U.S. Supreme Court limits damages against California tax agency

U.S. Supreme Court limits damages against tax agency

The U.S. Supreme Court today affirmed a decision of the Nevada Supreme Court concerning the Nevada courts’ exercise of jurisdiction over the Franchise Tax Board of California.

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The U.S. Supreme Court was equally split on whether to overrule a 1979 Supreme Court decision that allows a private citizen to sue another state without that other state’s permission. Therefore, the Court affirmed the Nevada Supreme Court’s decision to allow the suit.

The U.S. Supreme Court, however, concluded that the U.S. Constitution does not permit Nevada courts to award the taxpayer (a private citizen) damages greater than Nevada law would allow a private citizen in a similar suit against Nevada. This part of the lower court’s decision was vacated and remanded.

The case is: Franchise Tax Board of California v. Hyatt, No. 14-1175 (S. Ct. April 19, 2016). Read the U.S. Supreme Court’s decision [PDF 117 KB] that includes a dissenting opinion.

Background

The taxpayer, an individual, moved from California to Nevada in the early 1990s. The taxpayer alleged that he moved in September 1991. The California Franchise Tax Board asserted he moved in April 1992 and that, as a consequence, he owed California move than $10 million in taxes, interest, and penalties.

The taxpayer filed a lawsuit in Nevada state court against the California Franchise Tax Board, and sought damages for what he considered to be the tax agency’s abusive audit and investigation practices (for instance, rifling through his private mail, combing through his garbage, and examining private activities at his place of worship). 

California asked the Nevada courts to dismiss the case on constitutional grounds, and pointed to California law that provided state agencies with immunity from lawsuits based upon actions taken during the court of collecting taxes. The Nevada Supreme Court rejected California’s claim. This case eventually was considered by the U.S. Supreme Court which in 2002 affirmed that California would not be immune from suit when Nevada law permits actions against Nevada agencies for acts that were taken in bad faith or for intentional torts. 

On remand, the case went to trial, and a Nevada jury awarded the taxpayer about $500 million in compensatory and punitive damages. California appealed and asserted the trial court had not followed the law (that in similar suits against Nevada officials, damages would be limited to $50,000). The Nevada Supreme Court accepted that Nevada law would impose a limit on damages, but while most of the damages awarded were set aside, the Nevada high court affirmed $1 million of the damages as compensation for fraud. California petitioned the U.S. Supreme Court for certiorari. 

U.S. Supreme Court

The U.S. Supreme Court agreed to address two questions: (1) whether to overrule a 1979 decision that provides one state can allow a private citizen’s lawsuit against another state without that state’s consent; and (2) whether the U.S. Constitution permits Nevada to award the taxpayer damages against the California tax agency that are greater than those that Nevada would award in a similar suit against its own state agencies.

The U.S. Supreme Court (4-to-4) affirmed the first question—i.e., Nevada’s exercise of jurisdiction over California’s state agency. 

Concerning the second question, the Supreme Court majority agreed that Nevada could not decline to apply California law in favor of a special rule of Nevada law that is hostile to California. Accordingly, the U.S. Supreme Court determined that the Constitution requires the Nevada Supreme Court to afford the California tax agency immunity to the extent that Nevada agencies would be entitled to immunity under Nevada law. Because damages in a similar suit against Nevada agencies would be capped at $50,000 by Nevada law, the majority of the U.S. Supreme Court concluded that damages against the California agency must be capped at $50,000. 

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