Dan Walters: Pioneering microchip inventor fights California over old tax bill

04/21/2014 12:00 AM

04/20/2014 6:23 PM

Gilbert Hyatt may be the least known of the inventors and entrepreneurs who created a technological and economic revolution that began in California, centered on digital data processing.

As a young man 40-plus years ago, he invented – and eventually patented after a two-decade-long struggle – a microprocessor chip that earned him many, many millions of dollars in payments from companies that transformed the technology into digital devices that have become indispensable to, or at least ubiquitous in, modern life.

Hyatt was a Californian at the time, but evidently aware that his forthcoming windfall would be subject to California’s high income tax rates, he moved to Nevada, which has no income taxes, prior to receiving the first of his royalty payments.

His patent battle took 20 years, but his battle with California tax authorities has lasted even longer. The Franchise Tax Board claims that Hyatt owes taxes on those initial payments. The original tax bill it sought to collect was modest but has been multiplied several times by interest and penalties and at last count was about $55 million.

Hyatt has refused to pay, contending the state is not entitled to collect since he has been a resident of Nevada since 1991. Technically, the administrative process to resolve the case is still underway.

The conflict made its way into Nevada’s state courts when Hyatt won a U.S. Supreme Court case granting him the right to sue the FTB for harassment. He eventually won a nearly $500 million judgment against the state, an appeal of which has been pending in the Nevada Supreme Court for two years.

But that’s only one of Hyatt’s legal adventures.

The inventor is also suing the U.S. Patent Office for stalling approval of a device for which he sought a patent more than 40 years ago.

This month, Hyatt filed a federal lawsuit in Sacramento against the Franchise Tax Board and the state Board of Equalization, alleging that their long delays in settling his tax case have deprived him of his constitutional rights.

Now 76, he contends that California tax authorities may be stalling until he dies so that they can fight over his estate.

“Without this court’s grant of relief that Hyatt seeks,” his suit says, “the FTB’s 20-plus-year vendetta to ‘get’ Hyatt will continue indefinitely and unabated in violation of Hyatt’s equal protection rights.”

How this saga ends is anyone’s guess, and it may be many more years, or even decades, before it is settled. But there is more to its resolution than just Hyatt’s tax obligation, if any.

It may affect the decisions of other high-income inventors and entrepreneurs about living and working in a state with the nation’s highest marginal income tax rate. And in doing so, it may reveal whether California is undercutting its future by discouraging innovation in what has been its brightest economic sector.

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