A federal appeals court yesterday ruled against a group of Hawai'i taxpayers challenging the use of state general funds for the Office of Hawaiian Affairs.

The move is in line with a U.S. Supreme Court decision last year that indicated payment of taxes alone isn't enough to establish the taxpayers have the necessary legal standing to challenge the state funding.

Yesterday's decision by a three-member panel of the 9th U.S. Circuit Court of Appeals also found that the taxpayers did not have standing to challenge the state funding.

But instead of dismissing the taxpayer lawsuit, the appeals court sent the case back to U.S. District Judge Susan Oki Mollway.

H. William Burgess, lawyer for Earl Arakaki and about a dozen other Hawai'i taxpayers, said he wasn't happy with the ruling. He said the appeals court could have found that last year's U.S. Supreme Court ruling, in an Ohio case, did not apply and ruled that his clients could pursue their lawsuit.

He said he will argue that point when the case is sent back to Mollway.

State Attorney General Mark Bennett said he was pleased that the appeals court ruled in favor of the state on all "substantive issues." But he said the appeals court could have ordered that the case be dismissed instead of sending it back to the trial court. Bennett said he didn't know what was left for Mollway to decide.

Bennett said he anticipates that Mollway soon will hold a conference with the lawyers on how to proceed with the case.

The decision is the latest development in the taxpayer lawsuit alleging that the use of government money for OHA is unconstitutional because the organization benefits only those of Hawaiian ancestry.

Mollway initially threw out the lawsuit, filed in 2002, challenging government money to OHA and the Department of Hawaiian Home Lands. But in 2005, the appeals court reinstated the portion of the suit dealing with OHA, which gets about 10 percent of its operating budget from state general fund money.

In June last year, the U.S. Supreme Court rejected that part of the suit and indicated that the payment of taxes alone isn't enough to give the residents legal standing.

The high court cited a previous ruling that threw out an Ohio taxpayer lawsuit challenging $300 million in tax breaks for a DaimlerChrysler Jeep assembly plant.

The high court sent the Hawai'i case back to the appeals court to issue a ruling based on the Ohio case, which led to yesterday's decision.

"In light of the Supreme Court's decision in DaimlerChrysler, we now hold that plaintiffs, as state taxpayers, lack standing to bring a suit claiming that the OHA programs that are funded by state tax revenues violate the Equal Protection Clause of the Fourteenth Amendment," the panel's unanimous opinion said.

"Although it is not clear that any plaintiffs have standing in any other capacity to challenge the OHA programs, we remand to the district court for further proceedings."

The 36-page opinion was written by appeals Judge Jay Bybee, who wrote the decision for a three-member panel that Kamehameha Schools' admissions policy of giving preference to Hawaiians violated federal law. A larger panel of the 9th Circuit later reversed that ruling.

OHA Chairwoman Haunani Apoliona yesterday said she was pleased with the decision, but warned that Hawaiians must gain political status to ward off future legal challenges.

"Although we have prevailed in the legal battle, we must continue our efforts to recognize Native Hawaiians as an indigenous people with a sovereign identity," she said.

Reach Ken Kobayashi at kkobayashi@honoluluadvertiser.com.