Business & Real Estate

California gets split verdict on tax case before U.S. Supreme Court

Gilbert Hyatt displays one of his micro computer chips in his La Palma, California home August 30, 1990.
Gilbert Hyatt displays one of his micro computer chips in his La Palma, California home August 30, 1990.

California’s tax collectors got a split verdict Tuesday from the U.S. Supreme Court in a multimillion-dollar fight with a wealthy computer-chip inventor from Southern California that’s been brewing for a quarter century.

The court, on a 4-4 vote, upheld Las Vegas entrepreneur Gilbert Hyatt’s right to sue the California Franchise Tax Board in Nevada state court over the way tax collectors have treated him. Hyatt claims the California investigators dug through his trash and violated his privacy in their effort to prove he was still a Californian when he came into millions.

The California agency did win a significant point, however. The Supreme Court ruled that under Nevada law Hyatt’s damage claim against California would be limited to a maximum of $50,000. A Nevada jury in 2008 awarded Hyatt around $490 million, although the Nevada Supreme Court later reduced the ruling to $1 million.

The U.S. court’s 4-4 vote is a result of the death of Justice Antonin Scalia, which has left a vacancy on the court. Because the court was evenly divided, the ruling of a lower court stands. It was the second time the Supreme Court had weighed in on Hyatt’s tax dispute; in 2003 it ruled for the first time that he had the right to go to court in Nevada.

The Franchise Tax Board, in a prepared statement, called Tuesday’s ruling a “reasonable position that all government agencies be treated equitably in the courts of other states.” In seeking the cap on damages, California officials noted that under Nevada law, Hyatt wouldn’t be able to recover more than $50,000 from a Nevada state agency – and shouldn’t have the right to collect a higher sum from a California agency.

Hyatt and the Franchise Tax Board are still fighting on another front. In February 2015, a federal judge in Sacramento dismissed a lawsuit Hyatt filed in an effort to halt the state’s efforts to collect his income taxes. The state contends that Hyatt left the state owing $7.4 million, a sum that has grown to $55 million with interest and penalties.

Hyatt’s tax fight dates to 1990. An inventor working from his home near Los Angeles, he was awarded a critical patent on the computer microprocessor. He says he moved to Nevada, which doesn’t tax personal income, in September 1991. California officials argued that he didn’t really switch residences until April 1992. During that seven-month stretch, he earned $7.4 million in patent royalties, according to California officials.

Eventually his royalties would grow to $350 million, California officials said, although the income earned between September 1991 and April 1992 is what’s in dispute.

Dale Kasler: 916-321-1066, @dakasler

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