A state judge tentatively approved a deal today in which the Bishop Estate will pay the Internal Revenue Service $9 million in back taxes but will retain its tax-exempt status.
In a seven-page written order, Probate Judge Kevin Chang said the so-called IRS closing agreement is in the best interest of the 115-year-old charitable trust since it preserves its nonprofit status and avoids costly litigation.
Chang also noted that the Bishop Estate's $9 million tax bill is far less than the $65 million that the IRS initially had asked the estate to pay.
"The court finds and
concludes that the settlement with the
IRS is in the best interest of
the trust estate ... and the
"The court finds and concludes that the settlement with the IRS is in the best interest of the trust estate, its subsidiaries and affiliated organizations, the beneficiaries of the trust estate and the Hawaiian community," Chang wrote.
"Above all else, the settlement with the IRS protects and preserves the tax-exempt status and allows the charitable purposes and educational mission of the trust estate to continue into the future."
Final approval of the closing agreement is contingent on the permanent removal of former trustees Henry Peters and Richard "Dickie" Wong.
A suit charging that Peters and Wong took excessive compensation, mismanaged the estate and neglected the estate's core educational mission is scheduled to go to trial on Dec. 13.
The IRS, which has been auditing the estate since 1995, earlier this year threatened to revoke the estate's tax-exempt status for the 1990-1996 period if the estate's board was not removed permanently.
The Arthur Andersen consulting firm recently concluded that the loss of its tax-exempt status could cost the estate more than $750 million.
In May, Chang temporarily removed Wong, Peters, Lokelani Lindsey and Gerard Jervis and accepted the resignation of Oswald Stender in response to the IRS's threat. Jervis has since resigned and Circuit Judge Eden Elizabeth Hifo removed Lindsey after a five-month trial.
Chang said he is not pleased with every aspect of agreement with the IRS but noted that it puts into place far-reaching changes in the daily operations of the Bishop Estate.
The estate, which is now governed by a five-member interim board appointed by Chang, has agreed to spend more money on the Kamehameha Schools, implement a single-voice management system headed by a chief executive officer and establish reasonable pay levels for future trustees and trust executives.
Former trustee Peters, however, has opposed the closing agreement, saying it breaks the will of the estate's founder, Princess Bernice Pauahi Bishop. Peters believes that the spending targets set for the Kamehameha Schools will result in financial trouble and will force the trust into selling its valuable lands.
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