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Wednesday, August 23, 2000




Kamehameha
Schools faces new
IRS probe

The agency is looking into
the reorganization of one of
the trust's investments


By Rick Daysog
Star-Bulletin

The Internal Revenue Service is investigating the Kamehameha Schools' controversial reorganization of its investment in Goldman Sachs Group.

In a petition filed in U.S. District Court yesterday, the IRS said it is examining the tax liabilities of the Kamehameha Activities Association for the fiscal year ended June 30, 1999.

Wade Clark, a revenue agent with the IRS' Tempe, Ariz., office, said he recently issued an administrative summons asking that the $6 billion trust turn over all staff reports, accountant's opinions and other internal memos relating to the association's restructuring.

Kamehameha Activities Association is a nonprofit corporation that is legally separate from the Kamehameha Schools but is controlled by its board of directors.

In 1998, the estate's former board of trustees transferred its investments in Goldman Sachs, Columbia/HCA and Florida-based developer WCI Limited Partnership to the association, saying the move would create significant tax savings and better link the trusts' investments with its educational mission.

But the move was heavily criticized by then-Attorney General Margery Bronster, who argued that the former trustees were attempting to place billions of dollars of trust assets outside the jurisdiction of the IRS, the attorney general's office and the state Probate Court.

Bronster asked the Probate Court to reverse the transfer.

Probate Judge Kevin Chang approved the Kamehameha Activities Association reorganization last year on the recommendation of special master Benjamin Matsubara, who called it a prudent move.

The IRS' examination of the association is believed to be separate from its exhaustive, four-year audit of the Kamehameha Schools. The IRS reached a settlement last year in which Kamehameha Schools retained its tax-exempt status and paid $13 million in back taxes and interest.

The closing agreement with the estate's for-profit subsidiaries is pending but the trust is expected to pay about $46 million to settle that part of the IRS audit.

In court papers yesterday, Clark said the estate was less than forthcoming about its KAA records.

The IRS agent said he requested that association executive Wallace Chin appear at the IRS' Honolulu office on July 26 to provide testimony on the association's reorganization. But Clark said Chin didn't show up for the interview and that the trust sent over only three of the seven documents he requested.

An estate spokesman declined comment, saying the trust has not yet been served with the latest IRS petition.



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