Inventor’s tax fight with California flares up again

The death of U.S. Supreme Court Justice Antonin Scalia in 2016 famously left the court tied 4-4 on a landmark California case about the ability of public employee unions to collect dues from non-members.

This year, with Donald Trump nominee Neil Gorsuch having succeeded Scalia, the court voted 5-4 in another case to settle the issue, ruling that non-members cannot be compelled to pay such dues.

Scalia’s death also created a 4-4 split on another, albeit more obscure, California case and with the conservative wing of the court destined to become even stronger, how it rules could affect the state’s ability to tax those seeking refuge from California’s high tax rates.

High-technology inventor Gilbert Hyatt changed his official residence from California to Nevada, which has no income tax, more than a quarter-century ago, clearly seeking to avoid state levies on millions of dollars in royalties he was then beginning to receive from his inventions.

His move touched off a running legal battle with the California Franchise Tax Board that has been waged in appeals to the California Board of Equalization, in the Nevada Supreme Court and in the U.S. Supreme Court.

It would take a book – a thick book – to fully chronicle Hyatt’s battles with the FTB, not only on the issue of residency for tax purposes but on the inventor’s allegations that state tax authorities harassed him unmercifully.

The short version is that Hyatt generally has prevailed, most recently before the Board of Equalization on his appeal from the Franchise Tax Board. The Board of Equalization declared that Hyatt was a resident of California for only a few months when he started receiving royalties, minimizing his tax bite.

However, that was before Gov. Jerry Brown and the Legislature stripped the Board of Equalization of most of its authority, including acting as an appeals board, and gave those powers to a new state agency, the Office of Tax Appeals.

The FTB is now trying to persuade the new agency to reopen the residency case. The California Taxpayers Association, which has followed the case closely, reports that in June the U.S. Supreme Court also granted the FTB’s petition to decide whether Hyatt’s successful harassment case in Nevada courts is valid.

Hyatt’s allegations that the FTB harassed him and committed fraud in its pursuit of tax payments were upheld in Nevada, but California has insisted that it has immunity from being sued in the courts of another state. The U.S. Supreme Court’s 4-4 tie after Scalia’s death left the pro-Hyatt ruling in Nevada standing, but the FTB hopes it can prevail with the court now at full strength.

There’s much more at stake than this one man’s tax liability, because of fears among state officials that other high-income Californians might emulate him and change their residences to escape state taxes.

By siding with Hyatt on harassment, the Nevada courts have, in effect, declared that the Silver State will welcome and protect tax refugees from the Golden State. And that’s important because the recent overhaul of the federal tax system severely limits the deductibility of state taxes on federal returns, thus increasing their economic impact and, officials fear, enticing some wealthy people to change residences.

While there’s no evidence of a large-scale flight from California yet, the federal tax changes are too new for their fallout to be evident.

The Hyatt case, in all its ramifications, is a case study in how those fleeing from California’s taxes could be treated, and is being closely watched by those who specialize in minimizing tax exposure of high-income Californians.