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Kamehameha
Schools completes
its deal with IRS

The former Bishop Estate
has paid $13.4 million in back
taxes and will get to keep
its tax-exempt status

By Rick Daysog
Star-Bulletin

The U.S. Internal Revenue Service has finalized an agreement today with the Kamehameha Schools that preserves the 115-year-old charitable trust's tax-exempt status.

Retired Adm. Robert Kihune, chairman of the estate's interim board of trustees, said that IRS officials in Washington D.C. signed the so-called closing agreement this morning.

The pact ends the federal tax agency's exhaustive, five-year investigation of the $6 billion Kamehameha Schools tax-exempt operations, which resulted in the permanent ouster of the estate's former board of trustees.

"It is gratifying to have this document signed so that we can put the last few years behind us and move ahead with our educational mission," Kihune said.

As part of the deal, the trust already has paid $13.4 million in back taxes and interest and has agreed to implement major reforms of its operations.

The estate said it is negotiating a second closing agreement with the IRS to resolve tax issues related to its for-profit units. The IRS initially demanded $165 million from the estate's for-profit subsidiaries but the trust now said it expects to pay about $46 million.

The estate's interim board of trustees and the state Probate Court, which oversees charitable trusts in Hawaii, have already approved the initial closing agreement.

The attorney general's office welcomed the closing agreement, saying it ends an unfortunate chapter in the trust's history.

"We're pleased that the beneficiaries will retain the tax-exempt status," said Deputy Attorney General Hugh Jones. "But it's sad that millions and millions of dollars had to be spent to get to this point."

Based on its 25,000-page preliminary audit findings, the IRS threatened to revoke the Kamehameha School's tax-exempt status for the 1990-1996 periods -- a move that would have cost the trust nearly $1 billion.

The IRS also demanded the permanent removal or voluntary resignations of former trustees Henry Peters, Richard "Dickie" Wong, Oswald Stender, Gerard Jervis and Lokelani Lindsey, and called for major reforms of the estate's management structure.

Those five trustees have since stepped down permanently.

Yesterday, during a luncheon speech before Honolulu Rotary Club at the Royal Hawaiian Hotel, Hamilton McCubbin, the estate's new chief executive officer, outlined some of the major charges that are required under the closing agreement with the IRS. The speech marked McCubbin's first public appearance as the Kamehameha School's first chief executive.

One of the most far reaching changes can be found in the estate's new spending policy. The interim board of trustees has agreed to spend 2.5 percent to 6 percent of the trust's assets each year on educating children of native Hawaiian ancestry.

The spending policy means that the trust will be spending an average of $200 million a year on educational programs, or about double the current $100 million a year, said McCubbin, a 1959 Kamehameha Schools grad.

The plan also will finance the expansion of technical and vocational programs, create new partnerships with the state Department of Education and bring new resources to the trust's early childhood educational services.

McCubbin said the trust hopes to double its preschool programs, which currently serve about 1,000 children at 20 sites.

McCubbin noted that the Kamehameha School's Kapalama Heights campus will continue to focus on college prep curriculum, but he acknowledged that much of the new resources will be directed toward vocational and outreach plans as specified in the will of the estate's founder, Princess Bernice Pauahi Bishop.

On the management side, the estate has hired a chief investment officer, longtime real estate executive Wendell Brooks, and is in the process of hiring a chief financial officer. The new management team will assume many of the duties previously conducted by the former trustees, who were criticized for micromanaging the trust's business.

McCubbin praised the school's president, Michael Chun, who he believes will lead the Kamehameha Schools into the future.

The estate's previous board stripped the popular Chun of his duties as school president, launching protests by alumni and community leaders that rocked the Kamehameha Schools during the past three years.

"It's safe to say, without overstating, that things at the Kamehameha Schools will never be the same," McCubbin said.

"The change in structure, the change in management, the change that's happening is really designed to shift the focus of the Kamehameha Schools into the direction of ... educating as many Hawaiian children and those of Hawaiian ancestry as conceivably possible."

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