A California tax board is scheduled this week to finally resolve a 24-year dispute that could blow a hole in the state budget.
The Board of Equalization will decide whether former Southern California inventor Gilbert Hyatt was a La Palma resident when he started cashing in on the proceeds from a lucrative microprocessor patent he received in 1990.
Hyatt maintains he had moved to Las Vegas by the time most of the money started rolling in; state tax collectors contend he was a California resident for longer than he admits.
If Hyatt wins, the state may have to pay him tens of millions of dollars in legal fees he’s accumulated since auditors at the Franchise Tax Board began investigating him in 1993. H.D. Palmer, spokesman for the Department of Finance, said state officials are watching the case because of its potential to affect the general fund.
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If the state wins, Hyatt would be on the hook for at least $13.3 million in taxes and penalties from 1991 and 1992. At past court appearances, the state has argued that Hyatt owes more than $55 million when interest is tacked on to those initial charges.
The saga could end on Tuesday if the Board of Equalization, an elected tax board that has authority over personal income tax complaints, sides with Hyatt, now approaching 80.
The Franchise Tax Board, which conducted the audits that determined Hyatt failed to report income he earned in California, cannot appeal decisions by the Board of Equalization. If Hyatt loses, he’ll be able to pursue an appeal in civil court. In fact, he has a case moving forward at the U.S. 9th Circuit Court of Appeals.
But the clock is ticking on the Board of Equalization.
In January, it’ll lose most of its authority as California’s tax court and be replaced by a new Office of Tax Appeals. The new office will be staffed with appointed administrative law judges instead of the elected officials who now preside over tax disputes.
That means any delay this week could push the long-running case into the new tax appeal system lawmakers created in June when they voted to strip the Board of Equalization of most of responsibilities after a series of scandals suggested it had misused public resources and failed to properly allocate taxes among different government departments.
Board of Equalization member George Runner, who opposed the law that shrank his agency’s authority, said business owners like Hyatt and other companies are better off having their cases considered by the elected representatives.
“The ability to take this to a group of unbiased elected officials is better than taking it to a group of state employees who in the long run benefit from a decision for the state,” Runner said.
Hyatt’s high stakes case has twice reached the U.S. Supreme Court. Hyatt once won a judgment against California tax collectors that would have compelled the state to pay him $490 million, but the most recent Supreme Court case in 2016 capped the payout at $50,000. That lawsuit centered on what a Nevada jury considered to be heavy-handed tactics by Franchise Tax Board investigators who dug through Hyatt’s trash and scared off his potential business partners.
The Franchise Tax Board has already spent $25 million trying to collect the money while defending itself from Hyatt’s lawsuits, department spokesman Jacob Roper said.
“This is a well-known case, well documented,” Runner said. “It’s promoted and looked at as a very complex case, but in the end, it’s all about residency. Where did this individual live?”