Taxable Talk

The Las Vegas Review-Journal has published an excellent summary of the Gilbert Hyatt case and judgments.

Mark Hutchison, Mr. Hyatt's lead attorney, believes that the Franchise Tax Board will appeal the case. (I agree with him that the case will be appealed.) He's quoted by the Review-Journal,

[The verdict] sends a clear message that government abuse and over-reaching will not be tolerated by Nevada citizens...I think the message is: If you are going to audit Nevada residents, you had better do so in a fair and impartial manner and not be results-oriented in seeking to grab money from Nevada residents.

Mr. Hyatt was also interviewed by the Review-Journal, and noted that the FTB's original claim against him (that he was a California resident beyond September 1991) will be reviewed by the California Board of Equalization within two years.

My thanks to reader Darren Hankel to alerting me to this article.

California Assembly Speaker Karen Bass told the Wall Street Journal that she expects to reach a budget compromise this week. I doubt it.

The Democrats are still only arguing to increase taxes. Republicans in the Legislature vow that's not going to happen. Democrats, including Speaker Bass, say that there's no spending left to cut because of previous cuts; Republicans say that there's plenty left to cut and that the Legislature needs to implement permanent spending restrictions.

Does that sound like there's a compromise that's imminent?

That seems obvious, right? You need to charge sales tax on items that are picked up.

Hopefully it also seems obvious that if you're a liquor store owner you need to include takeout items in your income. There's no exemption for takeout items in the Tax Code...but you knew that.

Well, you know that, I know that, but one carryout (liquor store) owner in Toledo, Ohio apparently didn't know that. Ann Riebe pleaded guilty to one count of Conspiracy to Defrauding the United States. Riebe and another owner took cash that customers paid and allegedly took some of that home with them, or wrote checks and didn't declare the income. Riebe will only serve one day at ClubFed but will spend ten months under house arrest and will have to make restitution with the IRS.

Earlier this year I posted about a complex tax fraud case out of Salt Lake City. Several individuals were accused of helping various other individuals and businesses evade about $20 million in taxes. Three pleaded guilty. One of those who chose to go to trial (and was found guilty), Sandy, Utah attorney Dennis Evanson found out his fate on Friday. The judge sentenced him to 10 years at ClubFed, and he must forfeit his Hummer, Toyota Tundra, four pieces of property, and pay $2.7 million in fines. Mr. Evanson had been found guilty of mail fraud, wire fraud, tax evasion, and assisting in preparation of false tax returns.

The scheme the conspirators used had the usual trappings: foreign entities (in this case, on the Cayman Islands), foreign bank accounts, and fraudulent transactions. During the trial testimony revealed that the conspirators kept 30% of the tax saved.

If you happen to have utilized the services of Mr. Evanson or one of his co-conspirators, you will likely receive a "Dear Valued Taxpayer" letter from the IRS. It appears that the tax you "saved" is more like a mirage.

A Las Vegas jury told California's Franchise Tax Board in no uncertain terms that the FTB's conduct towards Gilbert Hyatt was reprehensible. I had speculated that the jury would award Mr. Hyatt $250 million in punitive damages; that was exactly how much he received.

Mr. Hyatt had accused the FTB of several torts, including invasion of privacy, outrageous conduct, abuse of process, fraud, and negligent misrepresentation. Earlier, the same jury had awarded $138.8 million in actual damages.

Bill Leonard, a member of California's Board of Equalization, said that the FTB spent $8.8 million fighting this case to date. If we add that, the $138.8 million of actual damages awarded earlier, and the punitive damages, the total is $396.08 million. Meanwhile, California has yet to receive any of the $7.4 million it assessed Mr. Hyatt (which is now nearly $50 million including penalties and interest). Mr. Hyatt is still fighting that decision.

Interestingly I could only find one news report on this story (the Sacramento Bee story I've linked to)—a story that is perhaps one of the most significant tax stories of the year. Mr. Hyatt's lead counsel, Mark Hutchison, told the Bee, "Government agencies should pause and reflect on the significance of this verdict." Mr. Hyatt noted, "[I hope] this will prevent other taxpayers from going through the same nightmare that I have had to endure for over a decade."

The Bee story quotes the FTB's former lead auditor, Brian Toman: "As far as I know, and I've been around a long time, there has never been an award of tort damages against the Franchise Tax Board in any kind of audit." Well, there's a good reason for that—Californians cannot sue the FTB for tort damages. California law grants state agencies sovereign immunity from lawsuits such as Mr. Hyatt's (§860.2 of the Government Code). As noted in my previous post, Mr. Hyatt was able to sue because the actions the FTB took occurred in Nevada.

I fully expect the FTB to appeal the decision though officially no decision has been made. Interest will accrue to Mr. Hyatt during any appeal, so the total could easily exceed half a billion dollars. In the meantime it will be interesting to see if the FTB auditors realize that there is a line that shouldn't be crossed.