Grace Business Dev. Corp. v. Kamikawa

• Citation: 92 Haw. 608,994 P.2d 540
• Decision Date: 29 February 2000
• Docket Number: No. 22028.,22028.
• Parties: In the Matter of the Tax Appeal of GRACE BUSINESS DEVELOPMENT CORPORATION, Respondent-Plaintiff-Appellant, v. Ray K. KAMIKAWA, Director of Taxation, State of Hawai`i, Petitioner-Defendant-Appellee.
• Court: Supreme Court of Hawai'i

994 P.2d 540

92 Haw. 608

In the Matter of the Tax Appeal of GRACE BUSINESS DEVELOPMENT CORPORATION, Respondent-Plaintiff-Appellant, v. Ray K. KAMIKAWA, Director of Taxation, State of Hawai`i, Petitioner-Defendant-Appellee.

No. 22028.

Supreme Court of Hawai`i.

February 29, 2000.

Christopher J. Muzzi, Deputy Attorney General, on the writ, for petitioner-defendant-appellee.

MOON, C.J., LEVINSON, NAKAYAMA, and RAMIL, JJ., and Circuit Judge SIMMS, assigned by reason of vacancy.

Opinion of the Court by MOON, C.J.

We granted the application of the petitioner-appellee Ray K. Kamikawa, Director of Taxation, State of Hawai`i [hereinafter, the Director] for a writ of certiorari on December 9, 1999 to review the decision of the Intermediate Court of Appeals (ICA). See Grace Business Dev. Corp. v. Kamikawa, 92 Hawai`i 659, 994 P.2d 591 (Ct.App.1999)

[hereinafter, the ICA's majority opinion or the majority]. The majority reversed the tax appeal court's dismissal of respondent-appellant Grace Business Development Corporation's (Grace) claim against the Director for lack of subject matter jurisdiction. The question presented is whether the ICA erred in holding that the tax appeal court had subject matter jurisdiction to consider a request for refund of taxes paid under protest, pursuant to Hawai`i Revised Statutes (HRS) § 40-35 (1993),¹ in the absence of a tax assessment, denial of a refund, or other adverse ruling. In accord with Associate Judge Acoba's dissenting opinion [hereinafter, the dissent], we hold that there was no actual dispute within the meaning of HRS § 40-35. Accordingly, we reverse the decision of the ICA with respect to HRS § 40-35 and affirm the tax appeal court's dismissal of the claim.

I. BACKGROUND

The background facts are set forth in detail in the ICA's majority opinion. Grace Business Dev. Corp., at 660-663, 994 P.2d at 592-595. Briefly stated, the facts are as follows:

Grace is one of a small number of businesses incorporated under HRS chapter 420 (1993) and claiming tax exemptions as a business development corporation (BDC). After incorporating as a BDC on December 11, 1996, Grace took over operation of the Nimitz Holiday Inn and the Best Western Plaza Hotel under a licencing agreement with the owner and previous operator, Nimitz Partners, on April 24, 1997.

HRS chapter 420, originally promulgated in 1957, authorized the creation of BDCs "for the purpose of promoting, developing, and advancing the prosperity and economic welfare of the Pacific Islands[.]" HRS § 420-2(a) (Supp.1998). In addition to those powers enjoyed by business corporations under the general corporation laws, BDCs were granted powers generally associated with privately financed credit corporations, including, inter alia, the power to borrow and lend money, the power to hypothecate, and the power to assume and guarantee obligations. Chapter 420 exempted BDCs from certain state taxes, including the general excise/use tax (GET) and the transient accommodations tax (TAT). HRS § 420-16 (1993).

On October 17, 1997, the Director publicly issued Tax Information Release (TIR) No. 97-5, which reflected a change in the Department's policy with respect to BDC tax exemptions aimed at disallowing exemptions for businesses not intended to benefit from Chapter 420. Exemptions were previously afforded solely by virtue of incorporation under chapter 420; however, the TIR stated, in part, that:

[HRS chapter 420] was enacted to permit the establishment of privately financed credit corporations which would make available medium and long-term capital in the form of loans and investments. The BDCs were given powers to accomplish the purpose of making capital available to small and medium size business entities.

....

Substantial tax benefits are offered to BDCs because of the significant business risk they undertake in providing loans to struggling businesses for financing industrial businesses ... which will provide many jobs.

BDCs may not be formed for the purpose of conducting active business enterprises, such as movie theaters, management consulting services, or retailing. The Department will challenge any tax benefits claimed for BDCs formed or operated for these and any other purposes not within the design and intent of the law.

On December 10, 1997, a taxation compliance administrator with the Department sent Grace a letter noting its status as a BDC, advising it of the issuance of TIR No. 97-5, and enclosing a copy thereof. All registered BDCs were sent similar notices. By letter dated December 19, 1997, the Department notified Grace it was commencing an audit of its operations with respect to all taxes administered by the Department.

