An Arkansas authority's plans to sell $50 million of tax-exempts next week for borrowers in other states has been temporarily scuttled after lawyers questioned the deal's legality, sources said yesterday.

Public finance attorneys charged that if the Arkansas Development Finance Authority proceeded with plans to sell tax-exempts for hospital projects in other states, it would run afoul of federal law and the authority's own enabling statute.

And that, they warned, could prompt Congress or the Internal Revenue Service to crack down on tax-exempt hospital financings in general.

"We don't consider ourselves to be in an adversarial position to the Arkansas Development Finance Authority," said Ann-Ellen, Hornidge, a bond attorney with the Boston firm of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo.

Ms Hornidge, who spoke on behalf of the National Council of Health Facilities Authorities, said her intent was to convince the authority that "it is not good politics or good policy, even if we can get around the legal hurdles, to proceed with this transaction."

She added that the council's 26 members hope "we can prevail upon [the Arkansas authority] to engage in some self-restraint, so that we can avoid having Congress or the IRS do it for us." Already a staff member of a key congressman has said the transaction could lead to tighter restrictions on hospital financings.

The deal that caused the uproar was originally scheduled for sale next week, and would have raised $50 million for hospitals affiliated with American Healthcare Systems, a San Diego-based consortium of nonprofit hospital systems across the country.

The deal has now been postponed until sometime in the first three months of 1992 "because of political concerns," one source said. It was to have been the first in a series of multistate financings designed to raise about $200 million a year.

Promoters said the deals would simplify life for nonprofits with hospitals spanning state borders that now must issue bonds separately through financing authorities in those hospitals' home states. Most authorities are constrained by statute to selling bond issues only for projects in their states.

But the Arkansas authority has the unusual ability to export tax-exempt loans across state lines, proponents of the deal say. First Chicago Capital Markets assembled the transaction, based on the legal approval of bond counsel at Chapman and Cutler.

Attorneys at the law firm have consistently declined to comment on their rationale for approving the transactions, citing orders from First Chicago to protect proprietary information.

"I don't know what rationale they're using," Ms. Hornidge said. "We have submitted the letter, in part, to get a dialogue going, to hear from them how they've reached their level of comfort" with the proposed deal.

Yesterday, a Chapman and Cutler attorney again declined to detail the legal basis for the transaction. Bankers from First Chicago could not be contacted because they were in Little Rock for a hearing on the financing.

It was at the hearing, held to comply with federal tax law, that the council's lawyers presented a letter to authority Executive Director Robert J. Nash that says exporting tax-exempt loans to other states contradicts legal intent.

"The privilege granted to states by Congress to issue tax-exempt bonds for health care organizations is traditionally rooted in the understanding that the financed projects will serve a public purpose in the host state," the letter says. Indeed, an aide to Rep. Brian Donnelly, D-Mass., last month voiced concern over the financing and said the congressman might seek legislation to prevent it.

According to the attorneys representing the hospital finance authorities, the transaction may already be illegal under a number of existing laws, including the Tax Equity and Fiscal Responsibility Act of 1982.

The proposed use of tax-free financing raised in Arkansas by borrowers in other states would also "frustrate the mission" of state hospital finance authorities and raise other federal tax questions.

Ironically, the lawyers criticized the very hearing at which they aired their views. Yesterday's hearing was held to meet the requirements of the 1982 tax law, but the attorneys said it was unlikely the hearing actually fulfilled the law's requirements.

"On a strictly procedural level," the attorneys say, the law's "preconditions" could prove "difficult to satisfy" under the proposed multistate financing arrangement.

The authority had published a notice of the hearing in a Little Rock newspaper, the attorneys said. That notice, together with the single hearing in Arkansas, "fall far short of providing the ongoing level of public input and scrutiny by the host community intended by the legislation."

The council represents 26 authorities created by state statutes to serve as financing conduits for hospital projects in their states. The Arkansas Development Finance Authority, which has proposed issuing the multistate bonds, does not belong to the group.

In their letter to Mr. Nash, council lawyers also warn the transaction would run counter to the intent of the laws that created the Arkansas authority itself.

"The proposed financing," the letter says, "would seem to not only frustrate the mission of the issuers in the states where the [health care] facilities are actually located, but also the very intent of the drafters of your own enabling legislation."

According to the letter, that legislation stipulates that the authority's tax-free hospital financings benefit Arkansas citizens.

The authority says the financing for out-of-state projects meets that test. By acting as conduit, the authority can charge fees on the multistate deals. Those fees would finance an immunization program in Arkansas, to the benefit of the state's citizens.

But that rationale raises its own questions, according to Ms. Hornidge. "Our question is whether that's an appropriate use of a tax-exempt authority, to be used as a revenue generator."

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