Amicus Curiae Brief — Franchise Tax Bd. of Cal. v. Hyatt

No. 02-42 * ILE -:

Supreme Court of the United States

FRANCHISE TAX BOARD OF CALIFORNIA,

Petitioner,

V.

GILBERT P. HYATT, et ai,

Respondents.

On Writ of Certiorari to the

Supreme Court of Nevada

BRIEF OF THE NATIONAL GOVERNOES

ASSOCIATION, NATIONAL CONFERENCE OF

STATE LEGISLATURES, NATIONAL LEAGUE OF

CITIES, U.S. CONFERENCE OF MAYORS,

NATIONAL ASSOCIATION OF COUNTIES, AND

INTERNATIONAL CITY/COUNTY MANAGEMENT

ASSOCIATION AS AMICI CURIAE

SUPPORTING PETITIONER

RICHARD RUDA*

Chief Counsel

JAMES I. CROWLEY

STATE AND LOCAL LEGAL CENTER

444 North Capitol Street, N.W.

Suite 345

Washington, D.C. 20001

(202) 434-4850

* Counsel of Record for the

Amici Curiae -

WILSON-EPES PRINTING CO., INC. — (202) 789-0096 -— WASHINGTON, D. C. 20001

ees | QUESTION PRESENTED

Ser eS : Sa Whether a taxpayer who moves from one State to another

: Agnes Se A a eee can collaterally attack a tax assessment by his former State in

the courts of his new State of residence.

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TABLE OF CONTENTS

Page

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ne ED cccitnntnemncrangpesnsncscnsennessacesees iv

INTEREST OF THE AMICI CURIAE ...0......ccccccceeeeeeees |

ITTY ciiitiniinissidenideontancscsnssmngnecenenanensenseansecssionses 2

SUMMARY OF ARGUMENT ..............cccccccssceseeseeeneees 8

EET cicocntecsnatansepssennnngtzessceneverseneesetentenssscestennets 11

ONE STATE’S COURTS CANNOT ADJU-

DICATE A TAXPAYER’S COLLATERAL

ATTACK ON ANOTHER STATE’S TAX

PE UED cacncssensnssannesasnssncsonesecssssccsuteemsessesseen 11

A. Respondent’s Nevada Suit Is A Collateral

Attack On California’s Residency Audit And

Proposed Assessments ...............cccecceseeeeeeereeeees 13

B. Taxation Is A Core Sovereign Function .......... 14

C. The Structure Of The Constitution Prohibits

A State’s Exercise Of Jurisdiction Over

NEI ccsttnesnieneenensnensenenseenenencntinessuacnesessensets 17

eee ihcsittesicntonnensteeoiemessenqunvennensntenestensesmsencsennense 24

(iii)

iv

TABLE OF AUTHORITIES

Cases Page

Ableman v. Booth, 62 U.S. 506 (1858) .........cc000000 18, 19

Ambrosini v. United States, 181 U.S. | (1902)....9, 10, 18

Appleyard v. Massachusetts, 203 U.S. 222

a 20

Biddinger v. Commissioner of Police, 245 U.S.

ee i icsictsivcnsieiseininatsitnanniainaaintarnatiamaasiiinity 20

Bull v. United States, 295 U.S. 247 (1935)............ 14

California v. Grace Brethren Church, 457 U.S.

