Man loses long battle over tax bill, 9th Circuit rules

A former California resident who has fought a $7.4 million tax bill for decades may not continue with his federal lawsuit alleging that the state’s system to protest such bills violates due process protections.

On Tuesday, the 9th U.S. Circuit Court of Appeals ruled that California state law provides adequate remedies for Gilbert P. Hyatt to challenge the taxes that were levied against him after two audits conducted in 1993 and 1996 concluded that he owed $1.8 million in back taxes for the 1991 tax year and $5.6 million for 1992. Hyatt v. Yee, 2017 DJDAR 9445.

The 9th Circuit’s ruling is just one of many in a lengthy history of lawsuits and legal challenges Hyatt has filed since the tax bill was first levied.

Hyatt challenged the $7.4 million bill, arguing that he had moved to Nevada in 1991 and was no longer a California resident. The California Franchise Tax Board countered that Hyatt hadn’t actually moved to Nevada until 1992.

Hyatt chose not to pay the bill during his battle with the Tax Board, which lasted 11 years before he filed his first appeal. In 2008, he appealed the Tax Board’s bill to an internal appeals board. The appeal remained unresolved through 2017.

During this saga, Hyatt filed a separate suit in Nevada state court against the Tax Board for hundreds of millions of dollars in damages, which twice made it to the U.S. Supreme Court.

But the federal suit which the 9th Circuit weighed in on Tuesday was filed in 2014. At that point, Hyatt’s bill had ballooned to $55 million with interest. He contended in his lawsuit that the review process had taken so long that he could no longer present a fair case before the Tax Board because material evidence had been lost over the years.

U.S. District Judge Garland E. Burrell Jr. dismissed the suit, ruling that it was barred under the Tax Injunction Act, which limits the power of the federal judiciary to interfere in the states’ collection of their taxes.

The 9th Circuit panel affirmed Burrell’s ruling, concluding that Hyatt’s federal suit was barred by the Tax Injunction Act because the plaintiff failed to pursue speedier remedies available to him.

Under California law, taxpayers like Hyatt who wish to contest tax bills may either “pay-then-protest” or “protest-then-pay,” as the options are commonly known. Hyatt chose the latter of the two options, which goes through a review system within the Tax Board.

Through the “pay-then-protest” system, the 9th Circuit noted, a taxpayer may challenge his bill by making a full payment and then filing a refund claim with the Franchise Tax Board. From the filing of the claim, the Tax Board has six months to respond, after which a taxpayer like Hyatt may file a lawsuit in state court.

“In this case, Hyatt had, and still has, a plain, speedy, and efficient remedy available,” wrote Judge Julio M. Fuentes, visiting judge from the 3rd U.S. Circuit Court of Appeals. “[H]e can pursue the pay-then-protest process. ... Hyatt chose to pursue the protest-then-pay process knowing that it only permitted him to challenge his residency in California during 1991 and 1992.”

Hyatt argued that the delay in the protest-then-pay process was extended for decades intentionally by the Tax Board, which he said had singled him out. The court chose not to address who was at fault for the delay.

The case in its current iteration attracted appellate heavyweights Erwin Chemerinsky, dean of UC Berkeley School of Law, who represented Hyatt, and Seth P. Waxman, former U.S. solicitor general under President Bill Clinton and now with Wilmer Cutler Pickering Hale and Dorr LLP, who represented the Tax Board. Neither were available for comment.

Michael von Loewenfeldt, who represented the State Board of Equalization, said that the 9th Circuit decision was “consistent with a long line of cases.”