Hyatt v. Yee

• Decision Date: 26 September 2017
• Docket Number: No. 15-15296.,15-15296.
• Citation: 871 F.3d 1067
• Parties: Gilbert P. HYATT, Plaintiff–Appellant, v. Betty T. YEE, in her official capacity as California Franchise Tax Board member and California State Board of Equalization member; Diane L. Harkey, in her official capacity as California State Board of Equalization member; Jerome E. Horton, in his official capacity as California Franchise Tax Board member; Michael Cohen, in his official capacity as California Franchise Tax Board member; George Runner, in his official capacity as California State Board of Equalization member; Fiona Ma, in her official capacity as California State Board of Equalization member and Franchise Tax Board member, Defendants–Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

871 F.3d 1067

Gilbert P. HYATT, Plaintiff–Appellant,

v.Betty T. YEE, in her official capacity as California Franchise Tax Board member and California State Board of Equalization member; Diane L. Harkey, in her official capacity as California State Board of Equalization member; Jerome E. Horton, in his official capacity as California Franchise Tax Board member; Michael Cohen, in his official capacity as California Franchise Tax Board member; George Runner, in his official capacity as California State Board of Equalization member; Fiona Ma, in her official capacity as California State Board of Equalization member and Franchise Tax Board member, Defendants–Appellees.

No. 15-15296.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted February 17, 2017—San Francisco, California

Filed September 26, 2017

Erwin Chemerinsky (argued), UC Irvine School of Law, Irvine, California; Donald J. Kula and Oliver M. Gold, Perkins Coie LLP, Los Angeles, California; Malcolm Segal, Segal & Associates PC, Sacramento, California; for Plaintiff–Appellant.

Michael von Loewenfeldt (argued), Brady R. Dewar, and James M. Wagstaffe, Kerr Wagstaffe LLP, San Francisco, California; Seth P. Waxman (argued), Wilmer Cutler Pickering Hale and Dorr LLP, Washington, D.C.; Debbie Leonard, James Bradshaw, and Adam Hosmer-Henner, McDonald Carano Wilson LLP, Reno, Nevada; Cynthia J. Larsen, Katie DeWitt, and David W. Spencer, Orrick Herrington & Sutcliffe LLP, Sacramento, California; for Defendants–Appellees.

Before: William A. Fletcher, Julio M. Fuentes,^* and Johnnie B. Rawlinson, Circuit Judges.

OPINION

FUENTES, Senior Circuit Judge:

For over 22 years, Plaintiff Gilbert Hyatt has contested in administrative proceedings a California Franchise Tax Board ruling that he owed close to $7.4 million in taxes, penalties, and interest. This initial deficiency, compounding daily with 3% interest, grew to over $55 million at the time he filed his complaint in this case. The taxes were assessed on income he earned during the 1991 and 1992 tax years, during which Hyatt alleges he had moved from California to Nevada. Finally, while his administrative proceedings were still pending, Hyatt filed this suit in the district court, claiming that he had been unconstitutionally targeted and that so much time had passed in the administrative review of his tax claims that he can no longer receive due process. He asked the district court to enjoin California from collecting this tax bill.

Because we agree with the district court that the Tax Injunction Act bars it from "enjoin[ing], suspend[ing] or restrain[ing] the assessment, levy or collection of [this] tax under State law where," as here, "a plain, speedy and efficient remedy may be had" in the state court, we affirm the judgment of the District Court.

I. BACKGROUND

A. California's Statutory Tax Framework

Under California law, a taxpayer seeking to "prevent or enjoin the assessment or collection of" a California residency-based income tax may not file suit in state court without first exhausting the administrative remedies set forth in the California Revenue and Taxation Code.¹ In general, a California taxpayer must "pay now, litigate later."² However, a taxpayer seeking to contest his tax bill solely on the basis that he was not a resident of California during the disputed period has two options. The taxpayer may either pay now and litigate later, or may bring his claim through a protest-then-pay process, which allows him to delay paying the disputed tax. There is a significant difference: a taxpayer who pays now and litigates later can bring his claims to state court within six months, which guarantees an expeditious route to the state courts on the taxpayer's liability. A taxpayer who disputes his residency through the protest-then-pay process, however, must wait until the administrative agencies render their decisions before filing a challenge in state court.

