Inventor Gilbert Hyatt recently filed suit in Sacramento County Superior Court seeking a refund of $11.37 million in taxes, penalties, and interest paid to the Franchise Tax Board after the state ruled that he received California-source income in 1991.

In August of 2017, the State Board of Equalization ruled that Hyatt became a resident of Nevada on October 20, 1991, and was not a California resident for the remainder of the year or the following year, rejecting the bulk of the FTB’s claims that Hyatt was a California resident during the two disputed years.

However, the BOE also ruled that Hyatt had California-source income in 1991. Before the ruling became final under California law, the FTB petitioned the newly created Office of Tax Appeals for a rehearing of the entire appeal for both years. The OTA rejected the petition, ruling in early 2019 that the BOE’s decision was reached correctly.

Hyatt’s suit argues that all of the disputed income came from patents that did not have a California business situs, and that the FTB violated his due process rights by, among other things, raising the sourcing issue for the first time at the end of the protest – 11 years after issuing the notice of proposed assessment. He also argues that the FTB violated the law by making a major change in the sourcing argument during the appeal before the BOE (13 years after the NPA was issued), switching from alleging that Hyatt operated a California-based licensing business to an argument that the patents had a California business situs.

The FTB’s Litigation Roster indicates that the suit was filed March 16.

In Nevada, litigation continues between the two parties over legal costs for Hyatt’s suit alleging that FTB auditors committed fraud and violated his rights when performing the residency audit at the heart of the dispute. Hyatt initially prevailed, with a jury upholding the fraud claim and approving an award approaching $500 million, but the monetary award was negated years later when the U.S. Supreme Court overturned a longstanding precedent and ruled that Hyatt did not have standing to sue the tax agency.