Judge confirms Settlement Fund is tax-exempt entity

U.S. District Court for the NMI designated Judge Frances Tydingco-Gatewood yesterday confirmed that the NMI Settlement Fund is a tax-exempt entity.

Tydingco-Gatewood concurred with the Settlement Fund trustee and counsel for Betty Johnson that the Settlement Fund is an extension of the federal court, and as such, is exempt from taxation under the Commonwealth Code.

The judge ordered the CNMI government to recognize the Settlement Fund as a tax-exempt entity.

Tydingco-Gatewood said contrary to the CNMI government’s contentions, the Settlement Fund is not simply a restructured Retirement Fund nor does it “stand in the shoes” of the Retirement Fund.

Rather, the judge noted, the Settlement Fund is a distinct entity, separate and apart from the Retirement Fund.

Tydingco-Gatewood said the Settlement Fund was created in Johnson’s class action lawsuit under the auspices of the court and, as noted by the trustee and class counsel, is administered by a federally appointed trustee subject to the court’s supervision.

The judge said the trustee was appointed pursuant to Rule 66 of the Federal Rules of Civil Procedure and has all the powers of a federal equity receiver.

“Nevertheless, this does not equate the Settlement Fund to the Retirement Fund under receivership,” Tydingco-Gatewood pointed out.

Tydingco-Gatewood heard the tax-exempt issue last Tuesday.

According to Settlement Fund trustee Joyce C. H. Tang and Johnson’s class counsel, Robert M. Hatch, the Settlement Fund is a tax exempt because the settlement agreement in the 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.”

Tang said 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 CNMI government and the Settlement Fund on the tax issue, the completion of the audit has been delayed.

The Office of the Attorney General asked the court to hold off on deciding the tax issue, saying it should refer that decision to the director of Revenue and Taxation.

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

The OAG likened the Settlement Fund to the Retirement Fund under receivership and argued that “an entity under receivership does not become federal in nature.”

In her order, Tydingco-Gatewood said whether the Settlement Fund is a tax exempt entity depends on the nature and characterization of the Settlement Fund as created by the settlement agreement.

Thus, Tydingco-Gatewood said, with all due respect to the CNMI Department of Revenue and Taxation director, the court will not refrain from making a determination on the Settlement Fund’s tax exempt status.