Tax Appeal of Central Union Church--Arcadia Retirement Residence, Matter of, 6684

• Citation: 624 P.2d 1346,63 Haw. 199
• Decision Date: 04 March 1981
• Docket Number: No. 6684,6684
• Parties: In the Matter of the TAX APPEAL OF CENTRAL UNION CHURCH ARCADIA RETIREMENT RESIDENCE, Taxpayer.
• Court: Hawaii Supreme Court

Page 1346

624 P.2d 1346

63 Haw. 199

In the Matter of the TAX APPEAL OF CENTRAL UNION CHURCH

ARCADIA RETIREMENT RESIDENCE, Taxpayer.

No. 6684.

Supreme Court of Hawai'i.

March 4, 1981.

Reconsideration Denied

April 21, 1981.

Syllabus by the Court

1. Under HRS § 237-23(a)(6), a "charitable" purpose includes the relief of the poor and the distressed or of the underprivileged and the disadvantaged; it also covers numerous private endeavors generally beneficial to communities, especially those activities designed to alleviate problems that may otherwise become the responsibility of the government.

2. The elderly have been recognized as a disadvantaged and distressed group with definite needs calling for special attention. Poverty is only one form of distress to which the elderly as a class are particularly susceptible.

3. The rule of strict construction with regard to taxing statutes should only be resorted to as an aid to construction when an ambiguity or doubt is apparent on the face of the statute, and then only after other possible extrinsic aids of construction available to resolve the ambiguity have been exhausted.

4. While all enterprises providing residential accommodations and other services for the elderly are not engaged in "charitable" activities under HRS § 237-23(b)(3), the relevant statutory provisions should not be applied so stringently as to serve as a disincentive for religious and charitable organizations to engage in efforts to assist the elderly with their housing needs.

George G. Grubb, Honolulu (Carlsmith, Carlsmith, Wichman & Case, Honolulu, of counsel), for taxpayer-appellant.

Allan S. Chock, Deputy Atty. Gen., Honolulu (Harriet Yoshida Lewis, Deputy Atty. Gen., Honolulu, on brief), for Director of Taxation-appellee.

Before RICHARDSON, C. J., and OGATA, MENOR, LUM and NAKAMURA, JJ.

NAKAMURA, Justice.

The issue in this taxpayer appeal from the Tax Appeal Court is whether certain sums derived from the operation of a retirement home by a church are subject to taxation under HRS Chapter 237, the general excise tax statute. Finding the receipts in question are exempt from taxation thereunder, we reverse the Tax Appeal Court's decision and order.

The taxpayer, Central Union Church Arcadia Retirement Residence (hereafter Arcadia), filed a general excise tax return for the month of January, 1977, claiming exemptions from taxation for entrance fees, monthly service fees, and health care center fees paid by residents. The claimed exemptions of entrance and monthly service fees were disallowed by the Department of Taxation, but the claim of exemption of health care center fees was allowed. Arcadia paid the taxes assessed by the notice of assessment and filed a timely appeal to the Tax Appeal Court. After a hearing, the court entered judgment in favor of the Director of Taxation. The taxpayer has appealed, contending Central Union Church is generally exempt from coverage under HRS Chapter 237 pursuant to § 237-23(a)(6) ¹ and its operation of a retirement home for aged persons is an activity exempt from taxation pursuant to § 237-23(b)(3). ² Therefore, it asserts the receipts in question are not subject to taxation under Chapter 237.

The dispositive questions are:

(1) Whether Central Union Church's operation of Arcadia is exempted from general excise taxation as a charitable activity; and

(2) Whether the entrance and monthly service fees received from residents of Arcadia are derived from an "activity the primary purpose of which is to produce income."

I.

Central Union Church, a religious organization exempted from coverage under the general excise tax law by HRS § 237-23(a)(6), ³ owns and operates Arcadia as a "nonprofit, self-supporting" retirement residence that provides housing, meals, limited nursing care, and other essential services to enable its elderly residents to live independently and safely. Arcadia is a non-profit operation in that no profit therefrom inures to the benefit of the church or any person; ⁴ it is a self-supporting operation in that its operating expenses are primarily derived from fees charged residents. The construction of the residence was financed through loans from non-federal sources ⁵ since the church did not qualify for a loan under Section 202 of the Housing Act of 1959, as amended by the Housing Act of 1961, the Senior Citizens Housing Act of 1962, the Housing Act of 1964, and the Housing and Urban Development Act of 1965.

