HEI files tax appeal to recover $16.5M
By Sean Hao
Advertiser Staff Writer
Hawaiian Electric Industries Inc. is contesting $16.5 million in back taxes and interest paid to the state.
Last month, the company, which provides electric power to most Hawai'i residents and owns the state's third-largest financial institution, filed an appeal with the Hawai'i Tax Appeal Court seeking a refund shortly after it made the large tax payment.
The Department of Taxation maintains that money is owed for unpaid taxes of HEI Diversified Inc. and its subsidiary, American Savings Bank. Both operations are subsidiaries of HEI.
The dispute revolves around whether HEI Diversified and American Savings improperly deducted dividends received from subsidiary ASB Realty Corp. from its bank franchise returns for tax years 1999-2001. ASB is a real estate investment trust, or REIT, formed in 1998.
REITs, which have most of their assets in real estate, don't pay taxes on income. Instead, taxes are paid when profit is passed on to shareholders as dividends. However, under federal law, corporations are not allowed to deduct REIT dividends from their income, said Kurt Kawafuchi, state tax director.
The question is whether the Hawai'i tax code, which in many ways reflects the federal code, also prevents companies from deducting dividends from income.
"Essentially (HEI) is trying to deduct (the dividends) at both levels so they're paying no tax" on that REIT income, Kawafuchi said. "We don't think that's the intent of the Legislature."
At $16.5 million, the case is among the larger tax appeals the state has faced, said Hugh Jones, a state deputy attorney general.
"It's a big-dollar case, but it comes down to a matter of statutory interpretation," he said. "It's not a matter of fraud or something like that."
The appeal required the Tax Department to transfer subsequently $16.5 million from the general fund into a special litigated fund. Kawafuchi said CB Bancshares, parent company of City Bank, also is disputing about $5 million in taxes on grounds similar to HEI's.
If the court upholds the Tax Department's position, HEI could owe another $7 million in taxes for January 2002 through March 2003.
However, the $16.5 million payment has had no impact on the company's earnings, said HEI spokeswoman Suzy Hollinger. That's because the tax payment has been booked as a deposit, which the company expects to eventually get back, she said. "We still believe that we'll prevail in this matter so at some point we'll receive that money back," Hollinger said.
The money in question could be significant for Hawaiian Electric Industries. The company's second-quarter profits fell 30 percent to $21.9 million because of declining tourism and stock prices.
Jones said tax appeal cases typically take anywhere from six months to a year to resolve.
"So we're still in the early stages of this case," he said.
Reach Sean Hao at shao@honoluluadvertiser.com or 525-8093.
Correction: A previous version of this story incorrectly stated that CB Bancshares is the parent company of Central Pacific Bank.