eee ree vcccnsiecamneitentbeiteninesinnatteitiiiaiiaiusiiisasmsanes 15

California v. Superior Court of California, 482

a Sa rccscnnniictsiitiienencniinetiadiematinistanin 10, 20

County of Washoe, Nevada Tax Comm'n, et al.,

v. Golden Road Motor Inn, Inc., 777 P.2d 358

es Fe cciereensnccsntamstianasmnnciciitiaiammpiseiaiin 16

Dows v. City of Chicago, 78 U.S. (11 Wall.) 108

Ey Ui ntictniarisentanacternatisdainnsiiniinmmenemnnamaneniibiiatamainas 1,14

Fair Assessment In Real Estate Ass'n v. McNary,

8 EEL SE passim

First Nat'l Bank v. Board of Commissioners, 264

as SU iieieieeesinnsscicininiancitcsinesiiinrsariaatiaaaiiaian 15

Great Lakes Dredge & Dock Co. v. Huffman,

ee untiieniniitanintertiinnaieniiitiiaisis 15

Keely v. Sanders, 99 U.S. 441 (1878) .........c0000. 18, 18-19

Kentucky v. Dennison, 65 U.S. (24 How.) 66

ee eT 20

Lovelace Center for Health Sciences v. Beach,

606 P.2d 203 (N.M. Ct. App. 1980) ...........c0000 16

Lunding v. New York Tax Appeals Tribunal, 522

ee eT Cel icricrnsesnermicniarmncenteniaitiiinnininaraseaes 11-12

Marbles v. Creecy, 215 U.S. 63 (1909) .........cccc000 20

Matthews v. Rodgers, 284 U.S. 521 (1932)........ 15, 15-16

McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316

eC 22

Vv

TABLE OF AUTHORITIES—Continued

Page

Metcalf & Eddy v. Mitchell, 269 U.S. 514

TI cccnsennincneiunesnsememnsmmmmnmamemmsenmmannetiies 9, 18

Michigan v. Doran, 439 U.S. 282 (1978).......... 19, 20, 21

Middlesex Cty. Ethics Comm. v. Garden State

Bar Ass'n, 457 U.S. 423 (1982) .......ccccccccceeeeeeees 16

National Private Truck Council v. Oklahoma Tax

Comm'n, 515 U.S. 582 (1995) .......ccccceeeeeeeeeeeees 1,14

Nevada v. Hall, 440 U.S. 410 (1979)............. 9, 16, 17, 18

Perez v. Ledesma, 401 U.S. 82 (1971)...........:00000 14

Providence Bank v. Billings, 29 U.S. (4 Pet.) 514

IT ncnieciictnenenitensiainncnntensentnenensmeiniannenmmensenssen 14

Puerto Rico v. Branstad, 483 US. 219

ee 10, 20, 21, 22

Stanley v. Supervisors of Albany, 121 U.S. 535

SE EPRRE eeeere Se eee eee 15

Sweeney v. Woodall, 344 U.S. 86 (1953)..... 20, 20-21, 21

The Collector v. Day, 78 U.S. (11 Wall.) 113

a 18

Younger v. Harris, 401 U.S. 37 (1971)........:cece00 16

Wisconsin v. Pelican Ins. Co., 127 U.S. 265

CD cecensserccnscnenscnsssnstenessscnsenscssessenseneasasenemaness 16

Constitutional Provisions and Statutes

ee 2

Cal. Rev. & Tax Code § 19044 .0.0.......ccccccccceeeseeees 2

0) 2

) 2

xy 2

0 a 12,17

a 15

GRE, Chem, GOR, Vib, Ci, Beccccsestesssascssnssnsnsensssescssnsnes 16

Other Authorities

Thomas M. Cooley, A Treatise On The Law Of

a 15

vi

TABLE OF AUTHORITIES—Continued

Page

Jerome R. Hellerstein & Walter Hellerstein, State

And Local Taxation (6th ed. 1997) .................0.. 15

- Robert A. Leflar, Extrastate Enforcement of

Penal And Governmental Claims, 46 Harv. L.

fe 16

INTEREST OF THE AMICI CURIAE

Amici are organizations whose members include state,

county, and municipal governments and officials through-

out the United States.' Amici and their members have a

compelling interest in legal issues that affect state and local

governments.

The Court has long recognized that “‘[i]t is upon taxation

that the several States chiefly rely to obtain the means to

carry on their respective governments, and it is of the utmost

importance to all of them that the modes adopted to enforce

the taxes levied should be interfered with as little as

possible.” National Private Truck Council v. Oklahoma Tax

Comm'n, 515 U.S. 582, 586 (1995) (quoting Dows v. City of

Chicago, 78 U.S. (11 Wall.) 108, 110 (1871)). The Court has

also noted that “{t]he procedures fur mass assessment and

collection of state taxes and for administration and adjudi-

cation of taxpayers’ disputes with tax officials are generally

complex and necessarily designed to operate according to

established rules.” Fair Assessment In Real Estate Ass'n v.

McNary, 454 U.S. 100, 108 n.6 (1981) (citation and internal

quotation omitted).

Respondent’s Nevada civil action against the California

Franchise Tax Board—a collateral attack on California’s tax

collection scheme—violates these vital principles. Respond-

ent alleges that he “is and was at all times pertinent . . . a bona

fide resident of Nevada [who] should not be forced into a

California forum to seek relief from the unjust and tortious

attempts by the FTB to extort unlawful taxes from” him. Pet.

App. 57a (Complaint 4 17). California provides taxpayers a

' The parties have consented to the filing of this amicus brief and their

letters of consent have been filed with the Clerk. This brief was not

authored in whole or in part by counsel for a party, and no person or entity

other than amici or their members made a monetary contribution toward

its preparation or submission.

2

remedy, which respondent has invoked, Pet. 3, 10, to chal-

lenge the FTB’s residency audit and proposed assessments.

The Nevada Supreme Court has nonetheless ruled that

Nevada’s courts have jurisdiction over respondent’s inten-

tional tort claims against the Board and that respondent can

proceed with further discovery and a irial. This holding poses

a substantial threat to the effective administration of state tax

laws and the system of cooperative federalism, which is the

foundation of the Constitution.

Because of the importance of this issue to amici and their

members, this brief is submitted to assist the Court in its

resolution of the case.

STATEMENT

1. Following a residency audit of respondent Hyatt, peti-

tioner California Franchise Tax Board made the preliminary

determination that Hyatt had remained a California resident

until April 1992 and thus owed tax on an additional $ 40

million in income that he had earned while a California

resident but had failed to report on his last California tax

return. See Pet. 3. The Board thus issued respondent Notices

of Proposed Assessment for tax years 1991 and 1992. See id.

In addition to back taxes, the Notices sought to impose a civil

fraud penalty. See id. Respondent Hyatt filed an adminis-

trative protest against the assessments with the Franchise Tax

Board, which remains pending in California. See id.

Under California law, the protest proceeding is a de novo

review and the taxpayer is entitled to a hearing. See Cal. Rev.

& Tax Code § 19044. In the event of an adverse decision, the

taxpayer is entitled to a further de novo hearing before

the State Board of Equalization. See id. §§ 19045, 19046.

Thereafter, the taxpayer can seek judicial review, which in

the case of a challenge to a residency determination can be

commenced without payment of the assessment. See id.

§ 19381; Cal. Civ. Code § 1060.5.

3

2. Although his California administrative protest “could

result in modification or withdrawal of the FTB’s proposed

assessments,” Pet. 10, Hyatt filed this lawsuit against the FTB

in Nevada state court. /d. at 3. In the suit, respondent alleged

that he “is and was at all times pertinent . . . a bona fide

resident of Nevada [who] should not be forced into a

California forum to seek relief from the unjust and tortious

attempts by the FTB to extort unlawful taxes from this

Nevada resident.” Pet. App. 57a (Complaint 4 17). Respond-

ent further alleged that the “manufactured issue of his

residency in Nevada for the period of September 26 through

December 31 of 1991 should be determined in Nevada, the

state of plaintiff's residence.” /d. Respondent thus sought a

declaratory judgment that he was a Nevada resident

“commencing on September 26, 1991” through the present

and that “the FTB has no jurisdiction to impose a tax

obligation on plaintiff during the contested periods.” /d. at

64a-65a (Complaint ¥ 31).

Respondent’s complaint’s further alleged that the FTB had

committed six different intentional torts in the course of its

residency audit. Each of these claims re-alleges respondent’s

assertions regarding his residency in Nevada, see id. at

52a-54a, the FTB’s investigation of his residency, see id. at

54a-56a, the FTB’s proposed assessment for 1991, see id.

at 56a-57a, the FTB’s proposed assessment for 1992, see id.

at 58a, and the FTB’s motive. See id. at 60a-6la; see also

id. at 65a; 67a-68a; 69a; 70a; 72a; 78a. Each claim also

asserts that the FTB’s conduct was “malicious” and “oppres-

sive,” thus entitling respondent to an award of punitive

damages. Pet. App. 67a, 68a, 70a, 71a, 77a, 84a.

