Posts Tagged ‘GilbertHyatt’

Gilbert Hyatt In New York

Wednesday, November 27th, 2013

The decision on the Gilbert Hyatt appeal here in Nevada has still not come out. However, when I did my weekly check I discovered that the Gilbert Hyatt case has now reached New York State.

The entire Gilbert Hyatt case revolves around when Mr. Hyatt moved from California to Nevada. Mr. Hyatt said he became a Nevada resident in September 1991; the Franchise Tax Board said he left California in April 1992. Usually, seven months don’t make much difference. Here, though, that’s not the case. Mr. Hyatt is a successful investor and received a substantial payment in late 1991 (after September).

The Franchise Tax Board (California’s state income tax agency) audited Mr. Hyatt and assessed taxes and penalties. In 1996, Mr. Hyatt protested the audit. The Protest Division did not complete its review until 2007; Mr. Hyatt then appealed the FTB’s decision to the Board of Equalization. (The BOE hears appeals from the FTB).

Meanwhile, Mr. Hyatt filed a lawsuit against the FTB in Nevada (back in 1998). Before the case was tried, the FTB asked the Nevada courts to throw out the case based on sovereign immunity. That went up to the US Supreme Court; the Supreme Court ruled unanimously that Nevada does not have to immunize the FTB for intentional torts. The case was decided in 2009, and the FTB lost. The Appeal of that was heard in May 2012, and the decision has not yet been announced. The judgment to Mr. Hyatt totals $490 million.

So what is the litigation in New York? It stems from the appeal to the BOE by Mr. Hyatt. The FTB served a subpoena duces tecum on attorneys for U.S. Philips Corporation in New York, asking for information on Mr. Hyatt’s patents, income received in 1991 and 1992, his relationship to Philips, licensing of patents, and related items; they also asked for depositions of individuals. Mr. Hyatt asked the New York court to stop the subpoenas and depositions; the FTB contended that Mr. Hyatt did not have standing to challenge the subpoenas.

At the lower court (the New York Supreme Court), the Court ruled that Mr. Hyatt did have standing, that the FTB couldn’t asks for information on a patent infringement case, but that it could ask for information related to his residency and income in 1991 and 1992 (and related items). The Supreme Court modified the subpoena duces tecum to just that information. Both Mr. Hyatt and the FTB appealed; the appellate court upheld in all respects the original order. This decision came out in March.

The New York case relates to the BOE appeal. Presumably, the subpoenas have been served and the depositions have been taken (or soon will be taken). Sometime in 2014 the actual BOE appeal would occur…only 18 years after the protest was made!

That’s the key takeaway from this post. If you fight the FTB, the FTB will delay, delay, and delay some more in the hope that you can’t afford the litigation. Mr. Hyatt has deep pockets and can afford to litigate; many (most) individual and entities fighting the FTB don’t have the deep pockets to do so.

Could Tax Accountants Have Caused California’s Revenue Surge?

Wednesday, February 20th, 2013

California budget officials couldn’t figure out where the extra $5 billion in tax revenue came from in January. As this Los Angeles Times article asks, was this an accounting anomaly? Governor Jerry Brown’s administration now believes it was a timing issue.

Many businesses increased dividend payouts and other income into last year because of federal (and California) tax hikes. Many individuals (at the urging of tax accountants like me) make their fourth quarter estimated tax payment at the end of December rather than in mid-January to lower their tax bill; state income tax paid is deductible on federal income tax. The same is true for corporations (state income tax they pay is deductible on federal income tax).

While I do believe that some of the income isn’t timing related–Californians didn’t have time to make changes to their spending habits due to the late (in the year) passage of California’s tax hike–most likely much of it is just tax revenue coming in early. And there’s still the $500 million judgment in the Gilbert Hyatt case; that decision by the Nevada Supreme Court could come at any time.

California Musings

Thursday, September 27th, 2012

Yesterday a client emailed me and asked if I was planning on moving back to California. The answer is easy: no. I could make it stronger, but I’ll let others help with that.

First, Dan Walters writes about what will happen if Governor Brown’s tax increase passes. I could just quote Alan Greenspan: “Whatever you tax, you get less of.” Mr. Walters cites the case of Gilbert Hyatt (a case I’ve written about extensively) as an example of what will likely occur if Proposition 30 passes.

Mr. Walters thinks that the verdict in the Hyatt appeal will influence this. I disagree, though; if Proposition 30 passes, the exodus will increase. It’s even easier today than it was in the 1990s to live anywhere in the U.S. and run a business. My business partner is in Maryland, yet through the magic of computers, Skype, FedEx, and the telephone we’re able to run our business very efficiently. It really doesn’t matter where you reside these days, be it Los Angeles, Las Vegas, Denver, or Phoenix.

