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Daily Tax Report: State

Chip Inventor Scores Another Win in California Tax Fight (1)

Jan. 16, 2019, 4:43 PMUpdated: Jan. 16, 2019, 6:31 PM

Microchip inventor Gilbert P. Hyatt’s 25-year tax fight with the California Franchise Tax Board appears to be over.

The state’s new Office of Tax Appeals denied the FTB’s request for new hearings Jan. 15, a year and a half after a previous panel decided mostly in Hyatt’s favor.

This means the State Board of Equalization’s August 2017 rulings in the case will stand. And instead of owing $55 million in tax on patent royalties plus penalties and interest that accrued since 1992 as the FTB argued, Hyatt owes $1.9 million in tax for 1991 plus interest.

The saga began when the FTB launched an audit of Hyatt in 1993 after he moved to Nevada.

“It’s been a horrible quarter century,” Hyatt told Bloomberg Tax Jan. 16 in a rare interview about his case. “The FTB has used all kinds of tactics that I’ve been concerned it is using with all taxpayers to extort taxes that aren’t owed.”

A spokesman for the FTB declined to comment.

Fight on Several Fronts

Although the rulings don’t set a precedent that can apply to other cases, they vindicate Hyatt’s claims that the tax agency was unjustified in its case against him. He also fought the FTB in federal court and Nevada trial court, leading to three trips to the U.S. Supreme Court with a separate issue still pending before the high court over whether taxpayers can sue a state in another state’s courts.

The Supreme Court heard oral arguments on the issue Jan. 9. A decision could help shape what remedies taxpayers have if they believe a state exceeds its authority. At least five other tax dispute cases are pending against California, Massachusetts, Ohio, and South Dakota in the courts of other states.

Hyatt’s is one of several high-profile cases decided in the final months of the SBOE’s authority to hear cases before that job shifted to the OTA on Jan. 1, 2018. The office is expected to rule soon on the FTB’s request for new hearings in cases involving former NFL player Keyshawn Johnson’s California residency and whether Bank of America Corp.'s dividends from a $3 billion investment in a Chinese bank can be taxed by the state. Rulings are expected in the next few months.

OTA Credibility

The OTA’s ruling to affirm the SBOE’s decision helps establish the new appeals body’s credibility, Hyatt said. Lawmakers created the OTA when they stripped the elected, five-member equalization board of its duty to decide tax appeals after state auditors found some members were misusing the tax board’s resources for political purposes.

Taxpayers and practitioners are watching the OTA closely out of concern that the administrative law judges deciding tax appeals may be biased in favor of the FTB.

“We didn’t have any basis for evaluating the OTA’s attitudes,” Hyatt said. “This helps to establish that they put a lot of effort into reviewing the record and getting it right.”

A three-judge panel rejected the FTB’s arguments that the equalization board’s decisions in the residency dispute for 1991 and 1992 weren’t supported by facts or evidence and were contrary to law. The panel also disagreed that the SBOE’s hearing was unfair.

To contact the reporter on this story: Laura Mahoney in Sacramento, Calif., at lmahoney@bloomberglaw.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; Penny Sukhraj at psukhraj@bloombergtax.com