1. Postdeprivation "Pay-Then-Protest" Process

The "pay-then-protest" process³ requires the challenging taxpayer to make "payment of the tax," after which the taxpayer can file a refund claim with the Franchise Tax Board (the "Tax Board").⁴ If the Tax Board "fails to mail notice of action on [the] ... refund claim within six months after the claim [is] filed, the taxpayer may ... bring an action [in state court] against the [Tax Board] ... on the grounds set forth in the claim for the recovery of ... [the] overpayment."⁵ If the Tax Board acts on the challenger's refund claim and denies it, a taxpayer "claiming that the tax computed and assessed is void ... may bring an action [in state court], upon the grounds set forth in that claim for refund ... for the recovery of the ... amount paid" plus interest.⁶ These grounds need not be included in the "four corners of the initial claim," but the Tax Board must have "actual notice" of them.⁷

2. Predeprivation "Protest-then-Pay" Process

The plaintiff in this case chose to challenge his tax assessment through the protest-then-pay process. A taxpayer who challenges an assessment through this process⁸ must "file with the [Tax Board] ... a written protest against the proposed deficiency assessment, specifying in the protest the grounds upon which it is based."⁹ If the protest is filed, the taxpayer may request that the Tax Board "reconsider the assessment of the deficiency."¹⁰ If the protest is denied, the taxpayer may "appeal[ ] in writing from the action of the [Tax Board] ... to [the California State Board of Equalization ("Appeals Board") ]."¹¹ "The [Appeals Board] ... shall hear and determine the appeal," and an unsuccessful taxpayer may "file[ ] a petition for rehearing."¹² After rehearing before the Appeals Board, a taxpayer may seek review in a California state court.¹³

A taxpayer who initially challenges a residency-based income tax assessment through the protest-then-pay administrative process may elect to use the pay-then-protest process at any point by paying the disputed tax, thus guaranteeing a route to state court within six months.¹⁴

B. Factual History¹⁵

Hyatt alleges that in 1991, he moved from California to Nevada. Two years later, the Tax Board commenced an audit to determine whether Hyatt owed additional California state income taxes for the 1991 tax year. The Tax Board initiated a second audit in 1996 regarding the 1992 tax year. Ultimately, the Tax Board determined that Hyatt owed $1.8 million for the 1991 tax year and $5.6 million for the 1992 tax year.

Without first paying his taxes, Hyatt challenged his tax bill on the grounds that he did not owe these taxes because he was a resident of Nevada during 1991 and 1992. His Tax Board protest lasted 11 years. Then, in 2008, Hyatt filed an administrative appeal of the Tax Board's determinations before the Appeals Board. That appeal has yet to be decided. Hyatt alleges that "the delays in completing the administrative process fall squarely and primarily at the feet of the [Tax Board]."

In April 2014, Hyatt brought this action in the district court against the members of the Tax Board and Appeals Board under 42 U.S.C. § 1983, seeking to enjoin the pending administrative tax review process. At the time he filed suit, his tax bill had ballooned to over $55 million. In his Complaint, Hyatt alleges violations of the due process and equal protection clauses of the Fourteenth Amendment, and alleges that he "can no longer receive a full and fair adjudication on the merits due to the extreme passage of time and resulting loss of material evidence." He claims that during the long delay in the administrative process, "material witnesses have passed away, memories of witnesses have faded, and documents relevant and important to Hyatt are no longer available." Because of these events, he claims that he cannot properly challenge the Tax Board's allegations concerning his residency. Hyatt further states that during this administrative process, the Tax Board was out to "get" him and that the Tax Board singled him out for reasons not rationally related to any legitimate state interest.

C. The Tax Injunction Act

The Tax Injunction Act provides that: "The district courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State."¹⁶ This provision "restricts the power of federal district courts to prevent collection or enforcement of state taxes."¹⁷ The Supreme Court has "interpreted and applied the Tax Injunction Act as a ‘jurisdictional rule’ and a ‘broad jurisdictional barrier.’ "¹⁸

The Tax Injunction Act was passed as "only one of several statutes reflecting congressional hostility to federal injunctions issued against state officials in the aftermath of [the Supreme] Court's decision in Ex parte Young ."¹⁹ It "has its roots in equity practice, in principles of federalism, and in recognition of the imperative need of a State to administer its own fiscal operations."²⁰ It prevents federal courts from intruding into state tax collection, "an area which deserves the utmost comity to state law and procedure."²¹ This is because "[t]he power to tax is basic to the power of the State to exist."²² Thus, "[g]iven the systemic importance of the federal balance, and given the basic principle that statutory language is to be enforced according to its terms, federal courts must guard against interpretations of the Tax Injunction Act which might defeat its purpose and text."²³

Under the Tax Injunction Act, a litigant cannot challenge the administration of state tax law in federal court if the state court provides "a plain, speedy and efficient remedy" for the taxpayer's claims. This "narrow exception"²⁴ requires only that a state court remedy "meet ‘certain minimal procedural criteria.’ "²⁵ Specifically, a plain, speedy, and efficient remedy must provide a taxpayer with "a full hearing and judicial determination at which [he] may raise any and all constitutional...