HARMON'S RESPONSE TO TORKILDSON, KATZ

Bobby N. Harmon, CPCU, ARM

January 25, 2005

VIA fax @ 808-523-6001

e-mail: mat@torkildson.com

Matt A. Tsukazaki, Esq.

Torkildson Katz Fonseca Jaffe Moore & Hetherington

AmFac Tower, Floor 15

700 Bishop Street

Honolulu, HI 96813

RE: Kamehameha Schools - IRS Forms W-2 and 1099-R for Year 2000.

Dear Mr. Tsukazaki:

This is to again request that Kamehameha Schools issue the long overdue IRS Forms W-2 and 1099-R for Year 2000 for the settlement proceeds from my RICO lawsuit. I realize that your position in the past has been that the Settlement Agreement stated that the proceeds were for General Damages and did not specify any portion as wages. You will recall that I have argued that the fact that the Settlement Agreement did not characterize a specific amount as wages was not the key issue, but that IRS regulations would be the governing factor as to how the proceeds would be taxed, or not taxed.

Since neither you, nor Trustee Mary Lou Woo, or her accounting firm, have ever cited any IRS regulations regarding this matter, I quote for you the following from the Internal Revenue Services’ website www.irs.gov:

FAQS Regarding Miscellaneous Taxable Income/Withholding

What if the legal settlement is related to termination of an employee?

Settlements of suits in cases of employee termination arise from a variety of causes of action. The settlement could be for a breach of contract, a tort, or a violation of any one of a number of federal or state statutes such as the Age Discrimination in Employment Act or the Americans With Disabilities Act. All the facts must be considered, for instance the complaint, the settlement document, a court's opinion, etc., to determine what the award is for. There is no simple answer to this question.

We will focus upon damages received to compensate for economic loss, for example lost wages, business income, and benefits. These amounts are includible in gross income unless a personal physical injury caused the loss.

In general, severance payments are wages for employment and are subject to FICA taxes. This position is supported by no fewer than six court decisions dealing with payments made in the course of the layoffs and downsizing of the 1980s and 90s. Two of these decisions have been affirmed by the Second and Federal Circuits. Associated Electric Cooperative, Inc. v. U.S., 42 Fed. C1. 867 (1999), aff'd 226 F.3d 1322 (Fed. Cir. 2000) (plaintiff was required to sign a Release and Covenant Not to Sue in exchange for the payment); Abrahamsen v. U.S., 44 Fed. Cl. 260 (1999); Abbott v. U.S., 76 F. Supp. 2d 236 (N.D.N.Y. 1999), aff'd 231 F.3d 889 (2d Cir. 2000). Indications that the settlement amounts were wages for employment were that the payments arose in connection with the employment relationship and that the amounts were based on salary and years of service.

Wages are generally subject to FICA tax when they are actually or constructively paid. Employment Tax Regulation section 31.3121(a)-2(a). Severance payments are subject to FICA tax in the year in which they are paid. The FICA tax rate and wage base are those in effect in the year of payment. FUTA tax and income tax withholding also apply. Sections 3306(b), 3401(a). The Supreme Court recently affirmed the Service's position that FICA tax applies for the year of payment, not the year in which the services were, or were not, performed. U.S. v. Cleveland Indians, 121 S.Ct. 1433; 149 L. Ed.2d 401 (2001); rev'g 215 F.3d 1325 (6th Cir. 2000).

Note that the Service has recently issued an MSSP: Audit Guide for Lawsuit Awards and Settlements (January 1, 2001), Training 3123-009(11-00), TPDS No. 86391 G. It provides a lot of interesting information on this topic.

< END OF QUOTATION >

The following is quoted from Business Week Online:

TAX RAMIFICATIONS OF STRUCTURING SETTLEMENTS

No matter how carefully employers run their businesses, many companies face the prospect of paying settlements or court-ordered judgments as a result of legal actions brought by former employees. These payments arise from various causes of action such as claims for race, age or sex discrimination, wrongful discharge, defamation, and breach of contract, among others. Besides payment for traditional compensatory damages, portions of these settlements or court-awarded judgments often go to cover the employee's attorney fees, costs and disbursements, interest, mental and emotional distress, and punitive damages....

