The Supreme Court let him stick it to the tax man -- sorta

Ever wanted to sue the tax man? Usually you can't --- but Gilbert Hyatt found a loophole, and the Supreme Court gave him a symbolic victory Tuesday while depriving him of most actual damages.

Acting out the fantasies of anyone who's ever been audited, Hyatt sued the California tax authorities in a Nevada court and won a jury verdict of $388 million, later reduced to $1 million.

The high court justices split 4-4 on whether his suit should've been permitted at all --- a tie that allowed Hyatt's moral victory to stand. But then they said the Constitution restricted his damages to $50,000, the maximum he could have gotten if he had sued a Nevada official in Nevada court.

The case is fascinating, and not just because it's pleasurable to think about turning the tables on the auditors. At stake is the deep question of how states should be able to relate to other states, and the meaning of the full faith and credit clause of the Constitution.

The facts are your typical tax nightmare. In 1991, Gilbert Hyatt sold his house in California, rented an apartment in Nevada, registered to vote there, and opened a bank account. He claimed Nevada residency on his 1991 and 1992 tax returns, saving millions of dollars because Nevada has no income tax.

The California Tax Franchise Board smelled a rat and came after Hyatt hard. According to Hyatt, the California auditors looked into his windows and his garbage, contacted estranged family members, and discussed his affairs with the media, his business contacts and even his place of worship. Hyatt says one auditor spoke of him in anti-Semitic terms and took "trophy-like pictures" in front of his house after the audit.

When all was said and done, the California tax board concluded that Hyatt wasn't really a Nevada resident and assessed him as owing more than $10 million. Hyatt is still fighting the bill in California after he lost an 11-year administrative appeal of the audit.

Here's the part where Hyatt struck back. You can't sue the Internal Revenue Service, which is part of the federal government. And in California, you can't sue state tax auditors. But Nevada is different. In that particular slice of heaven, you can't sue the state government for negligence, but you can sue state officials for intentional wrongs they've committed against you.

So in 1998, Hyatt sued the California tax auditors in Nevada court, alleging fraud, invasion of privacy, and intentional infliction of emotional distress. California maintained that the Nevada court should apply California law which would bar any suit against it. But after the Nevada court said it would apply its own laws, the U.S. Supreme Court in 2003 approved the suit.

The high point of Hyatt's odyssey came when a Nevada trial court ruled for him against the auditors. A jury, no doubt riled up and also aware that Nevadans wouldn't be paying a penny for it, awarded Hyatt $1 million for fraud, $52 million for invasion of privacy, $85 million for emotional distress, and $250 million in punitive damages.

The Nevada Supreme Court knocked out all but the fraud claim, which still left Hyatt with a $1 million verdict in his favor. The California tax board cried foul and went to the U.S. Supreme Court.

The auditors advanced two different arguments. First, they said that one state shouldn't be able to subject another state to a suit in its courts without the first state's consent. Second, they said that if, indeed, the suit could go forward, California auditors shouldn't be subject to greater damages in Nevada court than Nevada auditors would be under the same Nevada state laws.

The first claim was the bigger one -- and on that, the court tied, which means Hyatt won because the court had to uphold a previous Nevada decision. A precedent from 1979, also involving California being sued in Nevada courts, says that the Constitution allows such suits. At the time, the liberal justices wanted to allow the suit while some of the conservatives were against it.

That makes sense in light of the general conservative preference for what Justice Anthony Kennedy has called the dignity of states, which ordinarily can't be sued for money damages in their own courts or the federal courts without their consent.

Presumably, if Justice Antonin Scalia had been alive, there would have been five votes to reverse the 1979 precedent. In truth, if states can't be sued in federal court without their consent (which is wrong, but it's the law), it makes no sense that they can be sued in other state courts without their consent.

But allowing Hyatt's suit didn't guarantee that Hyatt would get paid. The justices held 6-2 that Nevada had to treat California auditors the same way it would treat its own. Nevada state law restricts damages against state officials to $50,000, so the court knocked down Hyatt's $1 million by 95 percent, leaving him a symbolic victory only.

The basis for the court's conclusion was that the full faith and credit clause, as construed by the court's precedents, prohibits states from acting inhospitably towards one another. The majority opinion, by Justice Stephen Breyer, said that differential treatment was hostile. That seems right.

Chief Justice John Roberts, joined by Clarence Thomas, dissented. He was silent on whether Hyatt's suit should be allowed in the first place, even though he and Thomas presumably think it shouldn't have been. Roberts rather said that the full faith and credit clause doesn't require fair treatment of one state by another. Differential treatment is only hostile, he said, if there's no reason for it. And Nevada had a reason to treat California differently: it wants to protect its citizens from intentional attacks from the outside.

This is a bit odd, since Nevada should have an equal interest in protecting citizens from unjust auditors within. But Roberts did at least give some voice to Hyatt's aspiration to be protected from auditor abuse. Hyatt will have to appreciate that, since his $50,000 won't buy him much else.

Comment by clicking here.

Noah Feldman, a Bloomberg View columnist, is a professor of constitutional and international law at Harvard University and the author of six books, most recently "Cool War: The Future of Global Competition."