Reed Smith Client Alerts

For the third and final time, the United States Supreme Court heard and decided an appeal involving legal issues arising from Gilbert P. Hyatt’s disputes with the California Franchise Tax Board (FTB) involving his 1991 and 1992 California income tax liability.1 The Supreme Court’s decision and its implications, as well as several other California updates, are covered in this alert. (Sections of this are republished from Law360’s June installment of Reed Smith’s California Tax Takes monthly column.)

Mr. Hyatt’s protracted saga with the FTB began nearly 30 years ago, in the early 1990s, when he earned substantial royalty income from a technology patent.2 Mr. Hyatt, a longtime resident of California, moved to Nevada before receiving the patent royalties.3 In 1993, the FTB conducted a residency audit and ultimately concluded that Mr. Hyatt owed more than $10 million in back taxes on the royalty income received in 1991 and 1992, penalties, and interest. After 26 years, the accrual of interest brought the total liability to nearly $55 million.4  

Fast-forward all the way to 2017, when the Board of Equalization (BOE) finally opined that: (1) Mr. Hyatt was not a resident of California for tax years 1991 and 1992; (2) Mr. Hyatt’s patent royalties were California source income in 1991; (3) Mr. Hyatt’s patent royalties were not California source income in 1992; and (4) the fraud penalties that had been assessed by the FTB were not appropriate. The FTB filed Petitions for Rehearing with the Office of Tax Appeals (OTA) in January of 2019 and the OTA denied the petitions and agreed with the BOE’s findings.5