Friday, October 16, 1998

IRS grills trustees
on pay, perks

The query may mean
hefty surcharges for
individual members

By Rick Daysog


Internal Revenue Service investigators are asking tough questions about Bishop Estate trustees' $800,000-plus annual pay and perks such as honorary country club memberships, outside director's fees and questionable credit card transactions, according to sources familiar with the three-year audit.

They're also investigating estate jobs and student admissions into the estate-run Kamehameha Schools for relatives of trustees and executives.

While many of the issues addressed by the IRS audit have been raised by a separate investigation by the state attorney general, details of the IRS's line of questioning show the scope and direction of its inquiry.

The audit -- likely to be completed at the end of the year -- could result in hefty surcharges against individual board members, sources believe. But it's unclear whether the estate's tax-exempt status -- once considered untouchable -- will be affected.

"I expect the audit to result in substantial sanctions," said Randall Roth, University of Hawaii law professor and co-author of the "Broken Trust" article that prompted Gov. Ben Cayetano to launch a state investigation into the trust last year.

"Hopefully, the sanctions will be against trustees who have abused their positions."

A Bishop Estate spokesman had no comment on the status of the IRS examination, saying the IRS has not disclosed any of its findings to the estate.

Citing federal law, the IRS would neither confirm nor deny an audit of the Bishop Estate.

Established in 1884 by the will of Princess Bernice Pauahi Bishop, the estate is the state's largest private landowner, whose primary mission is to educate children of native Hawaiian ancestry.

It's also one of the nation's wealthiest charitable organizations, with assets listed at $5.7 billion.

The details of the IRS audit come as the estate is under intense scrutiny from local law enforcement authorities.

Attorney General Margery Bronster, capping a year-long investigation of the trustees, last month asked the state probate court to permanently remove at least three Bishop Estate trustees, alleging a pattern of self-dealing and mismanagement.

An Oahu grand jury -- convened at Bronster's request -- is investigating allegations that two trustees -- Henry Peters and Richard Wong -- received kickbacks from Wong's brother-in-law, Jeff Stone. All three deny the charges.

Stone and trustee Lokelani Lindsey are among those who have already appeared before the grand jury.

The IRS audit -- which covers the 1992-1996 fiscal years -- delves into some of the more mundane and technical aspects of the estate's day-to-day operations. They include questions over air fares, hotel accommodations and car rentals by trustees and executives.

But the audit also focuses on trustees' pay and questions whether they improperly benefited at the expense of the estate.

The federal agency, for instance, has requested copies of compensation studies commissioned by the trustees to justify their high six-figure commissions, sources said.

The agency has also requested records of time spent on trust work conducted by current and former trustees.

Bishop Estate Archive

Probe looks at memberships,
credit cards, lobbying fees

By Rick Daysog


In addition to trustees' pay, IRS investigators also are keying on various perks and benefits trustees may have received as a result of their work at the estate.

Honorary memberships at the exclusive Waialae Country Club and Mid-Pacific Country Club

The courses sit on leasehold land owned by the Bishop Estate. Memberships to the exclusive Waialae and Mid-Pacific clubs are valued at $44,000 and $36,000, respectively.

Three of the trustees -- Richard Wong, Lokelani Lindsey and Gerard Jervis -- have said they don't use the club facilities while Oswald Stender has turned down free membership at both clubs. Henry Peters has been an active member at Waialae.

Admission into the estate-run Kamehameha Schools for relatives of trustees or of key trust executives

The IRS has also inquired about the number of relatives of trustees employed by the estate.

In the past, the estate has defended Kamehameha Schools' admission policies as selective. It also has defended its hiring policies, saying it doesn't play favorites when interviewing job candidates.

Lobbying expenses

The IRS has asked the estate to provide information about its 1996 efforts to influence federal legislation curbing the pay of trustees of tax-exempt organizations.

The estate spent hundreds of thousands of dollars lobbying Congress on the measure, which could impact the pay of the Bishop Estate's trustees. The new law gave the IRS the power to fine individual trustees and board members if they took excessive compensation, as an alternative to yanking a nonprofit's tax-exempt status.

The estate said they were in favor of the intermediate sanctions legislation but wanted to change a draft of the proposal which did not include charities.

Outside director's fees

Auditors questioned the estate about director's fees paid to one trustee who served on the board of an outside company in which the estate was a substantial investor.

Personal credit card charges

The IRS has asked the estate to explain credit-card expenses by trust employee and former state Sen. Milton Holt, who ran up $21,000 on estate-issued Visa cards at local strip clubs and Las Vegas casinos.

Holt also spent $2,500 at local hostess bars and restaurants while entertaining prominent isle legislators. Holt has repaid the estate.

Bishop Estate Archive

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