Supreme Court Declines to Hear Two Pension Fund Cases

Lower court rulings involving an automotive, mineworkers’ pensions maintained.

The US Supreme Court has declined to hear two cases involving pension funds: Toshiba Corp. v. Automotive Industries Pension Trust Fund, and First Solar Inc. v. Mineworkers’ Pension Scheme.

Toshiba Corp. v. Automotive Industries Pension Trust Fund centers on two conflicting rulings over whether the Securities Exchange Act applies, without exception, whenever a securities fraud claim is based on a transaction in the US.  The US Court of Appeals for the 9th Circuit has ruled that the Act applies without exception, even if it mainly involves foreign conduct. However, the US Court of Appeals for the 2nd Circuit has ruled that the act does not apply in certain circumstances.

The 9th Circuit, unlike the 2nd Circuit, held that the US Securities Exchange Act always applies to a securities fraud claim involving a domestic securities transaction, even if the claim is against a foreign issuer that did not participate in the transaction, has not entered the US securities markets, has committed the alleged fraud abroad, and is subject to ongoing oversight by foreign securities regulators.

When the Supreme Court asked for its views earlier this year, the US government recommended that the petition be denied, and told the high court that the lower court’s decision, which left open the possibility that the case could go forward, was correct, and that because there has not yet been a final judgment in the case it might not be necessary for the Supreme Court to weigh in.

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The Supreme Court also declined to hear a case involving when stock loss causation lawsuits can be brought in First Solar Inc. v. Mineworkers’ Pension Scheme. At issue is whether a plaintiff may establish loss causation based on a decline in the market price of a security when the event or disclosure that triggered the decline did not reveal the fraud on which the plaintiff’s claim is based.

In 2012, investors sued First Solar, Inc., an Arizona-based company that makes solar-panel modules, alleging that it failed to disclose defects in its solar panels, and then misrepresented the effect of those defects. Under the Supreme Court’s cases, a plaintiff in a securities fraud case must show that the defendant’s fraud caused him to lose money. First Solar asked the court to decide whether the investors can make this showing when the event or disclosure that caused stock prices to go down did not itself reveal any fraud.

When the court sought out views on this case, the government also told the justices that the ruling by the US Court of Appeals for the 9th Circuit, which allows the case to move forward, is correct and does not conflict with the decisions of any other courts of appeals.

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IRS Issues Endowment Tax Regulations

Higher education foundations finally get guidance on 2017 excise tax.

The IRS has issued 58 pages of proposed regulations for the so-called “endowment tax,” a 1.4% excise tax on the net investment income of certain private colleges and universities that was included in the Tax Cuts and Jobs Act (TCJA) of 2017.

The tax applies to any private college or university that has at least 500 full-time tuition-paying students (more than half of whom are located in the US) and that has assets other than those used in its charitable activities worth at least $500,000 per student. According to the IRS, an estimated 40 or fewer institutions are affected by the endowment tax.

The proposed regulations define several of the terms necessary for educational institutions to determine whether the excise tax applies to them. For affected institutions, the guidance clarifies how to determine net investment income, including how to include the net investment income of related organizations, and how to determine an institution’s basis in property.

According to the regulations, fair market value of assets per student is based on the total number of all students attending the institution, not just the number of tuition-paying students. The IRS also said universities and colleges should base the definition of “tuition-paying” on the definition of qualified tuition and related expenses that is provided for education tax credits in section 25A(f)(1) of the Internal Revenue Code.

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The proposed regulations also require that a student be both enrolled at and attend the applicable educational institution. They also must be enrolled or accepted for enrollment in a degree, certification, or other program (including a program of study abroad approved for credit by the eligible institution at which such student is enrolled) leading to a recognized educational credential.

Additionally, it’s up to each institution to determine which students are considered full-time and part-time as long as those decisions are consistent with the institution’s practices in determining full-time and part-time status for other purposes.

The notice of proposed rulemaking has a 90-day public comment period, which means the comments will be due by Oct. 1.

Harvard University, one of universities opposed to the new excise tax, declined to say if it intends to submit a formal public comment, according to student newspaper The Harvard Crimson. Brigid O’Rourke, a university spokesperson, told the Crimson that the university was opposed to the endowment tax and would continue to advocate its repeal.

“We are working to analyze the proposed guidance … and legal requirements of this new tax,” O’Rourke told the Crimson. “We will continue to work with policymakers and others in the higher education community to push for Congress to re-examine this misguided and damaging provision in light of the Congress’ stated goals of increasing access and affordability.”

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