O.W. Ltd. Partnership, Matter of

• Decision Date: 18 August 1983
• Docket Number: No. 8659,8659
• Citation: 668 P.2d 56,4 Haw.App. 487
• Parties: In the Matter of the Tax Appeal of O.W. LIMITED PARTNERSHIP.
• Court: Hawaii Court of Appeals

Page 56

668 P.2d 56

4 Haw.App. 487

In the Matter of the Tax Appeal of O.W. LIMITED PARTNERSHIP.

No. 8659.

Intermediate Court of Appeals of Hawai'i.

Aug. 18, 1983.

Syllabus by the Court

1. The parol evidence rule must be applied in any action where the issue involved is what rights or duties were created by the instrument even if a party to the action was a stranger to the document.

2. A prerequisite to the application of the parol evidence rule is that there must first be a finding by the trial court that the writing was intended to be the final and, therefore, integrated expression of the parties' agreement. All relevant evidence bearing on the threshold question of whether an agreement is an integrated one is admissible.

3. The parol evidence rule does not prevent parties from subsequently making another different agreement or from modifying, changing, or altering the original agreement. Parol evidence of the subsequent agreement or the changes is admissible.

4. In reviewing the decision and findings of the tax appeal court, a presumption arises favoring its actions which should not be overturned without good and sufficient reason. The appellant has the burden of showing that the decision of the tax appeal court was clearly erroneous.

5. Although Rule 52(a), Hawaii Rules of Civil Procedure (HRCP) (1981), is not directly applicable in tax appeal cases, Rule 29, Rules of the Tax Appeal Court of the State of Hawaii (RTAC) (1981), states that in procedural matters not provided for in the RTAC the appellate court will be guided by the HRCP.

6. A joint venture is a mutual undertaking by two or more persons to carry out a single business enterprise for profit.

7. In a joint venture, it is essential that there be (1) an agreement between the parties for a joint venture and (2) a provision in the contract for their sharing, as joint venturers, of the profits of the business.

8. A joint venture is closely akin to a partnership and the rules governing the creation and existence of partnerships are applicable to joint ventures.

9. In determining tax liability, the substance of a transaction rather than its form governs. Where the taxpayer advances the theory of substance over form in determining tax liability, he must also show that effecting a tax advantage was not the motivating factor in the adoption of the form in controversy.

10. The findings of a tax appeal court are entitled to great weight. It is within the province of the tax appeal court to determine what weight or credit is to be accorded a witness' testimony.

T. Bruce Honda, Deputy Atty. Gen., for appellant, Director of taxation.

Arthur B. Reinwald, Honolulu (Ronald I. Heller, Honolulu, with him on brief); Hoddick, Reinwald, O'Connor & Marrack, Honolulu, of counsel for appellee, O.W. Ltd. Partnership.

Before BURNS, C.J., and HEEN and TANAKA, JJ.

TANAKA, Judge.

This appeal is from a judgment of the tax appeal court holding the taxpayer, O.W. Limited Partnership (OWLP), not liable for additional general excise taxes assessed for the years 1974 through 1977.

The issues on appeal are (1) whether the tax appeal court properly admitted extrinsic evidence concerning a written joint operating agreement and (2) whether the evidence supports the tax appeal court's Findings of Fact Nos. 8, 10, 11, 14, and 15 and Conclusions of Law Nos. 24, 25, and 26.

We answer yes to both issues and affirm.

OWLP, a Hawaii limited partnership, constructed and owned the Outrigger West Hotel. For the purpose of operating the hotel, OWLP entered into the Joint Operating Agreement for the Outrigger West Hotel dated December 30, 1974 ¹ (Agreement) with Hawaii Hotels Operating Co., Ltd. (HHOC) and Waikiki Services, Ltd. (WSL). The Agreement, inter alia, set forth the duties of the three parties and provided that revenues received from the operation of the hotel would be collected at each point of sale and allocated to the parties daily according to certain set percentages. The funds allocated would then be deposited in each party's bank account. Revenue from the hotel room rentals was allocated as follows: OWLP 73%, HHOC 27%, and WSL 0%. In practice, OWLP received the gross revenues and allocated them according to the set percentages.

In computing and paying its general excise taxes for the years 1974 through 1977, OWLP deducted from the gross hotel room revenues the amounts allocated to HHOC. ² Claiming that the correct tax base was the gross hotel room revenues, the Director of Taxation (Director) added back the excluded amounts for each of the years in controversy and assessed OWLP additional general excise taxes totaling $194,753.75.

On December 18, 1980, OWLP filed a notice of appeal to the tax appeal court challenging the assessment.

After an evidentiary hearing, the tax appeal court entered its Findings of Fact and Conclusions of Law, and Judgment in favor of OWLP on February 9, 1982. Director appeals.

I.

