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Ninth Circuit Upholds California Tax Appeals Process as Providing a Plain, Speedy, and Efficient Remedy

In Hyatt v. Yee, the plaintiff disputed the California Franchise Tax Board's ("FTB's") determination that he owed $7.4 million in unpaid taxes for the 1991 and 1992 tax years on the ground that he moved to Nevada in 1991. Under California law, a plaintiff contesting an assessment may not litigate in state court until exhausting administrative remedies set out in Cal. Rev. & Tax Code § 19381. Generally, a plaintiff must first pay the disputed tax before seeking a refund. Cal. Rev. & Tax Code § 19382. Under this "pay-then-protest" scheme, if the FTB does not mail a notice of action on the claim within six months, the plaintiff may sue in state court. Cal. Rev. & Tax Code § 19385. However, if a plaintiff is contesting an assessment solely based on residency, he may instead opt to "protest-then-pay" a tax by seeking reconsideration in front of the FTB, appealing to the State Board of Equalization ("SBE"), and then suing in state court. See Cal. Rev. & Tax Code §§ 19044 & 19381.

Hyatt sought to invoke federal jurisdiction for alleged constitutional violations in his ongoing dispute with the FTB after it took the FTB at least 11 years to make a final determination under protest-then-pay and the SBE had not come to a ruling in another 8 years. All told, it had taken at least 22 years to litigate under protest-then-pay, during which time Hyatt incurred substantial attorney fees and the original assessment ballooned in amount from $7.4 million to over $55 million. In addition to reconsideration of the assessment, Hyatt sought attorney fees in federal court (not apparently available in protest-then-pay). However, the Tax Injunction Act removes jurisdiction from district courts to hear any dispute over a state's imposition of taxes where "a plain, speedy and efficient remedy may be had in the courts of such State." 28 U.S.C. § 1341.

Here, the Ninth Circuit rejected the plaintiff's argument that California's tax appeal procedures did not come within the scope of the Act because pay-then-protest was a plain, speedy and efficient remedy. It was immaterial whether or not protest-then-pay also qualified. As long as a litigant can switch to pay-then-protest, he can have his appeal heard and determined by the FTB within 6 months after which he can proceed to state court. While the ruling narrowly concerns the jurisdiction of federal courts to review state tax appellate procedures, it is meaningful because it gives the FTB and SBE permission to take unlimited time reviewing residency-based appeals under protest-then-pay. Unless a litigant is willing risk paying decades of legal fees, the proper procedure is to pay the tax first to ensure a timely adjudication.

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