States Are Immune From Private Suits in Other States’ Courts

The U.S. Supreme Court ruled that states are immune from private suits brought in other states’ courts. In the Franchise Tax Board of California v. Hyatt, the court held that California was immune from a lawsuit filed by a taxpayer in Nevada courts.

By a 5-4 vote, the Court overruled longstanding precedent set in Nevada v. Hall, 440 U. S. 410 (1979). In Hall, the Court held that the Constitution did not bar private suits against a state in the courts of another state.

Dispute Over Taxpayer’s State of Residency

In this case, the taxpayer earned substantial income from a technology patent in the 1990s. Before receiving the patent, he was a long-time California resident.

In 1991, he sold his house in California. Then, in Nevada, he:

  • rented an apartment,
  • registered to vote,
  • obtained insurance,
  • opened a bank account, and
  • acquired a driver’s license.

He filed his 1991 and 1992 income tax returns claiming residency in Nevada. Nevada has no personal income tax.

The California Franchise Tax Board (FTB) suspected that the taxpayer’s move was a sham. It launched an audit and concluded that the taxpayer owed millions of dollars in back taxes.

Nevada Court Held Nevada Could Enforce State Immunity

The taxpayer sued the FTB in Nevada state court for torts he claimed the FTB committed during the audit.

The FTB argued that, under the Full Faith and Credit Clause, Nevada courts had to apply California’s statute immunizing the FTB from liability for injuries caused by its tax collection.

The Nevada Supreme Court held that the Full Faith and Credit Clause did not prohibit Nevada from applying its own immunity law to the case. Under that law, the FTB had immunity for negligent but not intentional torts. On remand, a Nevada court awarded damages to the taxpayer.

Hall Overruled

The FTB petitioned the U.S. Supreme Court for review, raising the question of whether Hall should be overruled. The Court did overrule Hall in its decision.

The Court found that Hall was irreconcilable with:

  • constitutional structure; and
  • historical evidence that states were immune from private suits, both in their own courts and in other courts.

Because the FTB is immune from the taxpayer’s suit in Nevada’s courts, the Supreme Court reversed the judgment of the Nevada court and remanded the case for further proceedings.

Franchise Tax Board of California v. Hyatt, U.S. Supreme Court, Dkt. 17-1299, May 13, 2019

Login to read more on CCHAnswerConnect.

Not a subscriber? Sign up for a free trial or contact us for a representative.

AUTHOR

CCHTaxGroup

All stories by: CCHTaxGroup