WASHINGTON - Two local housing authorities in Virginia have reached agreements with the Internal Revenue Service to settle tax disputes over four Apple Creek black box bond issues sold in late 1985.
Under the separate agreements, which were announced late Friday by the Newport News and Hampton redevelopment and housing authorities, the IRS agreed not to tax the interest earnings from the $10.3 million Apple Creek I bond issue, the $10 million Apple Creek II issue, the $6.7 million Apple Creek of Hampton issue, and the $7.4 million Apple Creek of Virginia Beach issue.
The IRS also agreed not to blacklist or disqualify the two authorities from making certifications about the tax exemption of future bond issues.
The authorities, in turn, agreed to compensate the IRS for a portion of the arbitrage that was earned from each of the deals.
At the same time, the authorities reached separate settlement agreements with some of the deals' participants, under which they received money from those participants.
Neither authority officials nor their lawyers would disclose the amounts of money the authorities paid to the IRS or the amounts they got from the participants.
"We are not in a position to get into the specifics of the negotiations with the [Internal Revenue] Service or the specifics of the closing agreements," said Harold E. Starke Jr., a lwayer with the firm of Mays & Valentine in Richmond, which represented both authorities in the settlement negotiations.
Closing agreements are settlement agreements between the IRS and bond issuers or other taxpayers.
The authorities are precluded from discussing the amounts of money obtained from participants of the deals because they entered into confidentially agreements, said William R. Derry Jr., another lawyer at the firm.
The IRS had warned each of the authorities in August 1991 that the four bond issues might not be tax-exempt, according to Starke.
The IRS said the bonds appeared to be taxable arbitrage bonds because the proceeds were used to acquire obligations that, at th time of issuance, were expected to produce a yield above the bond yield, according to Derry.
The proceeds were used to purchase guaranteed investment contracts rather than to finance housing projects. None of the housing projects was ever built.
In addition, the IRS told the Hampton authority in September 1991 that the bond issue for the Apple Creek project in Virginia Beach was also subject to arbitrage rebate requirements because it was not issued until July 1986, several months after those requirements took effect for multifamily housing bonds.
That bond issue was closed without cash in December 1985 by Mathews & Wright Inc., which is no longer in the municipal business, and Craigie Inc. of Richmond. But the bonds were warehoused and were not sold to public investors for cash until July 1986.
The IRS told the authorities in the letters it sent them in 1991 that it would consider negotiating a settlement of the tax charges. Starke said the authorities and the IRS have been holding settlement talks for almost a year.
The Newport News authority issued the Apple Creek I and II bond issues, and the Hampton authority sold the Apple Creek deals for the Hampton and Virginia Beach projects.
The four issues have most of the same participants. Bond counsel for all three issues was the firm of Willcox & Savage in Norfolk. The trustee was NCNB Texas National Bank. The developer was Ameracorp of Tulsa, Okla. The mortgage broker was Southwest Capital Investment Corp.
But while Matthews & Wright and Craigie underwrote the Apple Creek at Virginia Beach deal, Donaldson, Lufkin & Jenrette Securities Corp. and Craigie were underwriters on the other three deals.
Another exception is that while Prudential Insurance Co. of America provided the guaranteed investment contracts for the Apple Creek I and II deals, Travelers Insurance Co. provided the GIC for the Hampton deal and Crown Life Insurance Co. provided the GIC for the Virginia Beach deal.
Also, while Stubbeman, McRae, Sealy, Laughlin & Browder Inc. were special tax counsel for three of the deals, Bankston, Wright and Greenhill was special tax counsel for the Virginia Beach deal.
These kinds of deals, called black boxes because of their complexity and convoluted form, were structured so that the mortgage note to the property being bond-financed was to be sold to third-party investors to obtain cash for credit enhancement. But in most of these deals, the third-party investors were never found and the bond proceeds were used for credit enhancement rather than for the projects.
