Bronster says Bishop Estate
hoarding of $350 million violates
the princess' will
and IRS code

By Rick Daysog
Star-Bulletin

Bishop Estate's trustees have "recklessly endangered" the tax-exempt status of the trust by withholding hundreds of millions of dollars from the estate-run Kamehameha Schools, Attorney General Margery Bronster has charged.

But a lawyer for the estate dismissed the charge as "rank speculation."

In court papers filed yesterday, Bronster alleged that trustees are jeopardizing the estate's nonprofit status by elevating its investment management and business operations over its mission: education.

Bronster cited the recently completed audit by the Arthur Andersen accounting firm, which said trustees appear to spend little time on educational issues during their biweekly board meetings, while spending a lot of time on investment and business activities.

Bronster, who is seeking the removal of several trustees from the estate's board over allegations of fiduciary breaches, also called attention to the estate's hoarding of some $350 million in estate income.

The hoarding violates the will of the estate's founder, Bernice Pauahi Bishop, which called for the money to be spent on the schools, Bronster said.

But it also raises red flags with the Internal Revenue Service, which oversees the estate's tax-exempt status and is in the process of completing a three-year audit of the estate's operations.

In past instances, the IRS has revoked the tax-exempt status of charities in cases where the charities' fund-raising or investment activities exceeded their primary missions, said Bronster.

Taxes could cost millions

The loss of the tax exemption could cost the estate tens of millions of dollars.

the trustees have intentionally chosen business investment over the educational mission of the trust," said Bronster, who has been investigating allegations of financial wrongdoing by the estate's board members.

"The trustees' intentional accumulation of income violates the educational mission, the express directive to expend annual income . . . and orders of this court."

The IRS would not confirm nor deny an audit of the Bishop Estate. It also declined to respond to questions about the future of the estate's tax-exempt status.

Bronster's court filing -- a response to the estate's court-appointed master Colbert Matsumoto's supplemental reports on the operations of the Bishop Estate -- was one of several filed yesterday in probate court by parties involved in the Bishop Estate controversy.

Trustees Richard Wong, Henry Peters, Lokelani Lindsey, Gerard Jervis and Oswald Stender also filed responses to Matsumoto's highly critical report on the estate's operations.

The estate, the isles' largest private landowner and one of the nation's wealthiest charities, was founded in 1884 to educate children of native Hawaiian ancestry.

William McCorriston, Bishop Estate's attorney, said Bronster has no evidence that the IRS is considering revoking the estate's nonprofit status. He said the trust is well-off financially and is in the midst of a major expansion of its educational programs, which will include satellite campuses on Maui, the Big Island and leeward Oahu.

The issue of the accumulated income shows that trustees are acting prudently, McCorriston said. Much of the money, which he describes as retained income, eventually will fund the estate's educational expansion.

He believes that Bronster wants to show that the estate is in imminent danger to boost her petition seeking the removal of trustees.

"I don't know how many different rumors have been started and circulated by the AG's office and her supporters," McCorriston said. "I think it's time for everybody to sit back and let the facts speak for themselves."

Nonprofit status rarely lost

Revocation of a charity's nonprofit status is rare.

Of the 10,000 nonprofit organizations the IRS audits each year, only about 20 are targeted for revocation, said Marcus Owens, director of the IRS's Exempt Organizations division.

Some point to the recently passed federal legislation known as the intermediate sanctions law, which allows the IRS to fine individual board members and trustees of a charity in cases involving wrongdoing.

But Owens -- who was a speaker two weeks ago at a Portland seminar in which Bronster also was a speaker -- said the intermediate sanctions law is not an alternative to revoking a nonprofit's tax-exempt status.

Charities in which board members or officers diverted or misused funds and where board members have shown no interest in taking corrective action could see their tax-exempt status revoked, said Owens, who declined to confirm or deny the IRS's audit of the estate.

Owens -- who agreed to speak to the Star-Bulletin about audit procedures -- cited the case of John Marshall Law School, whose tax-exempt status was successfully revoked by the IRS between 1967 and 1973.

According to the IRS, the law school's dean, Theodore Fenster, received unsecured and interest-free loans from the school.

The school also paid for Fenster's home furnishings, his family's travel expenses, car maintenance bills and tickets to Atlanta Hawks basketball games. The school also issued scholarships to Fenster's children to finance their educations at other schools.

"Revocation is most likely to occur when there are bad acts and where there's an unwillingness to step up to the plate and be a good tax citizen," Owens said.

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