WASHINGTON -- The Internal Revenue Service has dropped its case against one bondholder but appears to be pursuing others in separate enforcement actions over a $34 million bond issue sold for the Sevier County, Tenn., Industrial Development Board in 1984.

The issue, which was sold as tax-exempt, was to be used to finance the expansion and rehabilitation of the historic Mountain View Hotel in Gatlinburg, Tenn. But the project never got off the ground and the bonds were redeemed in 1987.

The IRS, however, took steps toward taxing the interest earnings of some of the bondholders in April 1991, after contending that the bond issue had violated a $10 million small-issue limit for tax-exempt industrial development bonds and other tax laws and regulations.

Now, more than a year later, Raymond David Hill, a 67-year-old tile contractor in Memphis, said last week that the IRS had dropped its attempts to collect $1,934 in taxes from $5,025 in interest he earned in 1987 from $60,000 of the bonds.

Mr. Hill said IRS agents told him they would not pursue the case against him just three days before his trial was scheduled to begin in the U.S. Tax Court on June 15.

Mr. Hill said he had been notified by the IRS in April 1991 that he owed the taxes. But he refused to pay and in July of that year filed a petition with the tax court protesting the IRS' action.

IRS officials did not tell him why they dropped the case three and a half months ago, Mr. Hill said. "They just said, 'We don't want to try you. You don't owe us anything," he explained.

But the IRS has not dropped its enforcement actions against James S. Bozik, an attorney in Valparaiso, Ind., and Dr. Joseph Jarabak, a resident of Valparaiso who died in March 1989.

The IRS is seeking $1,974 in taxes on $5,025 of interest earned from the bonds in 1987 by Mr. Bozik, according to documents the IRS filed with the U.S. Tax Court last fall. Mr. Bozik denied he owed the taxes in a response to the IRS that was also filed last fall. Neither the documents nor Mr. Bozik said how many bonds he held. The case remains open.

The IRS also appears to still be seeking $6,232 in taxes on $25,125 of interest that Dr. Jarabak earned from about $300,000 of the bonds in 1987. The agency had notified Mr. Bozik, who is handling Dr. Jarabak's estate, that the taxes were due last year. The estate has been kept open until the tax dispute can be resolved.

Mr. Bozik and Dr. Jarabak's estate appear to have waived the three-year statute of limitations that would prevent the IRS from collecting taxes year on income earned in 1987 and reported in 1988. Under the tax laws and regulations, the IRS generally can tax income only three after it is reported in tax returns.

IRS officials refused to discuss actions regarding Mr. Hill, Mr. Bozik, and Dr. Jarabak's estate. But agency officials have said in the past that it is not unusual for the agency to treat bondholders differently since enforcement actions generally are initiated and carried out by district offices without oversight by the national office in Washington.

The Mountain View transaction was underwritten by Donaldson, Lufkin & Jenrette Securities Corp., Matthews & Wright, and Cumberland Securities Corp. It was structured as four bond issues of less than $10 million each in order to qualify as tax-exempt small issues of industrial development bonds. Each issue was to finance a separate project.

Under tax law provisions enacted years ago, small-issue IDBs are tax-exempt only if the face amount of the bonds, together with any project-related capital expenditures made from other funds for three years before and after issuance, is not greater than $10 million.

The IRS charged that the Mountain View financing was a single transaction and not four separate bond issues because the proceeds were used for one project and lent primarily to James A. Huff, who had family ties to the hotel but was to serve as developer for the renovation project.

The IRS said in a report made available to a bondholder that the bonds would be a single issue under Revenue Ruling 81-216. This ruling states that two or more issues are a single issue if they are sold at substantially the same time, at substantially the same interest rate, pursuant to a common plan of marketing, and with a common or pooled security available for debt service.

Mr. Bozik and lawyers from Peck, Shaffer & Williams in Cincinnati, bond counsel for the Mountain View transaction, have disputed the IRS' charges and contended that the bonds should be tax-exempt.

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