Kobayashi, In re

• Decision Date: 10 January 1961
• Docket Number: No. 4125,4125
• Citation: 358 P.2d 539,44 Haw. 584
• Parties: In re Taxes, Kenneth K. KOBAYASHI.
• Court: Hawaii Supreme Court

Page 539

358 P.2d 539

44 Haw. 584

In re Taxes, Kenneth K. KOBAYASHI.

No. 4125.

Supreme Court of Hawai'i.

Jan. 10, 1961.

SYLLABUS BY THE COURT.

1. In determining tax liability, substance rather than the form of a transaction governs.

2. Where a building contractor entered into an indivisible contract reciting a lump sum consideration and providing for the conveyance of a lot owned by him and for the construction by him of a dwelling thereon, only that portion of the consideration received by the contractor which was properly allocable to the price for the lot was exempt from the general excise tax as a 'sale of real property' under the provisions of the Revised Laws of Hawaii 1955, § 117-3.

3. A deputy tax commissioner in charge of the assessment of a particular tax may file an appeal to the supreme court from a ruling of the tax appeal court in favor of the taxpayer on an assessment involving the tax.

4. A deputy tax commissioner for the general excise tax in the first division may file an appeal to the supreme court from an adverse ruling of the tax appeal court on an additional assessment for such tax made against a taxpayer in the first taxation division.

Shiro Kashiwa, Atty. Gen., and Ronald B. Greig, Deputy Atty. Gen., for appellant.

Yasutaka Fukushima, Honolulu, for appellee.

Before TSUKIYAMA, C. J., CASSIDY and WIRTZ, JJ., and HEWITT, Circuit Judge in place of LEWIS, J., disqualified, and HAWKINS, Circuit Judge in place of former Associate Justice MARUMOTO, resigned.

CASSIDY, Justice.

This is an appeal taken by J. A. Bell as Deputy Tax Commissioner of the Territory of Hawaii from a decision of the tax appeal court holding invalid an additional assessment of general excise tax against the appellee, a building contractor. The assessment was on income claimed by the deputy tax commissioner to be allocable to receipts for dwellings constructed by the taxpayer on lots sold in a residential subdivision owned by him. The general facts upon which the additional assessment was based were stipulated by the parties on the hearing before the tax appeal court, as follows:

'Kenneth Kobayashi, the taxpayer, purchased the tract of land, subdivided the same, installed streets, utilities and other improvements. Thereafter, the taxpayer proceeded as follows: In a typical case, each of the lots was sold by a real estate realtor and an initial payment receipt and contract was executed by and between the taxpayer and the purchaser which is in Exhibit 3. Under the said contract, the taxpayer agreed to sell, the purchaser agreed to buy said piece of land together with a dwelling house chosen by the purchaser from among the model homes and some sketches exhibited and presented by the taxpayer. The agreed purchase price under said contract was for a total sum, without the allocation as to what amount was allocable to the land and what amount was allocable to the building chosen by the purchaser. The entire transaction was what was popularly known in real estate parlance as a 'package deal.' The purchaser's intent was to buy the land and the house; the seller's intent was to sell the land and the house so selected by the purchaser. It is also understood that the seller would not have sold the land separately. Secondly, with the execution of the contract, or very soon thereafter, the taxpayer and the purchaser entered into a building contract for the purpose of facilitating the financing of said transaction by the purchaser. Upon the approval by the lending institution, immediately prior to the closing of the loan, the taxpayer executed a deed for the full purchase price as is stipulated in the contract. Prior to the delivery of said deed, the taxpayer secured revenue stamps for the full contract price. That is shown on the deed, Exhibit 5. The real estate commission to the realtor was based on the full contract price. Thereafter the taxpayer proceeded to and completed building in accordance with the model homes sketch selected by the purchaser. Those are the facts in the case. It represents a typical transaction of the taxpayer, Mr. Kobayashi.'

The documentary evidence referred to in the stipulation of facts as a representative transaction pertained to a sale of a lot in the subdivision to Harold and Ethel Isa (hereinafter referred to as the 'purchaser').