Richard Roy Kelley, M.D. (Kelley), a partner of OWLP and the chief executive officer of the Outrigger West Hotel, HHOC, and WSL, testified at the hearing. When Kelley was asked to explain the purpose and function of the Agreement, Director objected on the basis of the parol evidence rule. Director argued that the Agreement was unambiguous and that evidence could not be introduced to amend or alter the Agreement. The tax appeal court overruled the objection and held that (1) where the parties by their own agreement modified their contract and independent facts support such modification, the evidence is admissible and (2) third parties do not have standing to challenge such modification to the contract.

A.

Director contends that, notwithstanding the fact that he is a stranger to the Agreement, he does have standing to resort to the parol evidence rule. We agree.

In Chang v. Meagher, 40 Haw. 96, 106 (1953), our supreme court stated that the parol evidence rule is "neither binding nor available" to strangers to the instrument and "may not properly be invoked by them nor against them." However, Chang was later limited to mean only that a stranger to the instrument has the right to show that the instrument is fraudulent as to him. Akamine & Sons v. American Security Bank, 50 Haw. 304, 440 P.2d 262 (1968). In Akamine & Sons, our supreme court held that the parol evidence rule must be applied in any action where the issue involved is what rights or duties were created by the instrument even if a party to the action was a stranger to the document. See Sullivan v. United States, 363 F.2d 724 (8th Cir.1966), cert. denied, 387 U.S. 905, 87 S.Ct. 1683, 18 L.Ed.2d 622 (1967), reh'g denied, 388 U.S. 924, 87 S.Ct. 2104, 18 L.Ed.2d 1378 (1967); 3 S. Gard, Jones on Evidence § 16:17 (6th ed. 1972); 30 Am.Jur.2d Evidence §§ 1029-31 (1967).

In the instant case, whether under the terms of the Agreement the parties thereto were joint venturers or partners is crucial in the determination of OWLP's general excise tax liability. Thus, the parol evidence rule can be invoked by Director. See Akamine & Sons v. American Security Bank, supra.

B.

Director then argues that the trial court committed prejudicial error by overruling his objection because the Agreement is free from ambiguity and the rule precludes parol evidence under such circumstance. Director's focus is on the wrong issue.

Although it is true, as Director argues, that parol evidence is not admissible where the writing is clear and unambiguous, Midkiff v. Castle & Cooke, Inc., 45 Haw. 409, 368 P.2d 887 (1962); Richards v. Ontai, 19 Haw. 451 (1909); MPM Hawaiian, Inc. v. World Square, 4 Haw.App. 341, 666 P.2d 622 (1983), a prerequisite to the application of the rule is that there must first be a finding by the trial court that the writing was intended to be the final and, therefore, integrated expression of the parties' agreement. Restatement (Second) of Contracts §§ 209 comment c, 210 comment b, 213 comment b (1981); J. Calamari & J. Perillo, The Law of Contracts § 3-2 (2d ed. 1977). See Cosmopolitan Financial Corp. v. Runnels, 2 Haw.App. 33, 625 P.2d 390 (1981); Sawyer v. Arum, 690 F.2d 590 (6th Cir.1982); NAG Enterprises, Inc. v. All State Industries, Inc., 407 Mich. 407, 285 N.W.2d 770 (1979). All relevant evidence bearing on the threshold question of whether the agreement is an "integrated" one is admissible. Sawyer v. Arum, supra; NAG Enterprises, Inc. v. All State Industries, Inc., supra; Restatement, supra, §§ 209 comment c, 213 comment b.

The parol evidence rule applies only to a written agreement which is integrated. Friestad v. Travelers Indemnity Co., 260 Pa.Super. 178, 393 A.2d 1212 (1978). See Hawaii Leasing v. Klein, 4 Haw.App. 1, 658 P.2d 343 (1983). Once the agreement has been found to be integrated, the issues involving ambiguity, fraud, duress, or mutual mistake may be raised to deal with the applicability of the rule. See MPM Hawaiian, Inc. v. World Square, supra. Cf. Mellon Bank v. Aetna Business Credit, Inc., 619 F.2d 1001, 1010, n. 9 (3d Cir.1980).

In the instant case, Kelley's testimony was elicited to show that the parties did not intend the Agreement to be a final expression of the allocation of revenues between the parties. There being no integration clause in the Agreement, relevant evidence was admissible to determine the preliminary question of whether it was integrated.

Kelley also testified that different allocations were made after the Agreement was signed. While the parol evidence rule applies to statements and agreements made prior to or contemporaneously with the execution of a contract, the rule does not prevent parties from subsequently making another different agreement or from modifying, changing, or altering the original written agreement. Parol evidence of the subsequent agreement or the changes is admissible. Foliage Corp. of Florida, Inc. v. Watson, 381 So.2d 356 (Fla.App.1980); Clark County Sports Enterprises v. City of Las Vegas, 96 Nev. 167, 606 P.2d 171 (198...