Court Opinion

ID: 9611814
Source: CourtListenerOpinion
Date Created: 2023-08-22 04:00:42.379246+00
Date Added: 2024-06-11T15:31:29.692219
License: Public Domain

CONCURRING & DISSENTING OPINION OF
ABE, J.
The majority of this court dismisses the taxpayer’s cross-appeal and I agree.
On the appeal of the tax director, the majority of this court affirms the judgment of the trial court that the rental income derived by Oceanic from Sea Life under a sublease is exempt from the general excise tax.1 I disagree.
In reaching its conclusion this court repeats with approval the trial court’s finding that:
“[T]he primary purpose of the plaintiff’s entering into the construction and operating agreement was to complete the display and research facilities necessary to the *7basic functions of the plaintiff, which facilities it was required to construct or cause to be constructed under its lease from the State of Hawaii.”
Then this court says that 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 * * *’ ”.
I.
It appears that this court is conveniently or purposely skirting around the basic issue of this case. Is the rental income derived from the educational activity of the taxpayer?
HRS § 237-23 (b) (3)2 provides tax exemption for the gross income of an otherwise exempt taxpayer only if two tests are met: First, the activity that generated the income must be “the . . . educational . . . activities of the [taxpayer].” And second, the income must not be produced by “any activity the primary purpose of which is to produce income even though the income is to be used for or in the furtherance of the exempt activities of such persons.”
The first statutory test requires that the gross income to be tax exempt must be derived from the educational activity of such person and this requires a finding of “what is the activity.” This finding of “what is the activity” encompasses both isolating the activity that produced the income and then characterizing it as educational or noneducational. Thus the initial question becomes exactly what activity generated Oceanic’s income. There appears to be no argument that Oceanic received the income now under contention in *8return for leasing certain property. Thus, the question would seem to be whether the leasing activity cán be characterized as educational.
While this court looks through the nomenclature of “Construction and Operation Agreement” and holds that the taxpayer and Sea Life entered into a sublease, amazingly, this court does not recognize the activity being questioned for this tax purpose as this same leasing activity and takes great pains to re-focus the inquiry elsewhere.
This court states that it is “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.”
While the “construction and operation of research and educational facilities” may or may not be educational, it is clear that the taxpayer did not sell any merchandise or perform any service in connection therewith to derive any income from such activities. Further, it is not an act to be performed by the taxpayer; it is a duty, responsibility or liability assumed by Sea Life. Thus, how can it be said that the activity being taxed is the “construction and operation of the research and educational facilities”? It must be emphasized that the tax is not being levied on Sea Life but on Oceanic — the taxpayer.
Here, it must not be forgotten, the subject of the tax is the rental received, by the taxpayer from Sea Life under the provisions of the sublease. The activity that produces the rent is the permitted use of the premises by Sea Life under the sublease. In other words the rental is solely in consideration for the permitted use of the' premises under the sublease by Sea Life in its commercial activities or undertaking. It appears to me that it would be absolute nonsense to say that Sea Life is paying the rental fixed in the sublease as consideration fo.r its obligation to construct and operate the “research and educational facilities”, which entails on*9ly expenditures and no receipt.
It is clear to me that the activity that produces the rental, the subject of the tax, is the permitted use of the premises by Sea Life under the sublease. Thus, the basic issue to be decided here is whether the sublease of the premises falls within the educational activity of the taxpayer.
While the phrase “educational” activity does not lend itself to easy mechanical definitions and certainly education is not limited to areas bordered by the traditional concept of a classroom, Wilhoit v. Fite, 341 S.W.2d 806, 816 (Mo. 1960), it would seem that such activity would require the transference of knowledge by “methodical instruction.” Bohemian Gymnastic Ass’n Sokol of City of N.Y. v. Higgins, 147 F.2d 774, 776 (2nd Cir. 1945). And though often one learns a great lesson from property transactions such knowledge is not derived from methodical instructions. Thus, in my opinion the leasing of the premises by Oceanic to Sea Life cannot be characterized as educational activity and does not meet the first statutory test and therefore the rental proceeds derived from the lease should be subject to our general excise tax.
II.
Separate and independent from the first test, i.e., characterizing the activity, the second test inquires as to the purpose of the activity that generates the income. The provision is crystal clear that the exemption is not to apply “to any activity the primary purpose of which is to produce income.” (Emphasis supplied.) Thus, even assuming that the leasing activity may be deemed “educational,” under the second test the rental proceeds may still be taxable if the primary purpose of the sublease transaction is to produce income.
On this point the trial court made a finding without any basis in the record. In reviewing the rent money based on the public exhibitions the court assumed that “[t]he rev*10enues generated from admission charges to run the exhibitions would have been exempt to Oceanic if operated directly by it.” Further, it held “that the interposition of an agreement between plaintiff and Sea Life did not convert the exempt activities into one primarily to produce income.”
The assumption by the trial court that the proceeds would have been exempt if Oceanic operated the exhibitions directly instead of Sea Life may not be correct. Under HRS § 237-23(b) (3) if the primary purpose of that activity, though it may be deemed an “educational activity,” were to produce income, the gross proceeds would be taxable.
In cases such as these the objective standard to be used by the court should be the basic inquiry of whether the activity contemplates a “profit.” If it does the income should be presumed taxable. A moment’s reflection will indicate why. Generally, the primary purpose of an organization offering the sale or rental of goods and services is for one of two reasons: either to make them available to the consumer or to make money. If the primary purpose is to make the goods or services available to the consumer then any “profit” motive, no matter how slight, merely hinders the achievement of this goal, because by foregoing profit the price can be lowered and correspondingly more people will be able to partake of the same.
On the other hand, if the primary purpose is to produce income for other uses, then a profit is absolutely necessary to achieve this goal. Therefore the evidence of a “profit” motive should raise the presumption that the primary purpose of the activity was to produce income and thereby derive a profit.
On this point the sublease agreement clearly points to Oceanic’s intent. Instead of setting the rent on a cost basis,3
*11Seá Life is required to:
“* * * pay to the Foundation for the privileges and concessions herein granted to it, in semi-annual installments commencing January 1, 1964, and on the first day of July and January of each year thereafter until January 1, 1969, a sum equal to 1.2% of the gross revenue of Sea Life for the preceding six (6) months, but in no event less than the following semi-annual minimum payments:
January 1 and July 1 of 1964 and 1965: $15,000
January 1 and July 1 of 1966 añd 1967: $30,000
January 1 and July 1 of 1968: $60,000
Commencing January 1, 1969, and on July 1 and January 1 of each year thereafter, during the terms of this agreement, Sea Life shall pay to the Foundation a sum equal to 12% of the gross .revenue of Sea Life for the preceding six (6) months, or $60,000, whichever is higher.”4
It should be noted that this rental provision is substantially the same as rental covenants contained in regular commercial leases entered into by landowners for the sole purpose of deriving income and profit. Further, it appears that the rental of 12% of the gross revenue is higher than most percentage rental fixed in such leases.
On this point, interestingly, counsel for the taxpayer stated to this court that Sea Life was finding the rental of 12% of the gross revenue too onerous and that renegotiation on the rental was contemplated.
As I have stated in Part I, I believe the activity which produces the rental, which is the subject of the tax, is the transaction whereby the taxpayer permits Sea Life to use the premises. Also, the obligation incurred by Sea Life “to construct and operate the research and educational facilities” is additional consideration to be performed by Sea Life in exchange for this same permitted use of the premises. In other words, Sea Life agreed to pay the rentals pro*12vided for in the sublease and also agreed “to construct and operate the'research and educational facilities” as consideration for the use of the premises. Then, there is no question that the construction and operation of such facilities inure to the benefit of the sublessor (Oceanic). Also, the performance by Sea Life of its undertaking under the sublease fulfilled the requirement of Oceanic under the State lease.
