Saturday, January 23, 1999

Trustees split
over IRS audit

Three call the inquiry into
schools admissions a threat to
Bishop's will and refuse
to step back

By Rick Daysog


Calling it an attack on the will of Princess Bernice Pauahi Bishop, the three majority trustees of the Bishop Estate have vowed to fight any attempts to alter Kamehameha Schools' century-old policy of admitting only children of native Hawaiian ancestry.

But two other board members believe the majority trustees are creating a smoke screen.

In court documents filed yesterday, Richard "Dickie" Wong, Henry Peters and Lokelani Lindsey said they believe the Internal Revenue Service may be seeking "far-reaching and irrevocable changes" to Kamehameha Schools and its longstanding Hawaiian ancestry admissions policy.

The three trustees gave no details of proposed changes, but characterized the IRS inquiry into the admissions policy as a "direct attack" on the princess' will.

The trustees said they would defend the policy vigorously.

"Any attempt to change our preference policy will be done over my dead body," said Wong, chairman of the estate's five-member board.

Established in 1884, the estate was founded by Bishop to educate children of native Hawaiian ancestry.

Since 1995 the IRS has been conducting an exhaustive inquiry of the multibillion-dollar charitable trust and the estate-run Kamehameha Schools. The audit focuses on the estate's tax-exempt status, the relationship between the nonprofit trust and its for-profit subsidiaries, as well as the schools' admissions policy.

The inquiry also is taking a close look at whether trustees benefited at the expense of the 114-year-old trust. IRS agents have requested information on trustees' $800,000-a-year compensation, their travel expenditures and perks such as free country club memberships and personal use of estate credit cards.

Earlier this month, the federal agency sent some of its preliminary findings to the estate, indicating that it is finalizing its audit.

The estate has 45 days to respond to the initial findings.

In their court filings, Wong, Peters and Lindsey asked Probate Judge Kevin Chang to approve a two-person advisory panel to help them address the IRS audit. The panel -- which would be named by the trustees -- would help board members navigate ethical conflicts that may arise in the investigation, which may target the trustees themselves.

The majority trustees said they could not recuse themselves from the IRS investigation since the audit targets the core purpose of the trust: the school's Hawaiians-only admissions policy. They believe that it would be a breach of their fiduciary duty to delegate any of their authority when it comes to the policy.

"This is hallowed ground," the trustees said.

Their arguments come after the estate's court-appointed master, Colbert Matsumoto, and trustees Oswald Stender and Gerard Jervis earlier this week asked Chang to prohibit trustees from taking part in the IRS probe.

Jervis and Stender, who have voluntarily recused themselves from the audit process, believe trustees have a conflict of interest in dealing with an investigation that may target them individually.

The two trustees also have asked Chang to appoint a special three-member panel to take over trustees' duties in the IRS audit.

Yesterday, Jervis and Stender sharply criticized the majority trustees, saying the three board members are attempting to divert attention from the conflict-of-interest issue.

While all five trustees are committed to preserving the current admissions policy at Kamehameha Schools, Stender said it is "outrageous" and "irresponsible" for Wong, Peters and Lindsey to use the issue to avoid recusal.

The policy has been approved by the IRS in the past. In a 1975 technical advice memorandum, the IRS concluded the schools' policies were racially nondiscriminatory under the agency's guidelines. That finding was reaffirmed in an IRS letter ruling.

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