California won the last round of a 26-year fight to collect personal income tax from a wealthy inventor who moved to Nevada just before he cashed in on a lucrative patent.
The 5 to 4 decision from the Supreme Court will not send any new tax revenue to California. It overturned a case in which the Nevada Supreme Court had ordered California to pay $100,000 to entrepreneur Gilbert Hyatt, who contested California’s effort to collect tax from him.
It was the third time that the Supreme Court ruled on a case stemming from California’s attempt to collect tax from Hyatt.
The majority opinion, written by Justice Clarence Thomas, held “that States retain their sovereign immunity from private suits brought in the courts of other States.”
Justices John Roberts, Samuel Alito, Neil Gorsuch and Brett Kavanaugh joined Thomas in the decision. Justices Stephen Breyer, Ruth Bader Ginsburg, Sonia Sotomayor and Elana Kagen dissented.
The Franchise Tax Board, which collects personal income tax in the state, conducted an audit of Hyatt in 1993, ruling that he owed $13.3 million for taxes and fraud penalties in 1991 and 1992.
While Hyatt claimed he had moved to Nevada — which does not collect personal income tax — in September 1991, California auditors obtained records showing the wealthy computer chip inventor 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.
Hyatt sued the tax board in the state of Nevada in 1998, alleging several violations, including negligent misrepresentation, intentional infliction of emotional distress, fraud, invasion of privacy, abuse of process, and breach of a confidential relationship.
The Franchise Tax Board countered that, arguing that under the Full Faith and Credit Clause of the constitution, Nevada courts must apply California’s statute immunizing the state’s tax collectors from liability. The Nevada Supreme Court rejected that argument, citing a 1979 Supreme Court ruling.
The Supreme Court initially upheld Hyatt’s right to sue the state agency in Nevada court. A jury trial in Nevada later awarded Hyatt $490 million in damages. That award was reduced over the course of several appeals.
The case again worked its way up to the Supreme Court, and with one seat vacant in 2016, the justices split 4 to 4, effectively upholding the Nevada ruling.
The court’s decision on Monday overruled precedent established by a 1979 decision, Nevada v. Hall, arguing that that ruling “misreads the historical record” and “is contrary to our constitutional design.”
The California Franchise Tax Board “is thus immune from Hyatt’s suit in Nevada’s courts” and “the judgment of the Nevada Supreme Court is reversed,” the decision says.
The Supreme Court’s ruling will make it easier for California to chase down tax cheats in the future, but it has come at significant cost. The case consumed more than $25 million of Franchise Tax Board resources over the course of 26 years.
Hyatt won an important decision two years ago that capped his liability. He appeared before the state Board of Equalization, which at the time was the final arbiter of income tax disputes in California government.
The board waived $5.7 million in fraud penalties and $5.7 million in taxes from 1992. That left Hyatt with charges for $1.9 million in taxes he owed from 1991 and interest that has accumulated on that sum since then.
Going into the hearing, Hyatt was expected to owe at least $55 million in taxes, penalties and interest from his initial fines, according to filings from related court cases.
The board determined that Hyatt was actually a Nevada resident during most of the six-month period when state tax collectors say he lied about his residency. But by a 3-2 vote, the board 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. It did not disclose his final bill.
Hyatt also lost a civil case against the tax board in the Ninth Circuit Court of Appeals in 2017.