‘Rev&Tax chief should decide tax status of Settlement Fund’

The CNMI government has asked the U.S. District Court for the NMI to hold off on deciding whether the NMI Settlement Fund is a tax-exempt entity, saying it should refer that decision to the director of Revenue and Taxation.

However, if the District Court proceeds with deciding the issue, the CNMI government takes the position that the NMI Settlement Fund is a tax-exempt entity, according to assistant attorney general Teresita Sablan.

Sablan, as counsel for the CNMI government, the governor, Department of Finance, and Finance Secretary Larrisa Larson, filed the government’s response to the issue after designated judge Frances Tydingco-Gatewood sought a full briefing on Settlement Fund trustee Joyce C.H. Tang’s position that the Settlement Fund is a non-profit, tax exempt entity under CNMI law.

Tydingco-Gatewood will hear the motion on Jan. 21, 2016.

Sablan said the Settlement Fund is merely carrying out the business of the NMI Retirement Fund under the control and supervision of the District Court.

As such, Sablan said, the Settlement Fund’s tax liability mirrors that of the Retirement Fund—it is exempt from taxation.

Tang earlier asked Attorney General Edward Manibusan for an opinion regarding the Settlement Fund’s tax status but Manibusan declined, saying the Settlement Fund does not fall within the scope of his representation. Instead, he recommended that Tang direct her request to the Revenue and Taxation director.

Sablan said the Revenue and Taxation director did not receive such a request from Tang and, instead, asked the District Court to make that determination.

Sablan said federal law subjects the Settlement Fund to applicable state and local taxes. As the official who must enforce the Commonwealth tax laws, it is the Revenue and Taxation director who should decide whether the Settlement Fund is exempt from taxation, Sablan said.

She said if there were a dispute over the District Court’s jurisdiction to enforce the agreement or a dispute about the meaning of any provision of the Settlement Agreement, then the District Court would be the rightful arbiter.

However, Sablan said, the issue raised cannot be classified as either—no party is disputing the court’s jurisdiction to enforce the agreement and no provision of the settlement agreement touches upon the Settlement Fund’s tax status.

As such, she said, the court should refrain from making the determination and refer the matter to the Revenue and Taxation director.

“If the court proceeds to make the requested determination, it should find that the Settlement Fund is exempt from taxation because it is carrying on the business of the Commonwealth government, and not because it is an extension of the District Court,” Sablan said.

Because the Retirement Fund is exempt from taxation, so is the Settlement Fund, Sablan said.

Sablan concluded that whether the Settlement Fund is exempt from taxation does not relate to the enforcement or interpretation of the Settlement Agreement; it relates to the enforcement of Commonwealth tax laws—laws by which the Settlement Fund must abide.

She said the Revenue and Taxation director is responsible for enforcing and interpreting tax laws, and it is the director who should determine whether the Settlement Fund is exempt from taxation.

The issue of whether the Fund has non-profit tax exempt status has delayed the completion of its fiscal year 2014 audit.

Tang and the counsel for Betty Johnson’s class action members recently filed a joint motion to confirm the Fund’s status as a tax-exempt entity.

According to Fund trustee counsel Dean A. Manglona and Johnson’s class counsel Robert M. Hatch, the Settlement Fund is a tax exempt entity because the settlement agreement in Johnson’s class action expressly provides for the appointment of a “person to act as an officer of the District Court to be the trustee of the Settlement Fund.”

Manglona and Hatch said the Settlement Agreement further provides that the trustee of the Settlement Fund has the powers of a federal equity receiver under Federal Rules of Civil Procedure 66, and “shall act as the receiver for the Settlement Fund.”

As such, the lawyers said, the trustee reports directly to the District Court.

According to Tang, the audit for the Settlement Fund for fiscal year 2014 by Ernst & Young began in January 2015 and has been completed.

However, Tang said, because of a disagreement between the NMI government and the Settlement Fund on the issue of whether the Settlement Fund is a non-profit, tax-exempt entity, the completion of the audit has been delayed.