LOS ANGELES -- A federal judge on Monday postponed deciding on a preliminary injunction in the Whitewater Gardens black box bond deal case after a U.S. attorney argued that a California housing authority might have an alternative remedy to an injunction.
U.S. District Court Judge Consuelo B. Marshall of Los Angeles said Monday that an existing temporary restraining order would remain "in full force" while she accepts further arguments on whether the Riverside County Housing Authority has the option of suing for a refund if it rebates $2.25 million of arbitrage profits from the deal.
The judge said she hopes to issue a ruling by July 22 on whether to grant the authority's request for a preliminary injunction.
Judge Marshall last month issued a temporary restraining order that prevents the Internal Revenue Service and the Treasury Department from either collecting arbitrage profits on the $17.5 million Whitewater Gardens deal or revoking the tax-exempt status of the bonds.
Lawyers with Brown & Wood, the firm representing the authority, have said the authority would suffer "irreparable harm" if the IRS forced it to rebate arbitrage or taxed the interest earnings of the Whitewater Gardens bondholders. U.S. attorneys said the authority has failed to show it will suffer such harm.
The housing authority argues that it lacks traditional remedies available in a tax dispute because rebated arbitrage is not a tax. Accordingly, the authority wants an injunction that blocks the IRS from taking enforcement action. The traditional remedies involve paying the tax and suing for a refund or filing a suit in the federal tax court.
But at a court hearing Monday to consider the authority's request for a preliminary injunction, U.S. lawyer argued that certain federal statutes might make the refund procedure available to the authority.
Edward M. Robbins Jr., an assistant U.S. attorney, cited both a judicial procedure code -- Section 13-46A1 under Title 28 -- and an Internal Revenue Code --Section 74-22A under Title 26 -- to support an argument that the authority might be able to use the refund procedure.
Mr. Robbins said those statutes, and an interpretation in a 1960 case known as Flora v. U.S., suggests a refund suit can encompass "any sum" in dispute, not just taxes and penalties.
"It's the "any sum" language we're keying on" to figure out whether it applies to an arbitrage rebate payment, Mr. Robbins said in an interview yesterday.
Henry S. Klaiman, a partner of Brown & Wood, said in a separate interview yesterday that "we don't think [the statutes] apply." According to Mr. Klaiman, his firm's research indicates that the "any sum" language refers to certain costs incurred when paying a refund. The government is taking an "extraordinarily novel position" to apply the statutes to an arbitrage rebate paymnet, he added.
Mr. Robbins told Judge Marshall on Monday that "the issue is not entirely without some doubt," and said the government in this particular case would be willing to stipulate that it will not attack a refund suit by the housing authority if it chose that option.
Lawyers for both sides noted that the court is the final arbiter in deciding whether it has jurisdiction under the statutes raised by Mr. Robbins.
Judge Marshall said the point raised by Mr. Robbins may be "something worthy." She noted, however, that the remedy had not been fully briefed in previous written filings, so she requested further arguments discussing, "Is this relief that's available?"
She asked the housing authority to file arguments by July 8. U.S. attorneys are scheduled to reply by July 15, and she expects to rule on the preliminary injunction request by July 22. Another oral hearing is unnecessary, the judge added.
The IRS contends that the Riverside authority must rebate $2.25 million in arbitrage profits from the Whitewater Gardens deal because the bonds were not validly issued until after arbitrage rebate requirements took effect.
The deal was rushed to market and closed without cash by Matthews & Wright Inc. on Dec. 31, 1985. The bonds were not sold to public investors for cash until weeks after the closing. The IRS is taking steps to tax the bondholders if the authority does not rebate the arbitrage profits to the government.
Monday's hearing featured arguments that were raised in previous filings regarding the injunction request. Those arguments -- and the briefs to be filed later this month -- will be studied by the judge in deciding whether to grant a preliminary injunction.
Much of Monday's hearing was devoted to jurisdictional questions. U.S. attorneys argue that the court must dismiss the case because it lacks the jurisdiction necessary to grant an injunction.
Federal laws generally prohibit court interference with tax collection activites, the government said. But James K. Manning, a Brown & Wood partner who spoke at Monday's hearing, said the authority fits a "narrow exception" to anti-injunction laws because it has "no other legal remedy."
In her questioning, Judge Marshall quizzed Mr. Robbins on whether the granting of a preliminary injunction at this stage would hamper efforts by the IRS to tax interest earnings of bondholders. In particular, she wondered whether the statute of limitations is "a legitimate concern at this point."
Mr. Robbins said "we are worried about that" because it "is a major project" to collect information on the taxpayers, audit them, issue statutory notices of deficiency, and assess the tax before the statute of limitations expires.
The clock runs out for some bondholders by April 15, 1992, three years after returns were due for the 1988 tax year, Mr. Robbins said.
Judge Marshall asked, "Isn't there sufficient time for that still to be done" once the case is resolved? Mr. Robbins said the authority's lawsuit could drag on because of a need for "substantial discovery" in a case involving a complex sham transaction.
But Mr. Manning of Brown & Wood said, "I would be very suprised if it is protracted" because both sides should be able to stipulate to many facts regarding the bond deal.
The housing authority also has argued that the expiration of the statute of limitations is of no concern because the IRS can ask taxpayers to agree to an extension of time to assess.
But Mr. Robbins claimed Monday that "no taxpayer in his right mind" would sign an extension if an injunction is in place that blocks the IRS from taking enforcement action.