Wednesday, April 28, 1999

IRS wants trustees ousted

A report says that, unless
the five step down, the trust
could be in danger of losing
its tax-exempt status

Senate ousts Bronster

By Rick Daysog


The Internal Revenue Service may seek to revoke the Bishop Estate's tax-exempt status if all five trustees do not step down, according to a confidential report filed with the state probate court.

The development represents one of the most significant events in the two-year controversy surrounding the Bishop Estate and the estate-run Kamehameha Schools.

In an eight-page report filed under seal yesterday afternoon, a five-member panel of special-purpose trustees appointed by Probate Judge Kevin Chang summarized some of the major concerns raised by the IRS in its exhaustive audit of the multibillion-dollar estate, sources said.

While the IRS audit is continuing, sources believe the panel's report indicates the federal agency may be unwilling to close its investigation of the 114-year-old, tax-exempt charity until board members step down.

Bishop Estate's trustees, who received copies of the panel's report yesterday, gathered last night in a regularly scheduled meeting at which they discussed the IRS audit.

Estate Chairman Richard "Dickie" Wong said this morning that trustees have no immediate plans to step down but have made no decision to challenge the federal agency's findings.

Wong said he was surprised by the IRS's hard-line stance but noted that the IRS is at a preliminary stage of settlement negotiations with the estate.

He said trustees are in the process of obtaining more information about the IRS audit.

"This is really unprecedented," Wong said.

The IRS in the past has declined to confirm or deny that it is conducting an audit of the Bishop Estate.

Retired Adm. Robert Kihune, a panel member, could not be reached for response, and a spokeswoman for the attorney general's office declined comment.

The IRS, which began its audit in 1996, has been investigating whether trustees improperly benefitted from the trust and has made inquiries about allegations of self-dealing, conflicts of interests, and improper perks.

The audit also examined the trustees' $800,000-a-year commissions, the relationship between the tax-exempt trust and its for-profit subsidiaries, and the Kamehameha Schools' admissions policy.The estate said last week that the IRS had upheld and reaffirmed its practice of giving preference to children of native Hawaiian ancestry for admission to Kamehameha Schools. But sources said the IRS has looked at other possible grounds to revoke the estate's tax-exempt status.

The federal agency does not have the legal authority to remove trustees but has leverage over charities through its ability to revoke its tax-exempt status.

Founded in 1884 by the will of Princess Bernice Pauahi Bishop, the Bishop Estate is the state's largest private landowner and one of the nation's largest charitable trusts.

Yesterday's filing comes after the special panel - whose members are Kihune, former Honolulu Police Chief Francis Keala, Hawaiian Electric Industries Inc. treasurer Constance Lau, attorney Ronald Libkuman and former Iolani School headmaster David Coon - met with IRS officials in Los Angeles on April 19.

The special panel has been negotiating with the IRS since February after Chang removed trustees Wong, Henry Peters, Lokelani Lindsey, Oswald Stender and Gerard Jervis from the audit process, saying board members have an adverse and material conflict of interest.

Before Chang's ruling, Stender and Jervis recused themselves from the audit process and petitioned the probate court to remove all trustees from matters involving the IRS audit, saying all were in conflict.

The attorney general's office also is conducting a separate inquiry into allegations of mismanagement and breaches of fiduciary duties by several trustees.

Last September, Bronster sued to temporarily and permanently remove several Bishop Estate trustees. The temporary removal case is now the middle of a five-week trial before Probate Judge Colleen Hirai, and the permanent suit likely will go to trial next year.

Separately, two Oahu grand juries, convened by Bronster, recently indicted Peters and Wong on theft charges from an alleged kickback scheme involving Wong's brother-in-law, Jeffrey Stone. All three have pleaded not guilty.

Trust law experts believe the IRS's ultimatum could prompt the probate court to immediately remove all five trustees on an interim basis. Randall Roth, University of Hawaii law professor and co-author of the "Broken Trust" article that criticized trustees' management of the estate, believes that threatened loss of the estate's tax-exempt status represents an immediate and continued harm to trust assets.

But he noted that the courts had ample grounds to remove the trustees long ago but have been slow to do so."They should have been removed on an interim basis a year and a half ago," Roth said.

Senate ousts Bronster

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