WASHINGTON -- Clearfield, Utah's $6.8 million Heather Estates black box housing bond issue has been declared taxable by the Internal Revenue Service, city officials said yesterday.

But the IRS told city officials it would not tax bondholders if the city enters into a closing agreement to pay the IRS $638,064.

Clearfield officials, however, said yesterday that they have no intention of entering into a closing agreement with the IRS over the bonds, which were first sold as a $7.5 million issue on Dec. 31, 1985, and then resold as a $6.8 million issue in July 1986 for Clearfield's Industrial Development Authority.

"I don't know where they got the idea that we were interested in a closing agreement. It's news to me," said Richard Waite, Clearfield's city manager. "I'd be hard pressed to tell the IRS we'd fork over $600,000 for something the city did in good faith," he added, saying, "We're just not ready to buckle under to the IRS on this thing since we have some litigation in process."

Clearfield filed a lawsuit earlier this year in a U.S. District Court against several of the participants of the black box multifamily housing bond deal.

Clearfield officials were notified of the IRS action in a letter received last week by Mr. Waite. The letter contends the bonds were arbitrage bonds under Revenue Ruling 85-182, a 1985 ruling in which the IRS concluded bonds were not tax-exempt because there was no reasonable expectation at the time of issue that the proceeds would be used for a housing project.

"Our examination indicates that the authority bonds were substantially similar to those described in Revenue Ruling 85-182," the IRS says in the letter.

Attached to the letter was a draft closing agreement, which the IRS contends Clearfield officials requested.

But Mr. Waite said no such request was ever made and criticized the IRS for seeking money from Clearfield. "It appears to me that the IRS is taking the easy way out. They're trying to go after the easy party, the issuer."

The Clearfield issue, which is still outstanding, was underwritten by Matthews & Wright, a firm no longer in the municipal bond business. Bond counsel was Fox, Edwards, Gardiner & Brown, now Ballard, Spahr, Andrews & Ingersoll. Underwriter's counsel was the former law firms of Bankston, Wright & Greenhill. The trustee bank was NCNB Texas, and the mortgage broker was Unified Capital Corp.

The Clearfield deal is the latest issue the IRS has gone after for tax law violations.

Earlier this year the IRS said a Louisiana Public Facilities Authority issue was no longer tax-exempt because there was no reasonable expectations the proceeds would be used for housing projects. The authority protested the IRS charge.

In past years, the IRS declared bonds issued by Guam and Arizona authorities taxable on similar grounds, but was able to reach closing agreements in each case.

More recently, the IRS also notified five issuers whose bonds were closed without cash by Matthews & Wright, in the mid-1980s that their bonds' interest earnings would be taxed if they did not rebate arbitrage profits to the government.

The IRS has not yet acted to tax holders of these bonds. But one of the issuers, the Riverside County Housing Authority, late last week got a U.S. District Court in California to issue a temporary restraining order against the IRS and Treasury Department, blocking them from either collecting arbitrage or revoking the tax-exempt status of the bonds.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.