Hyatt’s complaint asserts three claims of the common law

tort of invasion of privacy. Two of these claims allege that 1)

the FTB unreasonably intruded on respondent’s seclusion,

and 2) that the FTB gave unreasonable publicity to private

facts by disclosing “personal and confidential information” to

4

third parties during the course of the residency audit. /d. at

66a, 68a. The third invasion of privacy claim alleges that the

FTB cast respondent “in a false light” by “insinuating to . . .

Nevada residents” in the course of interviewing witnesses

“that [Hyatt] was under investigation in California, thereby

falsely portraying [him] as having engaged in illegal and

immoral conduct.” /d. at 69a.

Hyatt’s complaint also included common law claims of

outrage, abuse of process, and fraud. The outrage claim

alleges that “the true purpose of [the FTB’s investigation]

was to . . . harass, annoy, embarrass, and intimidate plaintiff,

and to cause him such severe emotional distress and worry as

to coerce him into paying significant sums to the FTB

irrespective of his demonstrably bona fide residence in

Nevada throughout the disputed periods.” /d. at 71a.

The abuse of process claim likewise alleges that the FTB’s

agents issued unlawful administrative subpoenas to Nevada

residents and businesses “for the ulterior purpose of coercing

plaintiff into paying extortionate sums of money to the FTB

without factual or constitutional justification, and without the

intent or prospect of resolving any legal dispute.” /d. at 73a.

This claim further alleges that the FTB abused its powers “by

assessing . . . huge penalties based on patently false and

frivolous accusations” that Hyatt concealed assets and

“fraudulently claim[{ed] Nevada residency.” /d. at 75a.

Hyatt’s final intentional tort claim alleged that the FTB

committed fraud by disclosing his address in subpoenas

issued to several Las Vegas utility companies in violation of

assurances given by the Board to his representatives. See id.

at 78a-79a. Hyatt further alleged that the FTB committed

fraud by making false assurances “that the audit was to be an

objective inquiry into the status of his 1991 tax obligation,”

id. at 82a, which induced him to provide the FTB with

confidential information. See id. at 84a. As part of the fraud

count, Hyatt furthers alleges “that the FTB has no credible

5

evidence, and can . . . provide none, that would indicate that

[he] continued to own or occupy his former home in.. .

California,” id. at 82a-83a, that the FTB ignored evidence that

he had reported the sale of his California home on his 1991

tax return (to his self-described business associate) and

instead declared the sale of his California home “a ‘sham.””

Id. The complaint further alleges that the FTB committed

these acts with the “intent of defrauding plaintiff into

believing that he would owe an enormous tax obligation to

the State of California.” /d. at 83a.

3. The FTB moved for judgment on the pleadings on the

ground that the Nevada courts lacked subject matter juris-

diction. See Pet. 4. The trial court dismissed the declaratory

relief claim but denied the FTB’s motion with respect to the

tort claims. See id. The FTB filed a subsequent motion for

summary judgment on the tort claims and also moved again

to dismiss for lack of jurisdiction. The trial court, however,

denied the motions.

The FTB then filed a petition for a writ of mandamus

ordering dismissal in the Nevada Supreme Court. The court

granted the petition, notwithstanding the “extraordinary”

nature of the writ, Pet. App. 40a, on the ground that its review

of the record “revealed that there is no probative evidence to

support Hyatt’s claims.” /d. at 41a. The court explained that

“(t]he myriad depositions and documents submitted to this

court are undisputed and indicate that Franchise Tax Board’s

investigative acts were in line with a standard investigation to

determine residency status for taxation pursuant to its statu-

tory authority.” /d. at 42a-43a. The court reasoned that

“{mJerely because a state agency is performing an inves-

tigation in the course of its duties does not automatically

render its acts an invasion of privacy or otherwise inten-

tionally tortious absent evidence of unreasonableness or

6

falsity of statements.” /d. at 43a. The court therefore ordered

the trial court to grant the FTB’s motion for summary

judgment. See id. at 43a.

Thereafter, respondent petitioned for rehearing. See Pet.

App. 6a. Nine months later, and without oral argument, the

Nevada Supreme Court granted the petition, vacated its

previous order, and reinstated respondent’s intentional tort

claims. See id. at 6a-7a. Other than to state that it had

“considered the parties’ documents and the entire record

before us,” id. at 6a, the court provided no explanation for the

reversal of its earlier order dismissing the case for lack of

evidence. See generally id. at 6a-16a.

The court then rejected the FTB’s arguments that the

Nevada courts lack subject matter jurisdiction over Hyatt’s

suit. See id. at 10a-lla. The court perfunctorily rejected the

FTB’s contentions that the doctrines of administrative

exhaustion and sovereign immunity barred the suit. See id. at

10a. The court further held that the Full Faith and Credit

Clause did not require Nevada’s courts to apply California’s

law of sovereign immunity on the ground that “Nevada does

not allow its agencies to claim immunity for discretionary

acts taken in bad faith, or for intentional torts committed in

the course and scope of employment.” /d. at 12a. Because

“Hyatt’s complaint alleges that [FTB] employees conducted

the audit in bad faith, and committed intentional torts during

their investigation,” the court concluded that the Nevada

courts have jurisdiction over the intentional tort claims. /d. at

12a-13a.

4. The case has already generated an immense amount of

discovery as the Nevada trial court ruled that “the entire

process of the FTB audits of Hyatt, including the FTB

assessments of taxes and the protests, is at issue in this case

and a proper subject of discovery.” Discovery Commis-

sioner’s Report and Recommendation, Hyatt v. Franchise Tax

Board 3 (Nev. Dist. Ct., Dec. 7, 1999) (No. A382999)

7

(quoted in FTB Petition For Writ of Mandamus 20, Franchise

Tax Board v. Eighth Judicial Dist. Ct., et al. (Nev. 2001) (No.

