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Friday, August 18, 2000

IRS says Peters
owes it $6 million

The former Kamehameha Schools
trustee is contesting the tax case

By Rick Daysog

The Internal Revenue Service is demanding that former Kamehameha Schools trustee Henry Peters pay more than $6 million in taxes and penalties, saying his $1 million-a-year pay was excessive.

In May, in one of the first tests of a new federal law limiting the salaries of charitable trust officials, the IRS sent Peters a notice of deficiency that alleged the trust overpaid him about $2.75 million between 1995 and 1999.

The federal agency -- which conducted an exhaustive audit of the Kamehameha Schools and five former trustees -- is demanding that Peters pay a 25 percent penalty, or about $687,000, on the alleged overpayments.

The IRS is seeking an additional 200 percent penalty, or about $5.5 million, for alleged overpayments that weren't returned to the Kamehameha Schools.

Peters is believed to be the only former trustee of the $6 billion charitable trust to have received a deficiency notice from the IRS.

His potential tax liabilities were disclosed in a petition he filed earlier this month with the U.S. Tax Court in Washington D.C. Peters, who was not available for immediate comment, is contesting the IRS's demands, saying his compensation was performance-based and that the 116-year-old trust enjoyed substantial growth during his tenure.

Bill Lehrfeld, a Bethesda, Md.-based tax attorney who is advising Peters, said he believes the taxes can't be applied in Peters' case. The so-called intermediate sanctions law that requires trustees' pay be limited to reasonable levels was passed in 1996, but the rules and regulations implementing the law have not yet been finalized, he said.

Lehrfeld, a former IRS attorney, added that the intermediate sanctions law may shield Peters from personal liability since his employment with the trust was covered by a written contract. The trust, however, may be liable for any overpayments made to Peters, Lehrfeld said. A spokesman for the IRS declined comment.

The former trustees' compensation has been a major source of criticism in the three-year controversy surrounding the Kamehameha Schools trustees and has been a key focus of the IRS's audit of the trust. The IRS recently commissioned an independent study, which concluded that the former trustees should have been paid between $60,000 and $160,000 between 1990 and 1996.

The independent study was part of the IRS's initial audit findings in January 1999, in which it threatened to revoke the trust's tax-exempt status if Peters and fellow trustees weren't permanently removed.

All five stepped down last year.

According to Lehrfeld, the IRS has 60 days to respond to Peters' petition. If both sides fail to reach a settlement after that, the case will go to trial before a federal tax judge in Honolulu, he said.

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