WASSON-BENDON PARTNERS v. KAMIKAWA, No. 22403.

Decision Date28 April 2000
Docket NumberNo. 22403.
Citation999 P.2d 865,93 Haw. 267
PartiesIn the Matter of the Tax Appeal of WASSON-BENDON PARTNERS, Appellant, v. Ray K. KAMIKAWA, Director of Taxation, State of Hawaii, Appellee.
CourtHawaii Court of Appeals

Gary G. Grimmer, (Carlsmith Ball Wichman Case & Ichiki), on the briefs, for appellant.

Christopher J. Muzzi, Deputy Attorney General, State of Hawai`i, on the briefs, for appellee.

BURNS, C.J., ACOBA and LIM, JJ.

Opinion of the Court by LIM, J.

Appellant Wasson-Bendon Partners (Taxpayer) appeals the adverse November 18, 1998 Judgment of the tax appeal court, in favor of Appellee Ray K. Kamikawa, Director of Taxation, State of Hawai`i (the State), and the court's March 23, 1999 Order Denying Taxpayer's Rule 52(b) Motion to Amend Findings and Make Additional Findings and Amend Judgment.

We affirm because Taxpayer's provision of medical equipment and ancillary services to its joint venture constituted "business" made subject to the general excise tax by Hawai`i Revised Statutes (HRS) § 237-20.

I. Background.

The parties do not dispute the tax appeal court's findings of fact.

Taxpayer appeals only the court's conclusions of law enumerated 11, 12, 13, 14 and 15.

The tax appeal court found and concluded as follows:

FINDINGS OF FACT

1. On January 28, 1998, [Taxpayer] paid under protest the amount of $20,596.59 assessed for 1990, and filed this appeal for the calendar tax year 1990, pursuant to [HRS § ] 237-42.
2. The question presented is whether [Taxpayer's] income from [its] business activity of providing medical equipment was subject to the General Excise Tax ("GET") under [HRS] § 237-13(10) or whether the income was [an] excise tax-exempt distribution.
3. [Taxpayer] was a Hawaii general partnership duly registered with the State of Hawaii, Department of Commerce and Consumer Affairs, Business Registration Division ("DCCA") on October 1, 1982.
4. The partners of [Taxpayer] were Eugene C. Wasson III[,] M.D. and James A. Bendon, M.D.
5. [Taxpayer] duly registered the tradename, "Imaging Associates" with the DCCA on January 6, 1983.
6. The stated purpose of Imaging Associates was "[T]he purchase and ownership of medical equipment to be employed in the practice of medicine as a joint venture."
7. Maui Radiology Consultants ("MRC") is a Hawaii general partnership, registered with the State of Hawaii, Department of Regulatory Agencies, Business Registration Division on June 1, 1981.
8. The initial partners in MRC were Eugene C. Wasson III, M.D., Inc., a Hawaii professional corporation[,] and James A. Bendon, M.D., Inc., a Hawaii professional corporation.
9. All of the [issued] and outstanding stock of Eugene C. Wasson III[,] M.D., Inc. is owned by Eugene C. Wasson III, who at all times relevant to this appeal, served as the president and sole director of that professional corporation.
10. All of the issued and outstanding stock of James A. Bendon, M.D., Inc. is owned by James A. Bendon[,] who, at all times relevant to this tax appeal, served as president and sole director of that professional corporation.
11. The stated purpose of MRC was "to provide high quality medical imaging services to the residents and visitors of the island of Maui."
12. Since 1980, MRC has provided medical imaging services to Maui Memorial Hospital ("MMH") through a contract with the Department of Health. Under these contracts, MRC has: rented space at MMH, provided radiology or imaging equipment [and] technicians to operate the equipment, serviced and maintained the equipment, and billed patients and insurers directly for the services.
13. MRC supplied the equipment required by [its] contracts by commitments through a leasing arrangement, first with Drs. Wasson and Bendon as individuals[,] and then, beginning in October of 1982, with Imaging Associates[,] to acquire, service and maintain the equipment.
14. Effective October 1, 1982, upon the advice of [its] tax attorney, MRC amended its Joint Venture Agreement to admit Imaging Associates as a Non-Physician Joint Venturer. As [its] contribution to the joint venture, Imaging Associates provided certain radiological equipment to MRC and received guaranteed payments of specified amounts. Pursuant to the amended Joint Venture Agreement, Imaging Associates established a capital account in the joint venture of $1.
15. It is evident that one of the reasons Drs. Wasson and Bendon formed the Wasson-Bendon partnership was to avoid the excise tax that would have been incurred if they simply had leased equipment to MRC instead of becoming a partner in MRC.
16. From 1980-1994, Taxpayer's acquisition cost for equipment, the use of which it contributed to MRC, was approximately $3,110,700.00
17. For fiscal years ending June 30, 1983 and June 30, 1984, both the federal and state income tax returns for MRC properly named Imaging Associates as a partner and identified all distributions made pursuant to the Joint Venture Agreement as partnership distributions.
18. The MRC Joint Venture Agreement was amended again effective April 1, 1984. The following language was inserted: "The payment to Imaging Associates shall abate to the extent that the payments exceed joint venture net income."
19. On October 9, 1984, [the State], prepared two Notices of Proposed Assessment of Additional General Excise Taxes for calendar year[s] 1982 and 1983. These notices were based on [the State's] conclusion that MRC's payments to Imaging Associates constituted equipment rental subject to the State of Hawaii General Equipment Tax.
20. Taxpayer filed a Tax Appeal, Case No. 2239, [on] October 26, 1984. On or around January 4, 1985, [T]axpayer presented a settlement proposal to the Deputy Attorney General representing [the State], T. Bruce Honda. The settlement was never accepted.
21. Since April 1, 1984, the Amended Joint Venture Agreement, as amended from time to time, provided that: 1) MRC would pay [T]axpayer solely from net profits of MRC; 2) Taxpayer's profit share would accrue and be distributed before any other partner's share; and 3) these distributions would abate to the extent that the Joint Venture's profits were insufficient.
22. In March through May, 1985, the parties fully briefed the 1982-1983 Tax Appeal. No decision was ever issued by the Tax Court, and the case was ultimately dismissed for lack of prosecution in 1997.
23. For tax year 1990, [T]axpayer filed GET returns reporting no excise taxes due.
24. MRC was profitable each of the years from 1984-1994 and always had enough to pay [T]axpayer its budgeted share of profit.
25. MRC was governed by a Governing Board. The Governing Board consisted of the directors of the physician partners. Thus, it included Drs. Wasson and Bendon, the only partners in [T]axpayer.
26. [Taxpayer] dissolved in 1994 and has ceased doing business.