36390)). The trial court further ruled that “Hyatt’s claim of

fraud against the FTB entitles him to discovery on the entire

audit and assessment process performed by the FTB that was

and is directed at him as part of the FTB’s attempt to collect

taxes from Hyatt.” Jd.’

? The broad scope of Hyatt’s discovery requests is best demonstrated

by the remarks of the Nevada discovery commissioner, in response to the

State’s attempt to limit discovery to those acts occurring within Nevada.

During the discovery hearing (Nov. 9, 1999), the commissioner, after

noting “the [trial] Court’s failure to limit the issues in this case any more

than the Court did, [so] that the plaintiff was entitled to press the case in

all of the counts alleged in the complaint,” explained that “the heart of the

case is the process by which the FTB conducted this audit, including

but not limited to those parts of the audit which intruded into the state

of Nevada.” Tr. 70-72, Nov. 9, 1999 (reprinted in FTB Mandamus

Pet. 21) (No. 36390).

In this same hearing the discovery commissioner observed that “there

is concern countrywide about the tax collecting services using methods

that are not appropriate and, you know, we are all completely aware of

that in regard to the IRS and methods like that, and | think that these

processes should be explored.” /d. at 55-56 (reprinted in FTB Mandamus

Pet. 20). Responding to the FTB’s point that Hyatt had ample remedies to

challenge the tax in California, the commissioner added:

You indicate that Mr. Hyatt has all of his rights and remedies in

California to challenge the tax. | don’t know if those rights and

remedies include exploration of the process and availability to all

the information that he could get by way of the claims that the Court

has left intact here. If there is fraud to be discovered, | think it

should be discovered on one side or the other.

Id. Later the commissioner reiterated that:

[T]he process I think is still fair game, and if you think otherwise

you will have to have the judge say that because obviously in my

view if we are only concerned with acts that took place in the state

of Nevada, then we would have a very small range of discovery in

this case because | think everybody is in agreement [that] there were

only some few certain acts done in Nevada, investigation by the

8

Taking full advantage of these rulings, respondent’s

lawyers have engaged in discovery on a vast scale. At the

time the FTB moved for summary judgment in January 2000,

respondent’s lawyers had taken 315 hours of testimony from

24 witnesses, made 329 separate document demands from the

FTB (which produced over 17,000 pages of documents), and

propounded an additional 340 document requests to deposed

witnesses. See FTB Motion for Summary Judgment 4, Hyatt

v. Franchise Tax Board (Nev. Dist. Ct. 2000) (No. A382999).

SUMMARY OF ARGUMENT

A. Respondent’s tort claims are an attempt to collaterally

attack the FTB’s residency audit and proposed assessments in

the Nevada courts. While cast in the lexicon of intentional

torts, each of his claims is a variation on the theme that he

became a bona fide resident of Nevada before he received

$40 million in licensing fees, and that the FTB is unjustly

attempting to extort taxes from him because it disputes his

assertions as to the commencement of his Nevada residency.

Indeed, the Nevada trial court has acknowledged this, as

evidenced by the discovery commissioner’s statement that

while “there were only some few certain acts done in

Nevada” by the FTB, these acts were “only a part of the

process of collecting the tax from Mr. Hyatt, and the process

is what is under attack here.” FTB Mandamus Pet. 22

(quoting Tr. 72-74 (Nov. 9, 1999)).

FTB on premises, so to speak, here as well as inquiring with various

Nevada companies and other things, but that in my view is only a

part of the process of collecting the tax from Mr. Hyatt, and the

process is what is under attack here, and | think in my view,

particularly a state agency should feel that its process should be

open to exploration in a case such as this so that we have an open

form of government.

Id. at 72-74 (reprinted in FTB Mandamus Pet. 22) (emphasis added).

9

B. ‘This Court has long recognized the importance of state

tax systems and the need to avoid illegitimate and abusive

interference with a State’s authority to collect taxes. The

Court has applied this principle regardless of the nature of the

relief sought. See Fair Assessment In Real Estate Ass'n v.

McNary, 454 U.S. 100 (1981). While the rule has its origin in

the need to avoid federal court interference with state tax

administration and is based on the Court’s longstanding and

“scrupulous regard for the rightful independence of state

governments,” id. at 111, this reasoning powerfully demon-

strates that respondent’s suit poses a “substantial threat to our

constitutional system of cooperative federalism.” Nevada v.

Hall, 440 U.S. 410, 424 n.24 (1979).

Tort suits for punitive damages against a taxing authority

would manifestly interfere with a State’s “capacity to fulfill

its own sovereign responsibilities.” /d. If the courts of the

national sovereign must yield to state tax procedures even

when federal constitutional rights are implicated, then surely

a State cannot exercise jurisdiction over tort claims brought to

collaterally attack another State’s tax proceeding. The

Nevada courts’ exercise of jurisdiction over respondent’s suit

is without justification as California law provides respondent

with adequate and complete remedies for contesting the

FTB’s proposed assessments, including two levels of admin-

istrative review and the right to judicial review without

having to first pay the final assessment.

C. While Nevada is a sovereign co-equal in status to

California, its courts’ exercise of jurisdiction over this suit is

not within their discretion. Rather, structural principles of the

Constitution preclude Nevada jurisdiction over this case.

The first of these is the principle that commands the vari-

ous sovereigns in the federal system to avoid unwarranted

interference with the governmental operations of other sover-

eigns. See, e.g., Metcalf & Eddy v. Mitchell, 269 U.S. 514

(1926); Ambrosini v. United States, 187 U.S. 1 (1902). For

10

example, this Court has derived from the Constitution the

intergovernmental tax immunity, which “rests on the law

of self-preservation, for any government, whose means

employed in conducting its strictly governmental operations

are subject to the control of another and distinct government,

exists only at the mercy of the latter.” Ambrosini, 187 U.S.

at 7. Few suits involve a greater interference with a State’s

administration of its sovereign functions than a collateral

attack on its tax proceeding, especially where, as here, that

attack summons the taxing State to answer in another State's

courts and seeks punitive damages as well.