The original agreement between the taxpayer and the purchaser was executed on a standard Honolulu Realty Board printed form designated 'Initial Payment Receipt and Contract.' It acknowledged receipt by a realtor from the purchaser on Junuary 14, 1956, of a $500 deposit as earnest money, and then set forth the contract between the parties. The contract (hereinafter referred to as the 'initial contract') was dated January 14, 1956. It was filled in to provide that the taxpayer agreed to sell and the purchaser to buy: 'Property located at Pearl City town tract land containing an area of 5117 sq. ft. more or less and to build 3 bedroom home according to specification & plan upon approval and further identified as Tax Map Key No. 9-7-34-7 for the purchase price of Fifteen Thousand Two Hundred and no/100 Dollars ($15,200.00) of which the Seller hereby acknowledges payment of the sum mentioned in the above Initial Deposit Receipt and the balance of which the Purchaser hereby promises to pay as follows: Down payment of $4900.00 including above initial deposit and balance subject to conventional loan.' The second agreement between the parties is denominated 'Building Contract.' It was also dated January 14, 1956. By its terms the taxpayer agreed to construct a three-bedroom dwelling on the lot covered by the initial contract according to attached plans and specifications, in consideration of the purchaser's promise to pay $10,300 in four equal installments the first of which was to be due when materials were delivered and work was started on the job. One of the remaining exhibits is a deed, dated February 1, 1956, conveying the lot to the purchaser for a recited consideration of $10 and other valuable consideration. The other exhibit is a mortgage of the lot, dated February 4, 1956, from the purchaser to a lending institution, securing the payment of the purchaser's note in the amount of $10,300.

The General Excise Tax Law, set out in Revised Laws of Hawaii 1955 as chapter 117, imposes a tax upon the privilege of doing business. The tax is applied to gross income at rates varying according to the occupation or activity of the taxpayer. For the purposes of the law, the term 'contractor' is defined by § 117-7 ¹ to include 'every person engaging in the business of contracting to erect, construct, repair or improve buildings or structures, of any kind or description.' By § 117-14(c)(1) it is provided that 'Upon every person engaging or continuing within the Territory in the business of contracting, the tax shall be equal to two and one-half per cent of the gross income of the business.' Among other exemptions, § 117-3 provides that the words 'gross income' shall not be construed to include receipts 'from the sale of real property.' ²

The additional assessment was $4,835.67, computed at two and one-half per cent (the then prevailing rate) on $193,426.64, which is claimed by the deputy tax commissioner to be the aggregate amount of the receipts in the taxpayer's business allocable to proceeds for constructing the dwellings on the lots he sold in his subdivision during the years 1954, 1955, and 1956.

It is the taxpayer's position, sustained by the tax appeal court, that under the method employed in disposing of the lots in the subdivision 'he sold the land together with the building selected by the purchaser from among the models or sketches exhibited and/or presented and, therefore, the entire purchase price was for the sale of real property and hence not taxable under Section 117-3, Revised Laws of Hawaii 1955.'

The taxpayer has not contested the accuracy of the deputy tax commissioner's computation of the additional assessment. His appeal to the tax court was based only on the claim that the 'receipts which are made the subject of the assessment arose out of the sale of real property.' As presented and argued on this appeal the issue has been reduced to a determination of whether the entire $15,200 in the Isa transaction constituted consideration received for the sale of real property and was therefore exempt, as the taxpayer claims, or whether, as the deputy tax commissioner urges, $10,300 thereof was received by the taxpayer for constructing the building on the lot sold to the Isas and constituted income in the taxpayer's contracting business subject to the excise tax.

Appellee argues that the determination of the issue turns on whether the agreement he entered into with the purchaser is an indivisible or a divisible contract. He argues that the initial contract is the governing document and that, as the tax appeal court held, 'the so-called building contract * * * was merely an additional paper which was used to implement the original deal.'

The appellee is on firm ground in contending that the initial contract is an indivisible agreement. Its unapportioned consideration affords strong support for the contention as is indicated in the quotation given us from 12 Am.Jur., Contracts, § 317, p. 872, as follows: 'The singleness or apportionability of the consideration appears to be the principal test. * * * If the consideration to be paid is single and entire, the contract must be held to be entire, although the subject thereof may consist of several distinct and wholly independent items.' We do not take singleness of consideration to be as conclusive as stated in the quoted portion of the text, but there appears to be no necessity of pursuing the point further since the issue is foreclosed by the stipulation that the taxpayer sold lots in his subdivision only on a 'package deal' basis and that it was understood (by the parties to the sale) that the taxpayer...