Gilbert Hyatt and the Franchise Tax Board Head Back to the Supreme Court…Again

Back in 1993 (that is not a typographical error), California’s Franchise Tax Board (FTB) initiated a residency audit of Gilbert Hyatt. Mr. Hyatt invented some technology relating to microprocessors in 1990. In 1991 he realized he was going to receive some large royalty payments; he moved from high-tax California to low-tax Nevada. The question was when did he move–was it in April 1992 or October 1991?

The auditors for the FTB committed various torts (for example, they rummaged through Mr. Hyatt’s garbage and did not obey privacy rules). The FTB ruled against Mr. Hyatt; Mr. Hyatt sued the FTB in Nevada state courts. That lawsuit is now heading to the US Supreme Court for the third time. This case will be heard on Wednesday (January 9th). SCOTUSBlog has an excellent preview of the arguments in this case.

Dan Walters is reporting that the FTB has also asked for a rehearing of the decision which went against the FTB at the Board of Equalization. The request for a rehearing is at the new California Office of Tax Appeals. If the rehearing isn’t granted (or if the FTB loses of the Office of Tax Appeals), expect the FTB to appeal the decision into the California court system. It’s likely this case will still be going on when I retire (which is many years away).

There are several points that the average person should realize regarding this case. First, if you’re going to move from a high-tax state to a low-tax state, really move. Make sure you have a clean break from the state.

Second, if you have a high income be aware that your old state may conduct a residency audit. Like almost everything in tax, you’re guilty until proven innocent. In a residency audit, the tax agency will look at your bank and credit card statements to see where you really were. If you said you relocated on July 1, and your credit card statement shows charges from your old state through September 30, you’re going to have a problem.

Finally, California tries to exhaust litigation opponents. The phrase “Pyrrhic Victory” absolutely comes to mind when you deal with the Franchise Tax Board. Additionally, the FTB believes that the whole world owes California tax. Their institutional mentality is definitely not pro-taxpayer.

As for Mr. Hyatt, if he wins this case at the Supreme Court he will eventually be collecting his reduced judgment (in the case in Nevada). If he loses, it’s probable he will be out a ton in legal fees and 15 years of his life and get nothing out of it.

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