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Estate to pay
IRS $72 million

The Kamehameha Schools agrees
to settle tax claims, ending a 6-year
dispute with the government


By Rick Daysog
rdaysog@starbulletin.com

The Kamehameha Schools will pay the Internal Revenue Service more than $72 million to settle tax claims related to its investment in Goldman Sachs Group Inc. and other ventures, in a deal ending the estate's six-year legal dispute with the IRS.

The $6 billion charitable trust said yesterday that it has signed a "closing agreement" with the IRS, which recently conducted a two-year audit of the estate's former for-profit arm Pauahi Holdings Corp. and Kamehameha Activities Association, a nonprofit support organization.

The 118-year-old estate said it also has agreed to transfer the bulk of the investment held by Kamehameha Activities Association to a separate nonprofit entity, the Ke Ali'i Pauahi Foundation, in a move that links the investments closer to the trust's educational focus.

The IRS deal has been approved by the estate's five-member board, but it will require approval from the state Probate Court.

"These should be the final agreements we will need to make with the IRS to bring closure to all of the tax issues raised regarding the trust's management during the late 1990s," said Kamehameha Schools Chief Executive Officer Hamilton McCubbin. "We are all eager to put this behind us and move forward with our strategic plan to educate more Hawaiian children."

In the deal, the estate said it will pay $17 million plus interest in penalties to correct information in previous tax filings with the IRS. The trust's for-profit units will pay an additional $55.5 million plus interest to settle other tax matters.

The $72.5 million total -- which represents more than a third of the $206 million that the trust spent last year on educational programs -- does not include additional taxes the estate may have to pay to states such as Hawaii, New York and Florida, where many of the investments are located.

Those states are likely to adjust the trust's tax liabilities as a result of the deal with the IRS.

The latest tax bill is more than five times the $13.4 million that Kamehameha Schools paid the IRS two years ago to settle the agency's exhaustive audit of the trust's operations for most of the 1990s.

The IRS threatened to revoke the trust's tax-exempt status but settled after former trustees Henry Peters, Richard "Dickie" Wong, Oswald Stender, Gerard Jervis and Lokelani Lindsey resigned and major reforms were implemented.

The IRS began its latest audit two years ago after the former trustees transferred the estate's holdings in Goldman Sachs, Columbia/HCA and Florida-based developer WCI Limited Partnership from its for-profit subsidiaries to Kamehameha Activities Association in 1998.

The Goldman Sachs investment has reaped more than $1 billion in gains for the trust, while the estate's holdings in WCI soared recently when the home-building company went public.

The former trustees said the reorganization -- which was approved by the state Probate Court and the estate's court-appointed master, Benjamin Matsubara -- aimed to reduce the estate's tax liabilities.

But critics such as former state Attorney General Margery Bronster alleged that the move was designed to place billions of dollars in trust assets outside of the reach of the IRS and the Probate Court.



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