Capitol Alert

After 24 years, wealthy inventor gets his day in tax court – and wins

A California tax board slashed millions of dollars in taxes and penalties that a wealthy computer chip inventor faced after state tax collectors accused him of fabricating a move to Nevada just as he started to cash in on a lucrative patent he obtained in 1990.

The Board of Equalization on Tuesday determined that Gilbert Hyatt, now nearing 80, was actually a Nevada resident during most of the six-month period 26 years ago when state tax collectors say he lied about his residence to dodge California taxes.

“Thank you so much. After 26 years or more, (it’s) finally over with,” Hyatt told the tax board at 10:30 p.m. Tuesday, the end of a 13-hour meeting that focused almost entirely on his tax dispute.

But Hyatt did not get a complete win in a feud with California tax auditors that dates back to a 1993 audit by the Franchise Tax Board, the department that collects personal income tax.

The Board of Equalization, which is the final arbiter of tax disputes, by a 3-2 vote concluded that Hyatt’s business was developed and operated out of California several months after his move to Nevada, exposing him to a portion of the original income taxes he owed from 1991.

The tax board did not disclose Hyatt’s new revised tax bill. Going into the hearing, he was expected to owe at least $55 million in taxes, penalties and interest from his initial fines, according to filings from related court cases.

That figured swelled from an original $13.3 million bill that the Franchise Tax Board said Hyatt owed for taxes and fraud penalties from 1991 and 1992.

A series of split Board of Equalization votes waived $5.7 million in fraud penalties and $5.7 million in taxes from 1992. That means Hyatt now faces charges for $1.9 million in taxes he owes from 1991 and interest that has accumulated on that sum since then.

The long-running case has twice reached the U.S. Supreme Court and consumed more than $25 million of resources by California’s Franchise Tax Board. Hyatt has an ongoing civil lawsuit against the state that’s moving forward at the 9th Circuit Court of Appeals.

He reported $101.8 million in profit on tax returns from 1991 and 1992, but said he earned just $600,000 while he was in California.

Hyatt has cast himself as the victim of overzealous tax collectors who were out to “get” him. He once won a judgment from a Nevada jury that would have required the Franchise Tax Board to pay him almost $490 million in damages. The Supreme Court last year shrank the award to $50,000.

The Franchise Tax Board began investigating Hyatt in 1993, suspecting he avoided California income tax by fraudulently claiming he had moved to Nevada in September 1991.

“I’ve waited 20 years for this opportunity,” Hyatt told the Board of Equalization as he began an initial 80-minute presentation describing his steps in late 1991 to sell his home in La Palma of Orange County and move to Las Vegas.

California auditors obtained records showing he was regularly in California in the fall of 1991, including sending and receiving business-related faxes at a home he sold to a friend in October of that year and serving as the grand marshal of a local parade that November.

The move looked suspicious to auditors in part because Hyatt did not use a real estate agent to sell his home and instead worked out an unusual agreement with a longtime friend and assistant. She took the house in the condition that he left it, including furniture, and paid him over six years. State tax collectors said they did not believe Hyatt ever received money for the $175,000 sale.

Hyatt in the fall of 1991 flew out of the Los Angeles airport for business trips that fall and used a post office box in Cerritos for patent-related work. In 1992, the Franchise Tax Board argued that Hyatt’s business continued to be managed out of California through meetings and through faxes sent to his former house in Orange County.

The documents “show (Hyatt) never left” California, said William Hilson of the Franchise Tax Board.

Hyatt insisted California tax collectors misinterpreted documents they obtained years after his move to Nevada. He said his business partners mistakenly sent documents to his former home in La Palma after he moved, and 22 of his neighbors have testified that he actually left California in October 1991.

He submitted more than 230 affidavits from different former neighbors and business partners who supported his argument. He conceded that he paid for attorneys who represented some of them.

“I don’t understand how anyone in good faith could argue that I was a California resident during the disputed period,” Hyatt told the board.

At the hearing, Hyatt was flanked by three of his representatives – attorney Edwin Antolin, accountant Michael Kern, and former Assemblyman and Board of Equalization member Bill Leonard. But Hyatt chose to speak for himself at the 12-hour hearing.

“I’m an open book for you,” he told Board of Equalization member Jerome Horton when Horton late in the hearing asked why Hyatt’s assistants were not helping answer questions.

Hyatt poked the state’s lawyers several times, continually calling their arguments “absolutely untrue” and saying he had eye-witness testimony supporting him while the Franchise Tax Board based its case on “lawyers’ arguments making up stories.”

By a 3-2 vote, the board determined that Hyatt was a Nevada resident as of Oct. 20, 1991, the day a lease took effect for Hyatt’s Nevada apartment. The Franchise Tax Board has considered him a California resident until April 3, 1992, when he moved into a 5,400-square-foot home he bought in Las Vegas.

Board members Fiona Ma and Betty Yee sided with the Franchise Tax Board, holding that Hyatt did not establish his Las Vegas home until 1992. They said he failed to provide basic documents to prove he had moved to Nevada in 1991, such as utility bills.

“You’re a sophisticated businessman, Mr. Hyatt. I don’t know where the records are or if they exist, but I just expected more,” Yee said. “You were still running a business in California.

Board members Horton, Diane Harkey and George Runner said they were persuaded by statements from Hyatt’s former neighbors who told attorneys that Hyatt had left California by October 1991.

Horton joined Ma and Yee in another vote that determined Hyatt managed his business primarily out of California even after his move to Nevada in 1991. That decision is the root of the taxes Hyatt still faces.

But Horton again sided with Harkey and Runner on a 3-2 vote that waived Hyatt’s 1992 taxes.

Separately, the board decided by a 4-1 vote that Hyatt did not intentionally commit fraud by misleading the California tax collector. Yee voted against the majority.

Adam Ashton: 916-321-1063, @Adam_Ashton

Related stories from Sacramento Bee