Inventor’s Spat With CA Tax Board Faces Review

WASHINGTON (CN) - California tax authorities persuaded the U.S. Supreme Court on Tuesday to determine whether they must pay up after defrauding an inventor.

The dispute stems from an investigation that the California Franchise Tax Board launched into Gilbert Hyatt after one of its auditors read a newspaper article in 1993 that described the fortune Hyatt was making from a computer-chip patent he owns.

A review of Hyatt's tax returns showed that he had reported just 3.5 percent of his taxable income for 1991. In addition to finding that Hyatt owed California $1.8 million in taxes for that year, plus a $1.4 million penalty and $1.2 million in interest, the board found that Hyatt owed $6 million for 1992 because he did not move to Nevada until April that year.

The inventor sued over that $10.5 million assessment, and Clark County jury found that the board misrepresented the audits' processes.

Ordered to pay Hyatt $139 million for his tort claims and $250 million in punitive damages, the tax board told the Nevada Supreme Court that it should have been granted immunity.

This past September, the six-justice court endorsed the jury's fraud and emotional-distress findings.

Immunity does not shield the board from Hyatt's intentional tort and bad-faith causes of action, but many of his other claims fail as a matter of law, according to the 68-page ruling.

"Hyatt is precluded from recovering for invasion of privacy based on the disclosure of his name, address, and social security number, as the information was already publicly available, and he thus lacked an objective expectation of privacy in the information," Justice James Hardesty wrote for the court.

The court likewise vacated Hyatt's $52 million for invasion of privacy, an amount meant to address the board's portrayal of Hyatt as a "tax cheat."

On this count, the Supreme Court said that the board's communications with third parties "was not highly offensive to a reasonable person and did not falsely portray Hyatt as a 'tax cheat.'"

"In contacting third parties, FTB was merely conducting its routine audit investigations," Hardesty wrote.

Hyatt's claims for breach of confidential relationship and abuse of process also failed.

The justices affirmed the $1 million in special damages awarded for the board's fraud but vacated the prejudgment interest figure. Though the Supreme Court said Hyatt had substantiated his emotional-distress claim, it reversed the $82 million award of damages because of errors from the trial court on evidentiary and jury-instruction rulings.

Finding that punitive damages are not available to Hyatt on remand, the court said the Nevada law authorizing such damages, NRS 42.005, does not apply against a government entity.

The $2.5 million awarded to Hyatt in costs is uncertain on remand, and the board petitioned the U.S. Supreme Court for certiorari in March.

As is its custom, the U.S. Supreme Court issued no comment in agreeing Tuesday to take up the case.

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