Ordinarily, only those elderly persons who are able to pay established charges and also are ambulatory and reasonably healthy are considered for admission. Prior to admission, residents execute "lifetime care agreements" with Arcadia and pay stipulated lump sum entrance fees. These fees represent payments for lifetime leases of apartments, and the payments vary with the accommodations furnished. Residents are also assessed monthly service fees to cover the home's operating costs and health care center fees ⁶ to cover skilled nursing care for the first five days of an illness. These monthly fees are established annually, in advance, to cover anticipated operational expenses. All fees derived from residents are used exclusively in furtherance of the taxpayer's purpose to provide a home for the aged.

The taxpayer contends Arcadia has an established policy of maintaining the resident status of persons admitted to residence, even if they subsequently become ill or unable to pay the monthly charges. The relevant provision of the "lifetime care agreement," however, reads in part:

Once admitted to occupancy in Arcadia, no resident will be asked to leave for lack of funds, provided the Resident has not depleted by willful or purposeful act, or by state of mental disorder or confusion, or through unreasonable persuasion, his assets, which are the source of funds used for payment of monthly service charges and Health Care charges.

II.

The general excise tax, originally enacted in 1935 to replace the short-lived business excise tax which was passed in 1932 at the height of the Great Depression, is the State's principal source of governmental revenue. See R. Kamins & Y. Leong, Hawaii's General Excise Tax, Leg.Ref.Bur.Rep. No. 2, 1963, 1-15. In form, it is a tax imposed upon entrepreneurs for the privilege of doing business; in effect, it is more. It has been characterized as "an amalgam of consumption, business and income taxation," for the ultimate burden is often shifted forward to consumers. R. Kamins & Y. Leong, supra, at 20. The tax applies at all levels of economic activity from production or manufacturing to retailing, albeit at different rates, and to virtually all goods and services. Its inherent pervasiveness, however, is mitigated by limited categories of exemptions from coverage provided for certain persons or entities, certain activities, and described transactions. ⁷

HRS § 237-23(a)(6) excludes entities organized and operated for religious, charitable, scientific, or educational purposes from coverage under the general excise tax law; it also excludes organizations operating senior citizens housing facilities if they qualify for federal loans under Section 202 of the Housing Act of 1959, as amended. The exemptions are, however, confined by HRS § 237-23(b) to the fraternal, religious, charitable, scientific, educational, communal, or social welfare activities of the foregoing organizations from which no profit inures to anyone; none is allowed for "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." In effect, the gross income of an exempt organization derived from an activity which is not deemed an exempted activity by § 237-23(b) is subject to taxation.

As noted, the plea for avoidance of taxation here is premised on the foregoing provisions of HRS Chapter 237. Central Union Church regards its operation of Arcadia as a "charitable" activity conducted by an exempt organization and the receipts in question as being derived from the activity, not from another activity whose primary purpose is to produce "income." The Director of Taxation does not view Central Union's operation of Arcadia so generously. Reading § 237-23(a)(6) narrowly, he sees no general exemption provided thereby for non-profit retirement residences. He construes the foregoing subsection as specifically exempting only those homes for the aged qualifying for construction loans under the federal housing programs designated in § 237-23(a) (6). His further response to the taxpayer's argument is that Central Union's "charitable" aims in this situation do not extend far enough to warrant an exemption because the entrance fees and monthly charges render Arcadia's facilities and services unavailable to those afflicted with poverty. Moreover, he does not see Arcadia as being fully committed to a policy of maintaining the resident status of persons who subsequently become unable to pay regular charges. We do not read § 237-23(a)(6) or view charity as narrowly as the director.

A.

Charity has traditionally been associated with the relief of poverty. But contemporary notions of philanthropy embody much broader objectives; a "charitable" purpose now undoubtedly embraces a wide range of activities. Nowhere is this more clearly evident than in our tax laws, particularly in federal income tax legislation which exempts from taxation numerous organizations, both religious and secular, whose activities extend far beyond relief for the poor. See 6 J. Mertens, Law of Federal Income Taxation § 34.09, at 40-53 (1975). The term "charitable" as applied there includes the relief of the poor and the distressed or of the underprivileged and the disadvantaged; it covers numerous private endeavors generally beneficial to communities, especially those activities designed to alleviate problems that may otherwise become the responsibility of government. Id.

The elderly have been...