Oceanic Foundation v. Kondo , 53 Haw. 1 ( 1971 )

OPINION OF THE COURT BY

MARUMOTO, J.

On January 12, 1967, The Oceanic Foundation brought an action in the circuit court of the first circuit against the State director of taxation for refund of general excise taxes paid under protest to December 31, 1966, in the aggregate sum of $5,231.25. By amendment to complaint made at the conclusion of trial on November 13, 1969, it also sought a refund of all general excise taxes paid subsequent to December 31, 1966.

The circuit court entered its judgment on December 23, 1969. With respect to payments made to December 31, 1966, it adjudged that Oceanic was entitled to a refund of $200 paid after December 13,1966, but that $5,031.25 paid before that date was government realization. With respect to payments made after December 31, 1966, it adjudged a refund of all payments made to August 1969, in the aggregate sum of $12,576.22.

The director appealed to this court from the entire judgment. Oceanic cross-appealed from a portion thereof which denied recovery of $5,031.25.

We will first give a brief consideration to the cross-appeal, just enough to show that it is without merit. Recovery of $5,031.25 was denied because the payments which made up that sum were made more than 30 days before the action was brought. The claim for refund here is governed by HRS § 40-35, which provides a 30-day limitation for the bringing of an action. Oceanic contends that the applicable statutory period is the 5-year limitation of HRS § 231-23, not the 30-day limitation of HRS § 40-35. A short answer to the contention is that Oceanic did not make such contention in the circuit court.

Counsel for Oceanic stated in the circuit court: “Your Honor, I have done quite a bit of research on this point and the law seems to be that where the statute provides a method for bringing suit against the state for recovery of taxes, that the failure to follow the method is deemed by many courts to be a waiver of your rights. Now, the method provided in Section 40-35 of the present statute does require bringing of suit within thirty days of payment. I have found nothing in the equity of this particular case which would justify really a going beyond that. So I’m afraid that under the circumstances, I do not have an argument against the state’s proposition of them.”

The main appeal involves the application of HRS §§ 237-23(a)(7) and 237-23(b)(3) to the facts in this case.

HRS § 237-23 (a) (7) exempts a corporation “organized and operated exclusively for * * * scientific, or educational purposes,” from the general excise tax law. However, that exemption is limited by § 237-23(b) (3), and applies only to the corporation’s scientific and educational activities as such and not to “any activity the primary purpose of which is to produce income even though the income is to be used for or in furtherance of the exempt activities * * * .”

Oceanic is a nonprofit corporation incorporated under R.L.H. 1955 § 172-16, presently HRS § 416-19, for the advancement of research and education in marine sciences.

The activity of Oceanic, which is in question here, is the making, on December 17, 1963, of an agreement designated as “Construction and Operation Agreement”, with Sea Life, Incorporated. The nomenclature given to the agreement is immaterial. In essence, the agreement is a sublease. So, in this opinion, it will be referred to as a sublease.

On October 19, 1962, Oceanic obtained from the State of Hawaii a lease to 118 acres of Kaupo State Park, at Waimanalo, Oahu, being General Lease No. S-3709. The lease is for 65 years, at the following rental during the first 20 years: $12,000 or 1.2 per cent of gross sales and business transacted annually, whichever is higher. Rentals during the balance of the term are to be adjusted at 10-year intervals by appraisal pursuant to HRS § 171-17.

An essential requirement of the lease was that Oceanic construct, or cause to be constructed, a scientific research facility, and a public exhibiting facility, of sea life, during the first three years of the term at a cost of not less than $1,200,000, with at least $120,000 allocated to research facility, that the facilities be comparable in capacity, quality, and variety to similar first-class facilities in this country, and that their construction be such as to harmonize with the natural beauty of the surrounding terrain and nearby sea.

The lease permitted Oceanic to sublease the exhibiting facility to a subsidiary corporation, with the right in the sub-lessee to charge admission fees, and to sublease other portions of the demised premises for restaurants, gift shops, and similar facilities. The sublease to Sea Life was made pursuant to this permission.

The sublease covers 20.014 acres of the land demised in General Lease No. S-3709. It is for an initial term of 19 years, with option to renew for additional 10-year periods during the term of the basic lease. The rentals during the initial term are as follows: $30,000 per year in 1964 and 1965; $60,000 per year in 1966 and 1967; $120,000 in 1968; beginning with the year 1969 and each year thereafter, $120,000 or 12 percent of gross annual receipts, whichever is higher. Rentals during the renewed periods are set by negotiation, or by arbitration in case of failure to agree:

In addition to the payment of rentals, the sublease required Sea Life to construct the research and exhibiting facilities which Oceanic was required to construct under the basic lease, and to permit Oceanic to use all exhibiting and supporting facilities for research purposes.

Following the execution of the sublease, Sea Life constructed the required research and exhibiting facilities, and has otherwise performed its covenants thereunder; and, with the use of the facilities thus made available, Oceanic has conducted, and conducts on a continuing basis, a substantial volume of research and educational activities in marine sciences.

The general excise taxes paid under protest by Oceanic were taxes assessed by the director upon Oceanic’s rental receipts under the sublease. The director made the assessments on the ground that such receipts were derived from an activity the primary purpose of which was to produce income.

In holding in favor of Oceanic, the circuit court stated: “Based on the evidence adduced, we conclude that the primary purpose of the plaintiff’s entering into the construction and operating agreement was to complete the display and research facilities necessary to the basic functions of the plaintiff, which facilities it was required to construct or cause to be constructed under its lease from the State of Hawaii.”

Treated as a finding of fact, the statement of the circuit court is not clearly erroneous. It is amply supported by the record, which shows the following:

Oceanic was founded by Taylor Pryor, a biologist whose principal interest is sea life. Upon his visits to Marineland in Los Angeles, Seaquarium in Miami, and Marine Studios in St. Augustine, he was surprised that their facilities were not used for research. He conceived a plan to conduct research in marine sciences with the use of similar facilities, but faced the problem of financing the construction of facilities, and found a solution in the sublease.

An appearance that the sublease was aimed primarily at income production is given by the substantial rental payments provided therein. But the financial statement in the record, covering the four years between 1965 through 1968, shows that sublease rentals constituted only a small fraction of Oceanic’s total revenues during those years. The total revenues during the four years were $2,637,689, of which $270,000, or only 10.2 percent, was derived from the sublease, and $2,367,689 came from grants, donations, contracts, consulting fees, and other non-rental sources. Even in 1968, when the sublease rental was $120,000, it was only 12.5 percent of the total revenues of $955,400 for the year.

We are not concerned here with a sublease having a single purpose of income production. Our concern is with a sublease which had a dual purpose, of which, in addition to production of income, there was the objective of obtaining the construction of research and educational facilities. In the light of the evidence in the record, we cannot say that the circuit court erred in finding that the latter was the primary purpose of the sublease.

Johnson H. Wong, Deputy Attorney General (Bertram T. Kanbara, Attorney General, with him on the briefs) for defendant-appellant, cross-appellee. Arthur B. Reinwald (Anthony & Waddoups of counsel) for plaintiff-appellee, cross-appellant.

The sole question for decision in this case is whether Oceanic’s rental receipts, which were claimed by the director to be taxable, were derived from an “activity the primary purpose of which is to produce income * * * ”. The questioned receipts were derived from the sublease. The finding of the circuit court that the primary purpose of the sublease was to obtain the construction of the required research and educational facilities involves a converse finding that income production was not its primary purpose. Thus, the finding disposes of the issue in this case.

Affirmed.