IRS won’t talk to
trustees until conflict
is resolved

A letter is the first official
confirmation of a query
by the agency

By Rick Daysog
Star-Bulletin

The Internal Revenue Service, which is conducting an audit of the Bishop Estate, has cut off communications with the estate's five trustees, saying trustees may have a conflict of interest.

In an undated letter to the estate, Janet Hughes, an IRS case manager based in Denver, said the federal agency will resume talks with the estate only after trustees resolve their apparent conflict.

Under Hawaii law, trustees require court approval to exercise their authority when their personal interests conflict with their duties to a trust, Hughes said.

The Star-Bulletin previously reported that trustees' commissions and perks are a key focus of the IRS audit.

"Because there is an apparent conflict between the trustees' individual interests and the duties of the trustees with respect to the examination of the Bishop Estate, we have suspended communications with the trustees and their agents and powers of attorney with whom we have been dealing," Hughes said.

An estate spokesman could not be reached for comment. In the past, the IRS has not confirmed or denied that it was conducting an audit of the estate.

Hughes' letter was disclosed in a court filing yesterday by the estate's special master, Colbert Matsumoto.

Matsumoto, who received a copy of the Hughes letter from the estate's in-house attorney, Nathan Aipa, recommended that the estate seek a court order appointing Aipa and its Washington tax lawyer, Mark McConaghy, to examine whether trustees face a conflict of interest in responding to the audit.

In the event that trustees were found to be in conflict, the probate court should appoint a three-member panel of special administrators to monitor and address the IRS' inquiry, Matsumoto said.

Since 1995, the IRS has been examining the operations of the estate and the estate-run Kamehameha Schools for its 1992 to 1996 fiscal years.

The audit, which likely will be completed this year, is investigating the arms-length relationship between the nonprofit trust and its for-profit subsidiaries, its lobbying activities, trustees' annual commissions of more than $800,000 and its conflict of interest policies.

The IRS audit also is looking at trustee perks such as country club memberships, travel and personal expenditures on estate credit cards.

Cynthia Quinn, special assistant to Attorney General Margery Bronster, said Matsumoto's recommendation underscores the need for a court-appointed receiver to run the estate's daily affairs.

Trustees are in conflict in their dealings with the IRS as well as their dealings with other investigations, Quinn said.

Bronster has been investigating allegations of trustee mismanagement and breaches of fiduciary duties and has asked the probate court to temporarily remove the estate's trustees. She also has called for the appointment of a receiver to run the estate's daily operations.

Probate Judge Colleen Hirai is set to rule on Bronster's request for trustees' interim removal soon.

"This is just another example why a receiver is appropriate," Quinn said.

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