According to the IRS, money received by a judgment or settlement, in a lump sum or periodic payments as damages for personal injuries, emotional pain, suffering, inconvenience, mental anguish, loss of enjoyment of life, and other non-pecuniary losses or sickness (such as in a sex harassment case) is not taxable. On the other hand, any money paid to an employee in settlement or judgment as compensation for lost wages, back pay and front pay, severance payments or fringe benefits is subject to withholding taxes. If such money is paid in lost wages, then the employer is required to withhold income taxes and FICA taxes from the payment. The employer would also be required to pay additional sums for FUTA and the employer's portion of FICA.

The potential liability to companies here arises when the IRS finds that the parties improperly treated an amount paid as excludable income (i.e., for pain and suffering) or non-wage income. In such cases, employers are liable for the employee's failure to pay FICA and income taxes together with interest and penalties unless the IRS can receive the amounts owed from the employee. Such penalties may also be assessed against certain corporate officers if the employee fails to pay said amounts. But note that the employer's portion of FICA taxes as well as FUTA tax cannot be paid by the employee and thus the employer is always liable for these taxes....

After understanding what is and is not tax deductible, you may then design the settlement to produce tax advantages for both the company and the employee. ... Once you know what you want to do, be sure to put all settlements in writing with specific allocations for specific payments. Identifying the underlying basis for any payments can help avoid problems with the IRS.

TIP: The IRS is not bound by any allocation but it may be honored if it is reasonable. Understandably, the IRS will look with suspicion upon attempts by the parties to diminish their tax liability, such as amending a complaint in a lawsuit just prior to settlement to eliminate or decrease a demand for back pay....

The fact that you failed to put “specific allocations for specific payments” into the Settlement Agreement, is an error and omission on the part of your law firm - not an error on my part. The fact that I have had to repeatedly call this error to your attention, and request that IRS Forms W-2 and 1099-R be issued as required by law, does not constitute an illegal “letter-writing campaign” on my part, and is not a breach of the Settlement Agreement. I paid my year 2000 taxes declaring the full proceeds that I received from the settlement as wage income. It is Kamehameha Schools that has breached the Agreement, and broken the law, by failing to pay their share of the employment taxes, and by failing to contribute the required additional payments into my Retirement Plan. And since this failure to pay taxes was deliberate, and done with the intent to silence my testimony in EQ 2048 and other pending legal actions, I maintain that your actions were willful, malicious and an obstruction of justice.

I refer you to the following web addresses for additional information:

www.the-catbird-seat.net

Alexander & Baldwin

www.the-catbird-seat.net/Apollo.htm

www.the-catbird-seat.net/Bishop.htm

www.the-catbird-seat.net/Claims-By-Harmon.htm

www.the-catbird-seat.net/Aon.htm

www.the-catbird-seat.net/AIG.htm

www.the-catbird-seat.net/AlliedWorldAssurance.htm

www.the-catbird-seat.net/BuzzardsOfParadise.htm

www.the-catbird-seat.net/ChubbGroup.htm

www.the-catbird-seat.net/GoldmanSachs.htm

www.the-catbird-seat.net/Investcorp.htm

www.the-catbird-seat.net/Ko-Olina.htm

www.the-catbird-seat.net/MarshBirds.htm

www.the-catbird-seat.net/Prudential.htm

www.the-catbird-seat.net/RICO-BH.htm

www.the-catbird-seat.net/TheMeadows.htm

www.the-catbird-seat.net/Travelers-St-Paul.htm

Through you, Mr. Tsukazaki, I again request that Kamehameha Schools issue the required IRS Forms W-2 and 1099-R for the amount received in settlement. This will remove one major obstacle to the settlement of the bankruptcy estate. My claims that the settlement itself was obtained through fraud and misrepresentation, and that Kamehameha Schools, your firm, and others conspired to commit fraud, and engaged in ongoing racketeering activities, can be dealt with as separate matters in the future.