The second principle is found in the Court’s cases inter-

preting the Extradition Clause, which is the Constitution's

other provision (besides the Full Faith and Credit Clause)

expressly mandating interstate comity on a government to

government basis. The Court’s cases interpreting the Extra-

dition Clause have repeatedly rejected fugitives’ attempts to

collaterally attack the charging State’s criminal proceedings.

The Court has rejected challenges to the legal merit of a

charge and to the fairness of criminal proceedings in the

courts of the charging State. See California v. Superior Court

of California, 482 U.S. 400 (1987); Puerto Rico v. Branstad,

483 U.S. 219 (1987).

As these cases recognize, the preservation of interstate

harmony is best achieved by mandating jurisdictional

limitations that prohibit the use of the asylum State’s judicial

processes to interfere with the charging State’s proceeding.

The respect which the States owe each other as co-sovereigns

in the federal system precludes a State from questioning the

integrity and fairness of another State’s administrative and

judicial processes.

Preventing tax evasion by those who cross state lines is as

important to interstate harmony as ensuring that fugitives are

returned for trial or incarceration. Moreover, respondent's

tort suit involves a far greater interference with California's

sovereignty than is typically implicated in extradition, as a

charging State is not summoned into another State’s courts

without its consent. Likewise, the charging State is not

threatened with the possibility of an award of punitive

damages. Indeed, if California had charged respondent with

criminal tax fraud, there would be little doubt that this

Court’s precedents would prevent him from bringing a tort

suit in Nevada challenging the process that led to the charge.

ARGUMENT

ONE STATE’S COURTS CANNOT ADJUDICATE

A TAXPAYER’S COLLATERAL ATTACK ON

ANOTHER STATE’S TAX PROCEEDING

The Supreme Court of Nevada erred in failing to dismiss

respondent’s intentional tort claims against the California

Franchise Tax Board. While the Nevada courts correctly

recognized the impropriety of adjudicating respondent’s

claim seeking a declaratory judgment that he was a Nevada

resident at the times material to the FTB’s proposed assess-

ments, the state supreme court’s judgment reinstating the

intentional tort claims opens a Pandora’s box for state tax

administration and poses a grave threat to the federal system.

As explained below, respondent’s intentic.al tort claims

are simply an attempt to collaterally attack the Franchise Tax

Board’s residency audit and its proposed imposition of back

taxes and a civil fraud penalty. Affirmance of the Nevada

court’s exercise of jurisdiction in this dispute—which seeks

both compensatory and punitive damages from the California

Franchise Tax Board—would be especially problematic

in light of the highly mobile nature of modern economic

activity.

Under our federal system, both workers and businesses are

free to move to any State in the Union. Moreover, workers

can choose to reside in one State and work or operate a

business in another. See, e.g., Lunding v. New York Tax

12

Appeals Tribunal, 522 U.S. 287 (1998). Similarly, firms can

set up their headquarters in one State and conduct business in

any other State. Given the large volume of economic activity

that involves the crossing of state boundaries, it is obvious

that States must be able to conduct audits of non-resident

taxpayers without being subjected to tort suits and potentially

massive punitive damages liability in the courts of the

taxpayer’s asserted State of residence.

While amici agree with California that the Full Faith and

Credit Clause requires the Nevada courts to apply California

law and dismiss respondent’s suit, this case does not simply

involve a matter of whether California or Nevada law applies.

To illustrate, California provides a remedy to a taxpayer

“aggrieved” if a Board employee “recklessly disregards

board published procedures.” Cal. Rev. & Tax Code

§ 21021(a). If the Nevada courts had decided to apply this

provision to respondent’s suit, it would nonetheless be

improper for them to exercise jurisdiction over the claim.

Rather, the structure of the Constitution prohibits a State from

allowing its citizens to use its courts to adjudicate a taxpayer

dispute against another State even when the claim is based on

the remedial provisions of the taxing authority.

This is not to deny a State’s legitimate interest in protecting

its citizens from tortious conduct committed by the employ-

ees of another State occurring within its borders. But where,

as here, a claim is simply a collateral attack on the taxing

State’s assessment, the forum State is not entitled to recog-

nize that interest over the structural limitation on adjudicating

another State’s tax proceeding. The judgment of the Supreme

Court of Nevada should therefore be reversed.

———— — rr ee —

13

A. Respondent’s Nevada Suit Is A Collateral Attack

On California’s Residency Audit And Proposed

Assessments

Respondent’s tort claims are an attempt to collaterally

attack the FTB’s residency audit and proposed assessments.

As explained above, each of respondent’s tort claims is

simply a variation on the same theme: that Hyatt became a

bona fide Nevada resident before he received $ 40 million in

licensing fees, and that the FTB is unjustly and tortiously

attempting to extort taxes from him because it disputes his

assertions as to the commencement of his Nevada residency. .

See discussion supra at 3-5. This is made clear by Hyatt’s

complaint, which states no claim of injury that is independent

of the FTB’s auditing process and assessments, and which in

its most candid moment asserts that he “should not be forced

into a California forum to seek relief’ from the FTB’s

assessments. Pet. App. 57a.’

That respondent’s claims are nothing more than a collateral

attack on the FTB’s assessments is confirmed by the

discovery commissioner’s understanding of the case. As the

commissioner stated, “the heart of the case is the process by

which the FTB conducted this audit, including but not limited

to those parts of the audit which intruded into the state of

Nevada.” Tr. 70-72 (Nov. 9, 1999, discovery hearing)

(reprinted in FTB Mandamus Pet. 21). See also id. at 72-74

(FTB Mandamus Pet. 22). Any contention to the contrary is

put to rest by the commissioner’s acknowledgment that “there

were only some few certain acts done in Nevada” by the FTB,

but these were “only a part of the process of collecting the

* It bears emphasis that Hyatt filed his collateral attack in the Nevada

courts after he invoked the administrative remedies provided by Cali-

fornia law for challenging the FTB’s Notices of Proposed Assessment.

See Pet. 3. Hyatt’s California protest is still pending and may afford him

complete relief from the proposed assessments and civil fraud penalties

that he is collaterally attacking in his Nevada suit. See id. at 3, 10.

14

tax from Mr. Hyatt, and the process is what is under

attack here.” Id. at 72-74 (FTB Mandamus Pet. 22)

(emphasis added).

B. Taxation Is A Core Sovereign Function

No function of government is more essential to sovereignty

than the administration and collection of taxes. See

Providence Bank v. Billings, 29 U.S. (4 Pet.) 514, 561 (1830).

“{T]axes are the lifeblood of government, and their prompt

and certain availability an imperious need.” Bull v. United

States, 295 U.S. 247, 259 (1935). As the Court recognized

more than 130 years ago, “[iJt is upon taxation that the

several States chiefly rely to obtain the means to carry on

their respective governments, and it is of the utmost

importance to all of them that the modes adopted to enforce

the taxes levied should be interfered with as little as

possible.” Dows v. City of Chicago, 78 U.S. (11 Wall.) 108,

110 (1871); see also National Private Truck Council v.

Oklahoma Tax Comm'n, 515 U.S. 582, 586 (1995) (quoting

same). Illegitimate and abusive interference with a State’s

enforcement of its tax laws threatens the very foundation of

state government.

More recently, the Court has explained that “‘[t}he

procedures for mass assessment and collection of state taxes

and for administration and adjudication of taxpayers’ disputes

with tax officials are generally complex and necessarily

designed to operate according to established rules.’” Fair

Assessment In Real Estate Ass'n v. McNary, 454 U.S. 100,

108 n.6 (1981) (quoting Perez v. Ledesma, 401 U.S. 82, 128

n.17 (1971) (Brennan, J., concurring in part and dissenting in

part)). In Fair Assessment, the Court held that taxpayers

could not bring a collateral attack under section 1983 seek-

ing compensatory and punitive damages from various

state and local government tax officials for their allegedly

unconstitutional property assessment. See 454 U.S. at

-—_ — a

|

i

15 :

105-07. The Court instead directed the taxpayers to “seek

protection of their federal rights by state remedies.” /d.

at 116.

The Court has long prescribed a policy of federal court

non-interference with state tax administration, which applies

regardless of the nature of the relief sought. See, e.g., Fair

Assessment, 454 U.S. at 116 (money damages); California v.

Grace Brethren Church, 457 U.S. 393, 411 (1982) (declara-

tory relief); Matthews v. Rodgers, 284 U.S. 521, 529-30

(1932) (injunctive relief); see also 28 U.S.C. § 1341 (Tax

Injunction Act). To be sure, these holdings relied on

principles of comity, which between the federal and state

sovereigns are not constitutionally imposed but derive from

the Court’s longstanding and “‘“scrupulous regard for the

rightful independence of state governments.””’” Fair Assess-

ment, 454 U.S. at 111 (quoting Great Lakes Dredge & Dock

Co. v. Huffman, 319 U.S. 293, 298 (1943) (quoting Matthews,

* The prohibition against collateral attacks on state tax assessments is

of longstanding vintage. See, e.g., Stanley v. Supervisors of Albany, |2\

U.S. 535, 549-50 (1887). A corollary is the requirement that a taxpayer

exhaust administrative remedies before bringing a judicial challenge to the

tax. See, e.g., First Nat'l Bank v. Board of Commissioners, 264 U.S. 450,

455 (1924) (noting “the requirement, broadly recognized, that

administrative remedies must be exhausted as a necessary prerequisite to a

judicial challenge of the tax”). While common law causes of action such

as fraud were once used to challenge tax assessments, the emergence of

statutory remedies has supplanted these claims. Cf Jerome R. Hellerstein

& Walter Hellerstein, State And Local Taxation 987-88 (6th ed. 1997)

(“Where statutory procedures exist for obtaining administrative review of

the action of a taxing authority, courts typically hold that remedy to be

exclusive[.]”). Moreover, the common law cause of action for fraud was

used to obtain equitable relief for certain improper types of tax assess-

ments, pot for obtaining compensatory and punitive damages from the

taxing authority. See Thomas M. Cooley, A Treatise On The Law Of

Taxation 539 (1876).

16

284 U.S. at 525)).° That recognition, however, itself

demonstrates that this case is what Nevada v. Hall called a

“substantial threat to our constitutional system of cooperative

federalism.” 440 U.S. at 424 n.24.

Tort suits for punitive damages against a taxing authority

would manifestly interfere with California’s “capacity to

fulfill its own sovereign responsibilities.” /d. If the courts of

the national sovereign must yield to state tax procedures even

when federal constitutional rights—which are the supreme

law of the land, U.S. Const. art. VI, cl. 2—are implicated,

then surely a State cannot exercise jurisdiction over tort

claims brought to collaterally attack another State’s tax

proceeding.°

Indeed, the Nevada Supreme Court’s holding is all the

more remarkable in light of its own previous ruling

concerning Nevada’s administrative remedies for taxpayers:

“if a statutory procedure exists either for recovery of taxes

collected erroneously or for disputing an excessive

assessment, that procedure must be followed.” County of

Washoe, Nevada Tax Comm'n, et al., v. Golden Road Motor

Inn, Inc., 777 P.2d 358, 359 (Nev. 1989) (per curiam)

(quoting Lovelace Center for Health Sciences v. Beach, 606

P.2d 203, 206 (N.M. Ct. App. 1980)). The Nevada Supreme

Court’s failure to follow this holding suggests that it has one

rule for the Nevada Tax Commission, and another for other

States’ taxing authorities.

* See also Middlesex Cty. Ethics Comm. v. Garden State Bar Ass'n,

457 U.S. 423, 435-37 (1982) (barring federal court interference with state

administrative proceedings); Younger v. Harris, 401 U.S. 37, 54 (1971)

(barring federal court interference with state criminal proceedings).

® Indeed, for years courts refused to enforce the tax laws of other

sovereigns, deeming them to be penal. See, e.g., Wisconsin v. Pelican Ins.

Co., 127 U.S. 265 (1888); Robert A. Leflar, Extrastate Enforcement Of

Penal And Governmental Claims, 46 Harv. L. Rev. 193, 215 n.63 (1932)

(collecting cases). '

17

Under California law, Hyatt has adequate and complete

remedies for contesting the FTB’s proposed assessments

including two levels of administrative review and the right to

judicial review without having to first pay the final

assessment. See discussion supra, at 2. California also

provides a remedy to a taxpayer “aggrieved” if a Board

employee “recklessly disregards board published proce-

dures.” Cal. Rev. & Tax Code § 21021(a).’ Thus, there is no

legitimate reason for the Nevada courts to exercise

jurisdiction over respondent’s suit. And as explained below,

while Nevada is a sovereign co-equal in status to California,

its courts’ exercise of jurisdiction over respondent’s suit is

not within their discretion. To the contrary, structural

principals of the Constitution preclude Nevada’s exercise of

jurisdiction in this case.

C. The Structure Of The Constitution Prohibits A

State’s Exercise of Jurisdiction Over A Citizen’s

Challenge To Another State’s Tax Proceeding

In Nevada v. Hall, the Court upheld California’s exercise

of jurisdiction over a tort suit brought under California law

against Nevada for injuries resulting from an auto accident

involving a Nevada state employee while travelling in

California. The Court held that the commerce, extradition,

and privileges and immunities clauses “do not imply that any

one State’s immunity from suit in the courts of another State

is anything other than a matter of comity.” 440 U.S. at 425.

The Court accordingly ruled that the Full Faith and Credit

Clause did not require California’s courts to apply a Nevada

statute limiting to $ 25,000 any tort award against that State

and affirmed a damages award of $ 1,150,000. See id. at

413, 427.

’The FTB’s procedures are accessible through its website. See

hup://www fib. ca. gov/.

18

It is true enough that nothing in the Constitution indicates

why one State’s policy of limiting monetary recovery should

defeat another State’s policy of providing full compensation

for auto accident injuries. See id. at 426. There are, however,

constitutional principles that demonstrate that this case falls

within the class denominated in Hall as a “substantial threat

to our constitutional system of cooperative federalism.” /d. at

424 n. 24.

The first of these is the background principle, found in

several lines of authority, which commands the various

sovereigns in the federal system to avoid unwarranted inter-

ference with the governmental operations of other sovereigns.

See, e.g., Metcalf & Eddy v. Mitchell, 269 U.S. 514, 523-24

(1926); Ambrosini v. United States, 187 U.S. 1, 7 (1902); ef.

Keely v. Sanders, 99 U.S. 441, 443 (1878); Ableman v. Booth,

62 U.S. 506, 516 (1858). For example, in Ambrosini, the

Court observed that the intergovernmental tax immunity

“rests on the law of self-preservation, for any government

whose means employed in conducting its strictly govern-

mental operations are subject to the control of another and

distinct government exists only at the mercy of the latter.”

187 U.S. at 7 (citing The Collector v. Day, 78 U.S. (11 Wall.)

113 (1870)). .

In Metcalf & Eddy, the Court explained that “each gov-

ernment in order that it may administer its affairs within its

own sphere, must be left free from undue interference by

the other.” 269 U.S. at 523 (citations omitted). The Court

further stated that “neither government may destroy the other

nor curtail in any substantial manner the exercise of its

powers.” /d. Cf. Keely, 99 U.S. at 443 (“no State court

could, by injunction or otherwise, prevent Federal officers

from collecting Federal taxes. The government of the United

States, within its sphere, is independent of State action; and

certainly it would be a strange thing if a State court by its

action could relieve property [subject] to Federal taxation

19

from liability to pay the taxes when they are due.”); Ableman,

62 U.S. at 515-16 (“no State can authorize one of its judges or

courts to exercise judicial power . . . within the jurisdiction of

another and independent Government”).

If these background principles prohibit the federal and state

sovereigns from undue interference with the governmental

operations of the other, then surely they must guide the

relationship between co-sovereign States as well. Few suits

involve a greater interference with a State’s administration of

its sovereign functions than a collateral attack on its tax

proceeding, especially where, as here, that attack summons

the taxing State to answer in another State’s courts and seeks

punitive damages as well. Indeed, allowing taxpayers to

subvert the remedial scheme of the taxing State and bring

punitive damages claims against it in another State’s courts

would clearly have a chilling effect on a taxing State’s

attempt to collect entirely legitimate tax obligations. The

extensive and highly burdensome discovery allowed here, see

discussion supra at 6-8, which, in the words of the discovery

commissioner’s report, subjects “the entire audit and assess-

ment process performed by the FTB” to discovery, see

FTB Mandamus Pet. 20 (quoting Discovery Commissioner’s

Report and Recommendation, at 3), further demonstrates that

respondent’s lawsuit is a novel, unwarranted and constitu-

tionally impermissible intrusion on California’s sovereignty.

The second principle is found in the Court’s cases inter-

preting the Extradition Clause, which is the Constitution’s

other provision expressly mandating interstate comity on a

government to government basis. “The purpose of the Clause

was to preclude any state from becoming a sanctuary for

fugitives from justice of another state and thus ‘balkanize’ the

administration of criminal justice among the several states.”

Michigan v. Doran, 439 U.S. 282, 287 (1978). The Clause

recognizes that interference with another State’s efforts to

20

bring a person charged with a crime to justice “would create a

serious impediment to national unity.” Puerto Rico v.

Branstad, 483 U.S. 219, 227 (1987).*

The Court’s cases interpreting the Clause have repeatedly

rejected fugitives’ attempts to collaterally attack the charging

State’s criminal proceedings. The Court has invariably done

so, whether the attack was brought in state court, federal court

or in a state executive branch proceeding. See Branstad, 483

U.S. at 230; Doran, 439 U.S. at 290; Sweeney v. Woodall,

344 U.S. 86, 90 (1952) (per curiam); Marbles v. Creecy, 215

U.S. 63 (1909); Appleyard v. Massachusetts, 203 U.S. 222

(1906). It has applied this principle to challenges alleging

that the charge was without legal merit and an abuse of the

criminal process, see California v. Superior Court, 482 U.S.

at 412; that the charge was barred by the charging State’s

statute of limitations, see Biddinger v. Commissioner of

Police, 245 U.S. 128, 135 (1917); that the fugitive could not

receive a fair trial in the courts of the charging State, see

Branstad, 483 U.S. at 222; and that the charging State

subjected the fugitive to unconstitutional conditions of

confinement, see Sweeney, 344 U.S. at 88-90.