There are some catches Californians who plan on moving need to be aware of. If you have a business entity, you probably want to reform it in your new state. That way you can escape California business taxation, too. (Note that there are exceptions to this, and this definitely should be discussed with your tax professional.)

Second, there’s a study out by the Manhattan Institute titled “The Great California Exodus: A Closer Look.” A key bit from the executive summary:

The data also reveal the motives that drive individuals and businesses to leave California. One of these, of course, is work. States with low unemployment rates, such as Texas, are drawing people from California, whose rate is above the national average. Taxation also appears to be a factor, especially as it contributes to the business climate and, in turn, jobs. Most of the destination states favored by Californians have lower taxes. States that have gained the most at California’s expense are rated as having better business climates. The data suggest that many cost drivers—taxes, regulations, the high price of housing and commercial real estate, costly electricity, union power, and high labor costs—are prompting businesses to locate outside California, thus helping to drive the exodus.

The entire report is worth your time.

Finally, there will be a court hearing in November in Sacramento on blocking California’s train to nowhere. The city of Chowchilla along with the Madera and Merced Farm Bureaus and the county of Merced have sued under California’s Environmental Quality Act. The first leg of the train, if built, will run from Bakersfield to Merced.

The California Farm Bureau Federation is upset with the high-speed rail because it would urbanize prime farmland. I’m upset with the plan because it’s a colossal waste of money. The goal of the high-speed rail project is to connect the Los Angeles and San Francisco areas by trains that would take 2:40 to run between the metropolitan areas. The high speed rail’s website lauds that its sustainable trains would help the environment.

Today, you can fly between Los Angeles and San Francisco in just over an hour. Does anyone really think that people are going to spend an extra hour and thirty minutes to take the train? As far as electricity being cleaner than a jet, that’s true…until you realize that you have to generate the electricity. That means a fossil fuel (coal, oil, natural gas), hydroelectric power, or nuclear power. The difference between “clean” electricity and a jet is that with the electricity you’re one step down from where the “green” nature goes away.

In any case, the big problem is economics. High speed rail may make sense to connect two densely packed metropolitan areas (such as from Boston to Washington, D.C.). But without massive subsidies this program–estimated to cost upwards of $67 billion–is just more money down the drain in California.

Franchise Tax Board v. Hyatt to be Argued on May 7th

Sunday, April 29th, 2012

The oral arguments in the appeal by California’s Franchise tax Board in Gilbert Hyatt’s lawsuit against the Board will be heard on May 7th in Carson City by the Nevada Supreme Court. The FTB is appealing the nearly $500 million judgment that was levied against them in February 2009. The case itself was filed in 1998, but took a circuitous path to trial in Las Vegas: It first went to the US Supreme Court as the Franchise Tax Board argued it was immune from being sued. The FTB lost that argument unanimously in 2003, and then lost the case in 2009.

The good news is that a decision in the case will likely come this summer or fall. The bad news is the oral arguments will be heard in Carson City so I can’t attend. Hopefully there will be news stories on the hearing (I’ll pass those on).

Remember Gilbert Hyatt? (An Update)

Sunday, February 19th, 2012

One of the blogs I read, How Appealing, posted a link to this story on California’s attempt to ban video games featuring “murder and mayhem” from being sold to children cost the Bronze Golden State $2 million.

That’s nothing.

There’s a case that’s still waiting to be heard at the Nevada Supreme Court that’s cost California taxpayers many millions, and has the potential to cost the state over half a billion (yes, $500,000,000). The Franchise Tax Board’s appeal of Gilbert Hyatt’s lawsuit is waiting a date to be set for oral argument. It’s been stuck in this status for over a year (the last change noted in the online tracking system for the case was on February 4, 2011). I don’t know what the average wait time is, but most likely later this year this case will be heard.

If the appeal is heard here in Las Vegas (the Nevada Supreme Court holds sessions in Carson City and Las Vegas), I plan on attending…some day (hopefully in 2012).

Gilbert Hyatt and the FTB (An Update)

Friday, February 11th, 2011

When last I reported on the Gilbert Hyatt case, Mr. Hyatt had won nearly $400,000,000 (yes, that’s $400 million) in a lawsuit from the Franchise Tax Board. This case began when Mr. Hyatt moved from California to Nevada in 1992, but the Franchise Tax Board didn’t think so. So agents of the FTB rummaged through Mr. Hyatt’s garbage in Nevada, and in the view of a Las Vegas court, committed torts against Mr. Hyatt. Including legal fees and continued interest, the tab is now around $500 million.

This case went to the US Supreme Court before it was tried; the FTB attempted to hold that California couldn’t be sued. The Supreme Court ruled against the FTB, and the case was tried in 2008…ten years after it was filed.