And since I do not wish to make these arguments directly to Kamehameha Schools and to your office, for reasons I have stated in the past, I again ask that you have a licensed Claims Administrator from your Professional Liability Insurance carrier contact me as soon as possible in order that we can, at least, begin discussions regarding ways to resolve these outstanding claims against your law firm.

Very truly yours,

Bobby N. Harmon, CPCU, ARM

cc: Michael G. Cherkasky, President and Chief Executive Officer

Marsh & McLennan Companies, Inc.

(via fax @ 212-345-4838)

John D. Finnegan, President and Chief Executive Officer

The Chubb Corporation

(via fax @ 908-903-2027 and Email: info@chubb.com)

William K. Slate II, President/CEO, American Arbitration Association

(via fax @ 212-716-5905 and Email: Websitemail@adr.org)

Mark Appel, Senior Vice President

International Centre for Dispute Resolution

(via e-mail: AppelM@adr.org)

Harry Kaminsky, Vice President

Neutrals’ Services, Phoenix, AZ

(via e-mail: KaminskyH@adr.org)

James B. Farris, Senior Case Manager, American Arbitration Association

(via fax @ 559-490-1919 and e-mail: Farrisj@adr.org)

Mary Lou Woo, c/o Steven Guttman, Kessner Duca Umebayashi, et al.

(via fax @ 808-529-7177 and e-mail: sguttman@kdubm.com)

Mark Bennett, Attorney General, State of Hawaii

(via fax @ 808- 586-1239 and e-mail: hawaiiag@hawaii.gov )

Dee Jay Mailer, CEO, Kamehameha Schools (via fax @ 808-523-6313)

P&C Insurance Co., Inc. (via fax @ 808-523-6313)

Governor Linda Lingle, State of Hawaii (via fax @ 808-586-0006)

Hugh Jones, Deputy Attorney General (via fax @ 808-586-1477)

J.P. Schmidt, Hawaii Insurance Commissioner (via fax @ 808-586-2806)

Janet Hughes, Internal Revenue Service (via fax @ 303-844-3596)

Billy Beaver, Pension & Welfare Benefit Admin. (via fax @ 626-229-1098)

Ralph F. Boyd, Jr., U.S. Dept. of Justice (via fax @ 202-514-1116)

Lyn Flanigan Anzai, Hawaii State Bar Association (via e-mail: lanzai@hsba.org)

Susan Tius, Esq., c/o Rush Moore Craven Sutton Morry & Beh

(via fax @ 808-521-0597)

Gerard Jervis, Lokelani Lindsey, Henry Peters, Oswald Stender, and Richard Wong, c/o Kenneth Hipp, Esq., Marr Hipp Jones & Pepper

(via fax @ 808-536-6700)

Jeffrey H.K. Sia, Esq., Ayabe Chong Nishimoto Sia & Nakamura

(via fax @ 808-526-3491)

Robert S. Tameler, ALPS, Claims Admin for Bradley Tamm and Greg Dunn
(via fax @ 406-728-7416)

Michael F. Perlis, Esq., Stroock & Stroock & Lavan, LLP, Atty for Federal Ins Co

(via fax @ 310-556-5959)

Mike Coulter, Deputy Managing Director, Aon Insurance Managers
(via fax @ 808-540-4301 and e-mail: mike_coulter@agl.aon.com)

Casimer Fidele, Tradewind Insurance Company
(via fax @ 808-521-7489)

PricewaterhouseCoopers, c/o Warren Price III, Esq.
(via fax @ 808-533-0549)

Terry Mullen, CEO/Pres., John Mullen & Co.
(via fax @ 808-531-0053)

Additional References: