DALLAS -- Fort Worth officials plan to meet today to decide whether to sue the parties to a 1985 bond issue by the city's Trinity Housing Finance Corp. that the Internal Revenue Service says is no longer tax-exempt.

Judson Bailiff, the city's director of finance, said that litigation may be the only way the nonprofit agency can raise funds to settle with the IRS, which is demanding payment for arbitrage profits on the $27 million Overton Ridge Square multi-family housing deal.

At a closed-door meeting this morning, the Fort Worth City Council, which is also the housing corporation board, is scheduled to discuss what it could do to reach a settlement with the IRS and prevent the agency from declaring the bonds taxable.

"The corporation has no money, it never has had," Mr. Bailiff said. "I think that the IRS is looking for us to take a look at what other parties might have financial liability here."

City officials met Sept. 25 in Houston with IRS officials and Justice Department lawyers to discuss the situation. An IRS official declined to comment yesterday.

Mr. Bailiff said government officials estimated arbitrage on the December 1985 deal at $1.548 million, but have not demanded a specific amount to settle the matter.

"At the meeting they said they would be happy to accept a check for $1 million for it," Mr. Bailiff said. "But, of course, we don't have $1 million."

In August, the IRS notified the Trinity Housing Finance Corp. that investigations by the Securities and Exchange Commission and Justice Department found that the issue was one of 22 underwritten by Matthews & Wright that closed in a "sham" manner.

The deal was closed without cash on Dec. 15, 1985, but the IRS said the bonds were not validly issued until March 1986, when they were remarketed to public investors for cash. Because of that, the IRS said the bonds are subject to arbitrage rebate requirements that took effect for multifamily housing bonds issued after Dec. 31, 1985.

Mr. Bailiff said the housing corporation was unaware of the "sham" closing, but said the trustee had notified the agency that it had received proceeds from the December 1985 bond sale.

"We can't argue the facts of the case, but we can say that we are innocent and that we have no money," he said.

Like other issuers facing IRS demands over similar deals, Mr. Bailiff said that filing lawsuits against those involved in the sale of the bonds is likely to stop the agency from taking action against bondholders.

"If we go back to them and tell them to go after the bondholders, we don't know what they would do. They did not seem real eager to pursue that," he said. Later, Mr. Bailiff added, "For us, it is preferable to try and settle."

The bond counsel for the deal was Berkman Ruslander Pohl Lieber & Engel in Pittsburgh. The special tax counsel was Jacobs & Koegler in Jacksonville, Fla. Underwriter's counsel was Camp, Carmouche, Barsh, Hunter, Gray, Hoffman & Gill, now called the Carmouche Law Firm, in Lake Charles, La., and the trustee bank was the First National Bank of Shreveport, now called Premier Bank, in Shreveport, La.

The $27 million bond issue was sold to finance the Overton Ridge Square apartments in southwest Fort Worth. The project was to be developed and managed by a partnership and corporation created by Leonard E. Briscoe, a real estate developer.

Mr. Briscoe was indicted last month by a federal grand jury on 23 counts of bribery, fraud, and conspiracy in connection with three projects in Palm Beach County, Fla., that received funding from the U.S. Department of Housing and Urban Development. He has denied the allegations, saying he will fight the charges.

The Overton Ridge project was never built and the bond issue was collapsed in 1988 when the bonds were called and investors were paid in full.

Mr. Bailiff said he was not yet certain of who the housing agency might sue in an attempt to raise cash for a settlement with the IRS, but he added, "If we're convinced that we're innocent, then somebody else is guilty."

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