I don’t think it is unreasonable to assume that Sea Life would have been willing to pay a higher monetary rental (whether in form of fixed minimum or percentage) if it were not required to assume the obligation of constructing and operating such facilities. Now, inasmuch as the taxpayer benefits from the performance, of this obligation by Sea Life, and as it is without question additional consideration for the permitted use of the premises, ,it would appear to me that the annual non-cash benefits which inure to the taxpayer should be reduced to monetary figure by amortization formula or otherwise and taxed as rental together with the cash realization.
Now, if a lessee is required to pay in addition to certain fixed rental the real property tax, the real property tax so paid is considered as part of the rental received by the landlord. Then, if under a term of lease, the lessee is required to pay for the education of a landlord’s son, wouldn’t such payment for education be taxable as additional rental? In the second hypothetical case, landlord would not receive money but he would be receiving the benefits as he would not be required to pay for his son’s education. In other words, there a lessee had assumed the obligation of educating the lessor’s son. Here, Sea Life has assumed the taxpayer’s obligation (as lessee under the State lease) to “construct and operate research and educational, facilities,” whereby the taxpayer is relieved from making substantial expenditures. There is no question that because of this assumption of obligation by Sea Life, the taxpayer receives substantial benefits. Should the non-cash benefits to this *13sublessor be treated any differently from other non-cash benefits such as payment of lessor’s property taxes or the education of lessor’s son?
Here, the taxpayer by shifting its obligation to Sea Life received substantial benefit and I can see no reason that this benefit to the taxpayer should be treated differently. Hence, the benefits5 received should be reduced to an annual monetary figure and be taxed.
Thus, even assuming that the trial court and this court are correct in their conclusion that the sublease was entered into for “the construction and operation of the research and educational facilities,” clearly the object of the sublease is to provide income. Firstly, to have Sea Life pay the monetary rental; and secondly, to have Sea-Life assume the obligation of “constructing and operating the research and educational facilities,” and eliminate the necessity of raising and expending substantial sums of money for those purposes and thereby indirectly deriving an income.
It would appear to me the sublease in question is no different from any commercial lease where a lessee is .required to construct improvement and also to pay rental for the permitted use, of leased premises. However, it appears that this court in its anxiety to afford a tax exemption to the taxpayer is placing blinders upon itself so as not to see beyond what the taxpayer wants the court to see and to see no further than the trial court did on this issue. Otherwise, how can this court equate the finding of the trial court “that the primary purpose of the plaintiff entering into the construction and operating agreement was to complete the display and research facilities” to a finding that the subject of the tax — the rental paid and received under the sublease — was not therefore for the primary purpose of producing income.
In my opinion, the sublease was entered into not only for *14the primary purpose, but solely for the purpose of deriving an income.
Also, it is uncontroverted that the payments under the sublease are used for research and according to the president of Sea Life is “the whole basis of our ability to work over there.” In other words Oceanic entered into the lease transaction intending to make a profit thereby and to use such profit to finance its scientific and research programs. Thus, I believe the income derived by Oceanic under the construction agreement with Sea Life does not come within the exemption of HRS § 237-23(b) (3) and the income is taxable under the general excise tax law.

Then, under the decision of this court, will all leases executed by the Bishop Estate (founded to further the education of Hawaii’s children) to schools, universities, theatres, television and radio stations, bookstores, etc., be deemed “educational activities” and therefore the rental proceeds thereunder be exempt from our general excise tax?

HRS § 237-23(b) (3) reads:
“(b) The exemptions enumerated in subsection (a)(6) to (9) shall apply only:
(3) To the fraternal, religious, charitable, scientific, educational, communal, or social welfare activities of such persons, or to the activities of such hospitals, infirmaries, and sanitaria 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 of such persons.

Oceanie’s semi-annual rental payments to the State are only $6,000 or 1.2% of gross. It should also be emphasized here that under the terms of the sublease the taxpayer is assured of a gross profit of at least ten times its rental cost.

This provision appears on page 2 of the agreement i*..Jer subtitle “3. Payments to the Foundation.”

Of course, the determination may be difficult but I don’t think it is impossible.