SACRAMENTO—Business owners who have fled California often say their decision to leave wasn't just about tax rates, but about the punitive attitudes sometimes found among tax and regulatory authorities here. A new wrinkle in a high-profile, 22-year-old tax case gives fodder to those who make such claims.
In 1970, a young Southern California electrical engineer and inventor named Gilbert Hyatt filed a patent application for an innovative microprocessor chip. That was a year before Intel patented its chip, which led to the personal-computer revolution.
Twenty years later, after a complex legal battle over the origins of that technology, the U.S. patent office awarded Hyatt the patent for a microprocessor — a shocking and still controversial decision (that was later partially overturned) that would provide Hyatt with a multimillion-dollar windfall. He moved to Las Vegas, where he said he was a full-time resident before he received the earnings.
California's Franchise Tax Board (FTB) saw a newspaper article congratulating Hyatt for his patent and decided to seek $7.4 million in back taxes, claiming that he was still a resident of California when the money came in. That sounds like a simple enough dispute that could quickly be resolved, but what followed has been an ordeal that has consumed a good bit of Hyatt's adult life.
On Friday, Hyatt, now 76, filed a federal lawsuit accusing the state of violating his constitutional rights in pursuit of a sum that now tops $55 million as interest and penalties have accrued. He's asking for an injunction forbidding the state from pursing its claim any further. After all these years and legal expenses, he just wants California to leave him alone already.
The tax authorities have been pursing him through its administrative process. Tired of the endless investigations, Hyatt filed suit in Nevada court in 1998. California officials said they weren't subject to an out-of-state tort lawsuit. California lost that argument in the Nevada Supreme Court and the U.S. Supreme Court and the high court decision sent the case back to a Nevada district court, which awarded Hyatt nearly $400 million in damages after finding that the California authorities abused their power and invaded his privacy. That case is on appeal.
Hyatt believes that California officials are purposefully delaying. "Specifically, because of the 20 year delay Hyatt can no longer obtain a fair and full adjudication of whether he owes state taxes to California," according to his lawsuit. "During this time, material witnesses have passed away, memories of witnesses have faded, and documents relevant and important to Hyatt are no longer available." The board keeps assessing penalties, so he says it has every reason to keep delaying. He suspects the tax board is waiting for him to die so that it can go after his estate.
Under California law, the Franchise Tax Board has the "presumption of correctness," meaning that the onus always is on Hyatt to disprove what the tax officials say. And, he argues, they keep changing their stories and their allegations, thus resulting in more years of legal expenses and disputes.
"It's ruined my life. They keep coming up with these intensive positions, many hundreds of pages of allegations and such that we have to try and disprove decades later and it's just very consuming," Hyatt told me in an interview last week. "The FTB is out to get taxpayers' money and it will go to extreme ends to get money whether it is entitled to it or not…."
The state controller's office has yet to review the newly filed lawsuit. But former Board of Equalization member Bill Leonard, a former Republican Assemblyman, believes the state government is abusing rules designed to give taxpayers every opportunity to appeal a judgment to drag out a case against a taxpayer. The Legislature could fix the problem with a law granting a right to speedy trial on tax matters, he added.
It's hard not to conclude that California's tax agency is out of line as it continues to run up administrative and legal fees — not to mention risking potential multimillion-dollar liabilities — to pursue a decades-old dispute over where a taxpayer lived for six months. There's a troubling lesson here for wannabe entrepreneurs, who might want to think carefully about their residency before they hit the big time.