On January 20, 1998, Grace filed a GET return and a TAT return, both for the month of April 1997, and paid the applicable taxes under protest pursuant to HRS § 40-35, stating:

It is Grace's position that because it is a valid [BDC] lawfully formed pursuant to HRS chapter 420, it is not subject to Hawaii general excise taxes or transient accommodations taxes. It is also Grace's position that as a [BDC] it is not obligated to report its gross income on, or file [sic] general excise tax returns or transient accommodations tax returns.

On January 23, 1998, Grace filed, in the tax appeal court, its Complaint for Refund of Taxes and Declaratory Judgment and Injunctive Relief against the Director.

Thereafter, the 1998 Legislature passed Act 157, § 5, repealing HRS chapter 420, effective December 31, 2001, and gradually eliminating its tax exemption on a four-year sliding scale in the interim. 1998 Haw. Sess. L. Act 157, § 5 at 596-97.

On May 21, 1998, the Director issued TIR No. 98-3, which reiterated that the Department "will not consider operating business activities as fulfilling the purposes and requirements of chapter 420, HRS, and ... to challenge any tax exemptions or credits taken with respect to those activities."

On May 26, 1998, the Honolulu Advertiser headlined its "Business" section with an article about BDCs and their impending demise. The article featured several quotations of the Director, including the following:

[W]e haven't found one BDC that fulfills the purposes of the BDC law, ... so we're going to disallow their exemptions immediately, without any regard to the phase-out schedule.

....

"Company C," which is in the hotel industry, has avoided paying $520,000 in [GETs] and $690,000 in [TATs].

Although the Director declined to name specific BDCs, the article identified Grace as a BDC that operates the Plaza Hotel. The deposition testimony of a Department employee confirmed that Grace was "Company C."

On March 24, 1998, the Department, internally, had estimated annual tax losses due to Grace's HRS chapter 420 exemption to be $722,949 in GETs and $693,794 in TATs. A proposed assessment prepared by the Department for 1997 totaled $1,151,909.80. However, no notice of assessment was sent to Grace.

On July 17, 1998, Grace filed a motion for summary judgment for the declaratory relief and refund prayed for in its complaint. Simultaneously, the Director filed a motion to dismiss, alleging a failure to state a claim for which relief could be granted. Grace conceded that the tax appeal court lacked jurisdiction under HRS chapter 232 (1993) regarding tax appeals because there was no extant assessment, but claimed that the tax appeal court had jurisdiction under HRS § 40-35. Grace also acknowledged that its prayer for injunctive relief was moot.

On August 11, 1998, the tax appeal court heard Grace's motion for summary judgment and the Director's motion to dismiss. The tax appeal court's October 2, 1998 order stated the grounds for decision as follows:

Director's Motion to Dismiss is granted on the ground that the Tax Appeal Court lacks jurisdiction over this case because (1) [Grace] has not met the disputed claim or assessment requirements for an appeal to this court under HRS § § 40-35, or 232-11, (2) HRS § 632-1 prohibits declaratory relief in any controversy with respect to taxes, and (3) [Grace] has advanced no grounds for injunctive relief. For the same reasons, [Grace]'s Motion for Summary Judgment is denied.

Judgment was entered on the same date.

On appeal to the ICA, Grace argued that the tax appeal court erred because (1) HRS § 40-35 does not require an assessment or demand for payment by the Director of a specific amount of taxes as a technical pre-condition to a claim by a taxpayer for refund of payment made under protest, and (2) Grace's action for declaratory relief sought a determination that it was a valid [BDC] rather than a determination of a controversy with respect to taxes. The ICA reversed the judgment of the tax appeal court as to Grace's refund request, but affirmed the judgment as to Grace's request for declaratory relief.

As to Grace's refund request, the ICA's majority opinion held that the tax appeal court had subject matter jurisdiction over Grace's request for a refund of taxes paid under protest pursuant to HRS § 40-35 because a "dispute" existed between Grace and the Director. The majority's holding was based, in part, on its determination that "[t]he Department's public information releases [TIRs], its directive to Grace, its audit of Grace, and the Director's thinly veiled public comments about Grace, all in relation to the subject tax issue, when coupled with Grace's payment under protest of the taxes at issue, surely created a `dispute[.]'" Grace Business Dev. Corp., at 670, 994 P.2d at 602.

II. STANDARDS OF REVIEW

"Inasmuch as the facts [of this case] are undisputed and the sole question is one of law, we review the decision of the [t]ax [a]ppeal [c]ourt under the right/wrong standard." Kamikawa v. Lynden Air Freight, Inc., 89 Hawai`i 51, 54, 968 P.2d 653, 656 (1998) (citations and internal quotation marks omitted). "The interpretation of a statute is a question of law reviewable de novo." Gray v. Administrative Director of the Court, State of...