CONCLUSIONS OF LAW

1. Generally, exemptions from taxation are construed strictly against the taxpayer. [HRS] Chapter 237 subjects to the general excise tax virtually every economic activity imaginable. In re C. Brewer & Co., Ltd., 65 Haw. 240, 243 (1982)[.]
2. The central issues in this appeal [are] whether [T]axpayer was a partner in MRC and whether the payments it received from MRC were partnership distributions or some other transaction that would be subject to the excise tax.
3. The pertinent statutory provisions considered by the Court were:
A partnership is defined as an association (including a joint venture) of two or more persons to carry on as co-owners a business for profit. [HRS] § 425-106(1).
In determining whether a partnership exists, these rules shall apply:
[....]
(4) The receipt by a person of a share of profits of a business is prima facie evidence that the person is a partner in the business, but no such inference shall be drawn if such profits were received in payment:
(a) As a debt by installments or otherwise,
(b) As wages of an employee or rent to a landlord,
(c) As an annuity to a widow or representative of a deceased partner,
(d) As interest on a loan, though the amount of payment vary with the profits of the business,
(e) As consideration for the sale of a goodwill of a business or other property by installments or otherwise. [HRS] § 425-107.
A person or company having shareholders or members (a corporation, association, group, trust, partnership, joint adventure, or other person) is taxable upon [its] business with them and they are taxable upon their business with it. [HRS] § 237-20.
4. The Court finds that the requisite elements exist to find that [Taxpayer] was indeed a partner in the MRC partnership.
5. "Whether an agreement creates a partnership or not depends upon the intention of the parties." Dang v. F and S Land Dev. Corp., 62 Haw. 583, 589 (1980). Although, as originally drafted, the partnership agreement was deficient so as not to qualify payments to [T]axpayer as excise tax-exempt, the original agreement and testimony of the witnesses presented by [T]axpayer show the requisite intent to create a partnership. The signed MRC partnership agreement predates the 1984 excise tax assessment by [the State].
6. "A joint venture is a mutual undertaking by two or more persons to carry out a single business enterprise for profit." [In re O.W. Limited Partnership], 4 Haw. App. 487, 494 (1983). The Taxpayer's evidence shows a mutual undertaking with a sharing of profits. This constitutes prima facie evidence that it was a partner in MRC. [HRS] § 425-107.
7. Parties to a [j]oint venture may agree[ ] that only some members will bear the burden of losses while all share in profits. Shinn v. Yee, 57 Haw. 215, 553 P.2d 733 (1976). While HRS § 425-118(a) provides a model for sharing of partnership losses, this model may be modified by agreement between the partners. Thus[,] no showing of loss sharing is required by [T]axpayer to prove the existence of a partnership[;] rather it is the sharing of profits that is of primary importance. HRS § 425-106.
8.
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