Wednesday, April 28, 1999


While the IRS audit is continuing,
sources believe a five-member panel's
report indicates that the federal agency
may be unwilling to close its investigation
of the tax-exempt charity until
board members step down.

By Rick Daysog


The Internal Revenue Service may seek to revoke the Bishop Estate's tax-exempt status if all five trustees do not step down, according to a confidential report filed with the state probate court.

The development represents one of the most significant events in the two-year controversy surrounding the Bishop Estate and the estate-run Kamehameha Schools.

In an eight-page report filed under seal yesterday afternoon, a five-member panel of special-purpose trustees appointed by Probate Judge Kevin Chang summarized some of the major concerns raised by the IRS in its exhaustive, four-year audit of the multibillion-dollar estate, sources said.

While the IRS audit is continuing, sources believe the panel's report indicates that the federal agency may be unwilling to close its investigation of the 114-year-old, tax-exempt charity until board members step down.

Bishop Estate's trustees met last night in a regularly scheduled meeting. An estate spokesman had no comment.

Retired Adm. Robert Kihune, a panel member, could not be reached for response, and a spokeswoman for the attorney general's office declined comment.

The IRS, which began its audit in 1996, has been investigating whether trustees improperly benefitted from the trust and has made inquiries about allegations of self-dealing, conflicts of interests and improper perks.

The audit also has examined the trustees' $800,000-a-year commissions, the relationship between the tax-exempt trust and its for-profit subsidiaries and the Kamehameha Schools' admissions policy.

The estate said last week that the IRS had upheld and reaffirmed its practice of giving preference to children of native Hawaiian ancestry for admission to Kamehameha Schools. But sources said the IRS has looked at other possible grounds to revoke the estate's tax-exempt status.

The federal agency does not have the legal authority to remove trustees but has leverage over charities through its ability to revoke its tax-exempt status.

Founded in 1884 by the will of Princess Bernice Pauahi Bishop, the Bishop Estate is the state's largest private landowner and one of the nation's largest charitable trusts.

Yesterday's filing comes after the special panel -- whose members are Kihune, former Honolulu Police Chief Francis Keala, Hawaiian Electric Industries Inc. treasurer Constance Lau, attorney Ronald Libkuman and former Iolani School headmaster David Coon -- met with IRS officials in Los Angeles on April 19.

The special panel has been negotiating with the IRS since February after Chang removed trustees Richard "Dickie" Wong, Henry Peters, Lokelani Lindsey, Oswald Stender and Gerard Jervis from the audit process, saying board members have an adverse and material conflict of interest.

Before Chang's ruling, Stender and Jervis recused themselves from the audit process and petitioned the probate court to remove all trustees from matters involving the IRS audit, saying all were in conflict.

The attorney general's office also is conducting a separate inquiry into allegations of mismanagement and breaches of fiduciary duties by several trustees.

Two independent Oahu grand juries -- convened by Bronster -- recently indicted Peters and Wong for theft charges from an alleged kickback scheme involving Wong's brother-in-law Jeffrey Stone. All three have pleaded not guilty.

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