Hawaiian Airlines
reaches deal to cut
$129M tax claim

Hawaiian Airlines received some relief yesterday from an initial $129 million federal tax claim when the company announced it had reached an agreement on several disputed issues that will result in "a very substantial reduction" on roughly half that the claim.

The remaining $63.5 million of the claim, though, is still up in the air. Following an all-day hearing, Bankruptcy Judge Robert Faris took under advisement a proposed $40.5 million penalty that the Internal Revenue Service is seeking for fuel excise tax credits that Hawaiian claimed in 2001, 2002 and part of 2003.

A separate hearing on the $23 million that the IRS said is owed for those fuel taxes has been scheduled for Jan. 14.

The agreement announced yesterday involved the tax treatment of maintenance contracts, the retirement of DC-9 aircraft that Hawaiian previously used and the timetable of when Hawaiian should recognize as revenue tickets that customers buy but don't use. The exact amount of the reduction was not clear partly because the settlement was broadened to cover an additional tax year.

"(The settlement) will result in a very substantial reduction in the allowed amount of their claim," said Bruce Bennett, attorney for Hawaiian Airlines trustee Joshua Gotbaum.

Gotbaum said he was pleased with the settlement and that Hawaiian will be paying a fraction of what the IRS was seeking.

"When the IRS filed its claim, we said we thought it was substantially overstated, and we're pleased that the IRS has agreed to reduce claims under the magnitude of $70 million to less than $10 million," Gotbaum said.

Still at issue, though, is whether Hawaiian was justified in claiming excise tax credits for flying its Hawaii-mainland routes. Typically, U.S. carriers flying to international destinations don't have to pay federal excise taxes. On the advice of airline industry tax specialist Heffernan & Associates, Hawaiian claimed fuel tax credits on its trans-Pacific routes for 2001, 2002 and the first quarter of 2003.

But the IRS argued yesterday that the company didn't make a reasonable decision in selecting Heffernan and should have sought a second opinion when auditor Ernst & Young asked about how the refund that Hawaiian was receiving should be reported on financial statements.

Maurice Heffernan, founder of Heffernan & Associates, died in May 2002.

"When Mr. Heffernan came to (Hawaiian) and said they could get credit for flights between Hawaii and the (mainland) U.S., that should have raised a red flag," said Rick Watson, a Justice Department attorney. "Was it too good to be true? For them, it certainly was."

Watson said that Hawaiian had "the opportunity to get off the horse and they chose to ride."

"Now, they must pay the consequences," he added.

But Bennett argued that, when taken in context, Hawaiian acted reasonably in selecting Heffernan. He said there was no proof of what a second opinion would be and that the company couldn't be expected to be "reading the tea leaves."

He also said that before Hawaii became a state that there was no tax on fuel from travel to the mainland and that Congress didn't make its intentions known regarding that rule when it granted Hawaii statehood.