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Tuesday, February 8, 2000

Estate’s tax bill
shrinks to $46 mil

The Kamehameha Schools board
expects to settle its case with the
IRS this year and to retain its
tax-exempt status

By Rick Daysog


Kamehameha Schools expects to pay $46 million to settle the Internal Revenue Service's tax claims against its former for-profit unit.

In documents filed in state probate court on Dec. 30, the $6 billion charitable trust indicated that it could pay less than a third of the $165 million initially sought by the IRS to resolve Pauahi Holding Corp.'s outstanding tax issues for the 1992-1996 period.

The proposed tax bill is on top of the $13.8 million that the Kamehameha Schools has already paid to the IRS to settle tax issues involving the trust's nonprofit parent organization.

The $46 million is equal to about half of the annual budget of the Kamehameha Schools' educational programs. A person familiar with the estate's tax situation said Kamehameha Schools could see the tax bill go even lower since its negotiations with the IRS are not yet complete.

The lower tax bill is the result of months of painstaking negotiations between the IRS, which began its audit of the estate in 1995, and the estate's interim board, which took over the operations of the estate last May after the IRS threatened to revoke the trust's tax-exempt status.

The temporary board said it expects to resolve the estate's tax dispute this year and to retain the trust's tax-exempt status.

Temporary trustees are retired Adm. Robert Kihune, former Honolulu Police Chief Francis Keala, American Savings Bank executive Constance Lau, attorney Ronald Libkuman and retired Iolani School headmaster David Coon.

A spokesman for the Kamehameha Schools had no immediate comment and the interim board has declined to discuss the specifics of the IRS's tax claims.

But people familiar with the IRS's audit cited the previous board's aggressive transfers of money-losing investments from the nonprofit trust to its taxable subsidiaries.

The so-called "drop-downs" allowed the former trustees to take a more hands-on management of the trust's money-losing ventures but may have violated federal laws requiring arms-length relationships between a nonprofit entity and its for-profit subsidiaries.

Pauahi Holding Corp. is the former taxable subsidiary of the Kamehameha Schools that held big stakes in Goldman Sachs Group L.P., Columbia/HCA Health Care Corp. and WCI Limited Partnership, a Florida-based development company.

In 1998, the trust, then known as the Bishop Estate, merged the assets of Pauahi Holding into Kamehameha Activities Association, a nonprofit support organization controlled by the estate.

Bishop Estate Archive

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