Paging Franz Kafka. Mr. Franz Kafka

While this news item, culled from the most recent Cal-TaxReport, needs neither commentary nor cockroach to sharpen its point, the length of time this legal tussle has dragged on is both remarkable and indefensible. 

A protest over a tax audit took more than a decade to be fully adjudicated by a state agency? And the fallout could potentially lead to a nearly $550 million judgment against California when it needs every penny?  

This item has been edited for style but the facts remain those presented in the Cal-TaxReport, whose current volume contains a wealth of fiscal information, both good and ill.

Read and weep.   –California’s Capitol

 

 

On August 6, a Nevada jury awarded inventor Gilbert Hyatt $137 million plus nearly $1.1 million in legal fees in a lawsuit he filed against California’s Franchise Tax Board. 

The award included $52 million for invasion of privacy and $85 million for emotional distress the jury found was intentionally inflicted upon Hyatt by the tax board during a 1993 residency audit, which prompted Hyatt’s lawsuit. 

Damages could increase by another $411 million if the jury elects to award the maximum allowable punitive damages. The FTB, which has already spent $8.8 million on prosecuting the case through July 2007, previously estimated its potential liability at $200 million. 

The board has not said whether it will appeal the ruling. 

Hyatt, inventor of a computer microprocessor chip and data storage system, moved from California to Nevada in October 1991. Shortly after the move, he received a $40 million payment for licensing a patent. There is no personal income tax in Nevada. 

During the trial in Clark County District Judge Jessie Walsh’s courtroom, Hyatt’s lawyer told the jury that the FTB’s lead auditor became obsessed with going after his client to further her own career — and also may have been motivated by racism. 

Testimony showed that while discussing Hyatt’s case, the lead auditor said, “I’m going to get that Jew bastard!” 

The tax board’s lawyer tried to persuade jurors the agency was “doing its job” of investigating possible tax fraud, and that the audit was “common, average, everyday and ordinary.” 

But Hyatt’s lawyer told jurors the tax board sent letters containing Hyatt’s Social Security number to third parties, including newspapers, business partners and doctors who had never treated him. 

He also called witnesses who testified that the FTB ignored facts that did not fit its predetermined conclusion that Hyatt was a California resident for tax years 1991 and 1992. 

And, Hyatt’s lawyer asserted, the agency assessed fraud penalties without evidence of fraud, simply to increase the pressure on Hyatt by causing taxes and penalties to accrue at a rate of $8,000 per day. 

After deliberating six days, the jury agreed with Hyatt on all seven claims he brought against the FTB: fraud, intentional infliction of emotional distress, abuse of process, breach of confidential relationship as well as intrusion upon seclusion, publicity to private facts and false light. 

The case began when the tax board read about Hyatt in a 1993 newspaper article. FTB auditors examined his records then began a formal audit. 

In 1995, the tax board issued a letter saying Hyatt was a California resident in 1991 and part of 1992. As a consequence, he owed substantial taxes and massive penalties for fraud. 

As a result of the residency audit, the tax board says Hyatt owes $49 million comprised of $1.8 million in taxes, a $1.4 million fraud penalty and $7.2 million in interest for the 1991 tax year and $5.6 million in taxes, a $4.2 million fraud penalty and $19 million in interest for 1992. 

Plus a $10 million penalty for not availing himself of California’s tax amnesty program. 

In 1996, Hyatt filed a protest. It remained with the FTB until late last year. The protest has yet to be scheduled for a hearing by the Board of Equalization, which acts as the appellate body on such matters. 

Ten years ago, Hyatt sued the FTB in Nevada for its conduct during the audit.

The FTB attempted to have the suit dismissed, saying a Nevada court does not have jurisdiction over a California tax agency. The board also argued that its employees are immune from prosecution for acts carried out as part of their jobs. 

California residents are prohibited from suing the board for alleged wrongdoing during the course of an audit. 

The FTB’s challenge ultimately reached the U.S. Supreme Court which, in 2003 ruled in Hyatt’s favor, setting the stage for the just-ended trial. 

It is not known what effect the jury’s decision will have on the underlying residency audit. 

The case is Hyatt v. California State Franchise Tax Board, 98-A-382999-C.

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