The Kamehameha Schools said today that it has paid the Internal Revenue Service $29 million to settle tax claims against the trust's former for-profit subsidiary.
Transfers of investments between
Bishop Estate's parent and
its taxable subsidiary
By Rick Daysog
The payment by the $6 billion charitable estate covers back taxes and interests for Pauahi Holding Corp. through June 30, 1998.
The tax bill is less than one-fifth of the $165 million initially demanded by the IRS in 1999 for Pauahi and is on top of $13.8 million in back taxes and interest that the Kamehameha Schools paid the IRS last year to preserve its tax-exempt status and settle outstanding tax issues for its nonprofit parent organization.
"It's another chapter closed," said trust spokesman Kekoa Paulsen. "We're glad to be able to focus on moving the school forward."
Paulsen said the payment relates to the transfers of investments between the estate's nonprofit charitable parent and its taxable subsidiary.
The estate's previous trustees -- Henry Peters, Richard "Dickie" Wong, Oswald Stender, Gerard Jervis and Lokelani Lindsey -- aggressively transferred money-losing investments made by the trust to its taxable units to take advantage of tax credits.
The so-called "drop-downs" also allowed the former trustees to assume a more hands-on management of its money-losing ventures.
The IRS, as part of its three-year audit of the estate, questioned millions of dollars of such transfers, saying they were not made at arm's length and were not in accordance with generally accepted accounting principles.
At the time, Pauahi's investments included large stakes in Wall Street investment banker Goldman Sachs Group, Columbia/HCA Health Care Corp. and WCI Limited Partnership, a Florida-based residential developer.
In 1998 the trust, then known as the Bishop Estate, merged the assets of Pauahi into the Kamehameha Activities Association, or KAA, a nonprofit support organization controlled by the estate.
The IRS is investigating the investments held by KAA, but that audit does not include former Pauahi investments.
Founded in 1884 by the will of Princess Bernice Pauahi Bishop, the Kamehameha Schools is a charitable organization that educates children of Hawaiian ancestry.
The settlement of the tax issues of the estate's for-profit subsidiaries is the result of more than a year of painstaking negotiations with the IRS. In 1998, when the federal agency was threatening to revoke the estate's tax-exempt status, it demanded that the trust pay $165 million to cover tax issues relating to its for-profit unit.
The estate's former interim board of trustees was able to reduce that amount to about $46 million last August before settling the amount at $29 million.
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