate lawsuit Hyatt filed in which he sought to halt the state’s effort to collect those taxes from 1991 and 1992. While the original sum was $7.4 million, the state says the figure has grown to $55 million with interest and penalties.

This story was originally published July 1, 2015 at 8:57 AM with the headline "California tax fight headed to U.S. Supreme Court."