For example, in Sweeney the Court rejected an escaped

fugitive’s attempt to challenge the constitutionality of his

imprisonment in the charging State. See id. The Court rea-

soned that “(t]he scheme of interstate rendition . . . do[es] not

* As the Court long ago explained:

“[T}he statesmen who framed the Constitution were fully

sensible, that from the complex character of the Government, it

must fail unless the States mutually supported each other and the

General Government; and that nothing would be more likely to

disturb its peace, and end in discord, than permitting an offender

against the laws of a State, by passing over a mathematical line

which divides it from another, to defy its process ... .”

California v. Superior Court of California, 482 U.S. 400, 406 (1987)

(quoting Kentucky v. Dennison, 65 U.S. (24 How.) 66, 100 (1861)).

21

contemplate an appearance by [the charging State] in

respormient’s asylum to defend against claimed abuses of its

prison system. Considerations fundamental to our federal

system require that the prisoner test the claimed uncon-

Stitutionality of his treatment by [the charging State] in the

courts of that State.” /d. at 90 (footnote omitted). Con-

curring in the judgment, Justice Frankfurter explained that

“due regard for the relation of the States, one to another, in

our federal system . . . requires that claims even as serious as

those here urged first be raised in the courts of the demanding

State.” Jd. at 90-91.

While Sweeney involved a federal habeas corpus proceed-

ing, the Court in Michigan v. Doran rejected a state court

challenge to an extradition request. See 439 U.S. at 290.

There the Michigan Supreme Court had essentially held that

“the courts of an asylum state may review the action of the

governor and in that process re-examine the factual basis for

the finding of probable cause which accompanies the requi-

sition from the demanding state.” Jd. at 286. This Court

reversed, holding that “when a neutral judicial officer of the

demanding state has determined that probable cause exists,

the courts of the asylum state are without power to review

that determination.” /d. at 290.

The Court reasoned that the Extradition Clause, “its

companion clause in § | [the Full Faith and Credit Clause],

and established principles of comity merge to support this

conclusion. To allow plenary review in the asylum state of

issues that can be fully litigated in the charging state would

defeat the plain purposes of ” the Extradition Clause. /d.

(citations omitted). See also Branstad, 483 U.S. at 229-30

(rejecting governor’s assertion of discretion to refuse extra-

dition request on grounds that fugitive would not receive a

fair trial in charging jurisdiction).

As these cases recognize, the preservation of interstate

harmony is best achieved by mandating jurisdictional limi-

22

tations which prohibit the use of the asylum State’s judicial

process to interfere with the charging State’s proceeding. The

respect which the States owe each other as co-sovereigns in

the federal system precludes a State from questioning the

integrity and fairness of another State’s administrative and

judicial processes.

Preventing tax evasion by those who cross state lines is as

important to interstate harmony as ensuring that fugitives are

returned for trial or incarceration. Furthermore, a State’s

exercise of jurisdiction over a lawsuit such as respondent’s

involves a far greater interference with another State’s sov-

ereignty than is typically implicated in an extradition matter.

In extradition, the charging State is not hauled into another

State’s courts without its consent, it is not subjected to wide

ranging and potentially abusive discovery, and it is not

threatened with the possibility of an award of punitive

damages. Indeed, if California had criminally charged re-

spondent with tax fraud (instead of charging him civilly),

there would be little doubt that this Court’s precedents

would prevent him from bringing a tort suit in Nevada

challenging the process that led to the charge. See discussion

supra at 20-21.

That the framers of the Constitution did not expressly

contemplate the possibility of taxpayers crossing state lines

and using the courts of another State to challenge tax

proceedings brought in their former State of residence does

not render the structural principles which guide the

application of the Extradition Clause inapplicable in this

context. The framers can hardly be faulted for failing to

anticipate the novel intrusion on another State’s sovereignty

which respondent’s suit involves. See, e.g., McCulloch v.

Maryland, 17 U.S. (4 Wheat.) 316, 407 (1819). If they had,

they undoubtedly would have recognized that such suits

would balkanize tax administration and “create a serious

impediment to national unity.” Branstad, 483 U.S. at 227.

23

* * *

Throughout this country, millions of citizens cross state

lines to work, thereby incurring tax obligations to the State

where they are employed. Many citizens own property in,

and owe property taxes to, States other than that of their

primary residence. And, of course, large numbers of citizens

relocate each year from one State to another.

Obviously, whenever a state taxing authority has reason to

believe that a citizen of another State has improperly failed to

pay taxes due, by necessity its investigation will require some

contact with the taxpayer’s State of residence. That a taxing

authority engages in such contacts does not remotely justify

the courts of the taxpayer’s State of residence entertaining a

collateral attack on the taxing State’s processes. Indeed,

affirmance of the Nevada Supreme Court’s holding would

encourage tax evasion as state tax administrators will be wary

of pursuing cases if their agencies can be subjected to tort

suits for punitive damages. Moreover, as this case—with its

315 hours of depositions, not to mention the time taken to

prepare for them; its 329 document requests of the FTB, and

countless motions—demonstrates, the costs of defending such

actions will frequently make them too costly to pursue.

While tax evaders might well prefer that result, the Con-

stitution denies Nevada’s courts the power to frustrate a

co-sovereign’s enforcement of its tax laws.

24

CONCLUSION

The judgment of the Supreme Court of Nevada should be

reversed.

December 9, 2002

Respectfully submitted,

RICHARD RUDA*

Chief Counsel

JAMES I. CROWLEY

STATE AND LOCAL LEGAL CENTER

444 North Capitol Street, N. W.

Suite 345

Washington, D.C. 20001

(202) 434-4850

* Counsel of Record for the

Amici Curiae