Reader Kathy Macdonald objects to the tax-exempt status enjoyed by Kamehameha Schools, arguing that no other charitable organization is allowed to practice "racial discrimination" and still get a free pass on federal (and state) taxes.

She quoted the schools' latest federal tax return which says the organization has "a racially nondiscriminatory policy toward its students" despite the fact that it only admits students of Hawaiian ancestry.

I have trudged this particular branch of the money trail several times in the past couple of decades.

Back in 1972, then-state Supreme Court Justice Kazuhisa Abe wrote an opinion about Kamehameha Schools that said, "under the Internal Revenue Code, no private school which practices racial discrimination is entitled to federal tax exemption."

That caused the schools' New York tax attorney to consult with the IRS about the matter. In 1975, the IRS upheld the schools' tax-exempt status. The IRS re-affirmed the ruling in 1999.

Kamehameha Schools vice president Ann Botticelli said this week the Hawaiians-only admissions are "consistent with federal public policy as supported by the myriad of congressional statutes providing programs and benefits exclusively to Native Hawaiians."

It's a complicated subject with many cultural and historical layers to it. And the financial stakes are enormous. In 1992, a consultant said loss of the tax exemption would cost the schools $1 billion in back taxes. A lengthy IRS investigation of the schools and tax-paying subsidiaries in the 1990s resulted in payment of nearly $100 million in back taxes, penalties and interest. Under IRS pressure, the former trustees, who had been collecting annual compensation of as much as $900,000, were replaced. But the tax-exempt status was retained.

Private attorney John Goemans sued the IRS over the tax exemption issue in 1997, but later dropped the suit because his client did not have the money to pursue it. Goemans later participated in another suit against the schools filed on behalf of a non-Hawaiian student. The suit attacked the admissions policy on civil rights grounds, but had direct implications for the tax exemption issue.

The suit was withdrawn last month after reaching the U.S. Supreme Court. The schools agreed to pay an unspecified amount of money to the plaintiff in return for the suit's dismissal. The tax exemption and the admissions policy remain.

If you know that a particular money trail will lead to boondoggle, excessive spending or white elephants, reach Jim Dooley at 535-2447 or jdooley@honoluluadvertiser.com