Many people change their legal residence to Nevada to take advantage of its favorable tax treatment. Their former home states do not allow these moves to go unchallenged and may attempt to recover further tax payments. But taxpayers can fight back. In the case of inventor Gilbert P. Hyatt, who took a stand against the California Franchise Tax Board, the result has been a legal war that has lasted for over two decades.
Taxpayer Sues for Violations of Privacy, Fraud and Infliction of Emotional Distress
In one phase of the complex case, Hyatt claimed that the California Franchise Tax Board committed privacy violations and abused its authority while auditing him. In a Nevada trial court, Hyatt won $490 million in damages against the California tax agency for fraud and emotional distress. The Nevada State Supreme Court threw out most of that award, however, returning the case for further consideration of the question of damages for emotional distress but upholding the $1 million in damages for fraud.
Court Limits Damages Against Tax Agency of Neighboring State
Now the United States Supreme Court has set aside the fraud damages as excessive. According the Court, because the judgment against the California agency exceeds the $50,000 cap on damages that could be applied to a Nevada state entity, it discriminated against a neighboring state. In dissent, Justice Roberts called the outcome a hybrid, since it rejected Nevada's attempt to impose full liability on California, but also failed to apply California's law. Had California law applied, the Franchise Tax Board would have received complete immunity.
Lawsuit Over Tax Liability After Change In Residency Continues
While this part of the case is now resolved, Hyatt's original tax dispute with California, involving $55 million in tax liability in 1990, is still pending in state and federal courts.
The protracted case shows how complex and daunting tax disputes can be, but it also shows that a determined taxpayer can put government agencies and tax authorities on the defensive. Careful planning may also help taxpayers avoid disputes altogether. If you are changing your state of residency or have other tax issues, expert tax counsel can help you protect and assert your rights.