Not surprisingly, the FTB has appealed the decision. I’ve been trying for a while to discover the status of the case, and this evening finally found a blurb noting that the case is awaiting a date for oral arguments at the Nevada Supreme Court. [Go to page 12 of the link to see the status.] (Nevada does not have intermediate courts of appeal.) So sometime in the next year or so we’ll likely get a final verdict on how much the Golden State will be out in this case. Of course, the FTB could appeal this case to the US Supreme Court if they lose at the Nevada Supreme Court.

Meanwhile, the underlying alleged liability that triggered the whole fiasco–whether Mr. Hyatt was a California resident when he earned money off a semiconductor patent–is trickling through the California administrative hearing process.

The FTB Losing Streak Continues

Sunday, February 8th, 2009

The Franchise Tax Board’s battle against Gilbert Hyatt continues in Las Vegas. Mr. Hyatt, as you may recall, moved from California to Las Vegas in the early 1990s a few months before he received a patent settlement in the millions. The FTB conducted a residency audit and found he was still a resident of Nevada. Mr. Hyatt sued the FTB in Nevada; the FTB fought the lawsuit claiming immunity from being sued. That case went all the way to the US Supreme Court, and the Court ruled that the FTB could be sued.

Last year Mr. Hyatt finally won his case, and he won big. He won $396.08 million. Over the last week Judge Jessie Walsh denied the FTB’s motion for a new trial. She also told the FTB that they must post a bond if they wish to appeal. Somehow, Judge Walsh doesn’t think California’s credit is good. I believe (but am not certain) that a 10% bond must be posted, so that would mean about $39 million.

What is thoroughly annoying to me is that the tactics that a California resident cannot sue the FTB even if the FTB were to use the same tactics as they used against Mr. Hyatt. The FTB does enjoy sovereign immunity in California.

Further motions are scheduled to be heard on March 11th. Presumably if these motions are denied the next step is for the FTB to file an appeal.

Good Summary of Hyatt Case

Wednesday, August 20th, 2008

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.

$396.08 Million…and the Meter Is Still Running

Sunday, August 17th, 2008

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.

$146.88 Million and Counting

Monday, August 11th, 2008

Back in October 1991 Gilbert Hyatt moved from California to Nevada. California’s Franchise Tax Board didn’t think he did, so they commenced a residency audit. California determined that Mr. Hyatt didn’t establish residency in Nevada until April 1992. Normally, six months wouldn’t be a big deal; however, Mr. Hyatt had invented a microprocessor and received a substantial amount of income during that time period. California assessed $49 million in taxes.

Mr. Hyatt fought the judgment through administrative appeals. He also wasn’t happy about the methods the FTB used to investigate him. Mr. Hyatt filed a lawsuit against the FTB in Nevada, alleging

…that [FTB] directed “numerous and continuous contacts … at Nevada” and committed several torts during the course of the audit, including invasion of privacy, outrageous conduct, abuse of process, fraud, and negligent misrepresentation.

The FTB fought the case, arguing that they were immune from being sued. (As an aside, had the actions that Mr. Hyatt alleged took place in California, the FTB would be immune.) The case went all the way to the US Supreme Court; the Court ruled unanimously that the FTB could be sued in Nevada. The case was remanded back to the Nevada District Court for trial.

The first phase of the trial ended last week, and the FTB suffered a ringing rebuke. According to Bill Leonard’s Leonard Letter, Mr. Hyatt prevailed on every claim and was awarded $137 million in damages plus $1.08 million in legal fees. The jury is now looking at potential punitive damages which could easily be another $400 million or so.

What did the FTB do? From the Leonard Letter:

Tax agents rummaged through his trash without warrants, visited business partners and doctors, and shared his Social Security Number and other personal information with the media. This is outrageous behavior and I call on the FTB to rein in their agents. What really galled me is the FTB testified in open court that this level of harassment was only a typical audit. If true, then the stormtroopers are alive and well at the FTB.

I have little to add to what Mr. Leonard stated. And he should know; Bill Leonard is an elected member of California’s Board of Equalization. The BOE hears administrative appeals on FTB cases after an individual (or organization) exhausts appeals at the FTB.

What’s the cost to California? To date, the FTB has spent $8.8 million fighting Mr. Hyatt. Add the $138.88 million that is now owed to Mr. Hyatt and the total is $146.08 million. If we add another $250 million for punitive damages the total is nearly $400 million. And while Mr. Leonard is hopeful that the FTB won’t appeal the case, I am almost 100% certain that the FTB will appeal. Thus, unless the FTB gets lucky in Nevada this case could easily cost California taxpayers over half a billion dollars.

Welcome to the Bronze Golden State….