WASHINGTON -- The Internal Revenue Service has refused to give the Riverside County Housing Authority more time to rebate $2.25 million of arbitrage profits on its $17.5 million Whitewater Gardens multifamily housing back box deal.

But the IRS granted two-week extensions, to June 28, for two other deals -- a $13 million Ironwood multifamily housing deal that was done for the authority in 1985 and a $29.29 million governmental improvement bond issue that was sold for the city of Galt, Calif., in 1986.

Lawyers with the firm of Brown and Wood, which represents both the housing authority and Galt, had asked the IRS for more time to study and discuss the three deals.

The lawyers and the issuers have contended that the deals did not violate tax laws, but the IRS has insisted that the deals were not validly issued to avoid being subject to arbitrage rebate requirements.

IRS officials refused to grant more tim for Whitewater Gardens, in part because the deal had not resulted in any project and there was no chance of a settlement of tax law issues, lawyers for the authority said.

The IRS could now declare the interest earnings from the Whitewater Gardens bonds taxable, following through on a threat made earlier this year.

The IRS notified authority officials in March that the Whitewater Gardens issue was subject to arbitrage rebate requirements and that the bonds' interest earnings would be declared taxable if the arbitrage earnings were not rebated to the federal government within 50 days. Since then, Brown and Wood has gotten a series of deadline extensions.

Those lawyers would not disclose the authority's future course of action, given the IRS's refusal to grant another extension.

"The authority is reviewing its options. Those include doing nothing, goint to court, or paying the arbitrage. And there is no money to pay the arbitrage," said Henry S. Klaiman, a partner at Brown and Wood.

The IRS may not take any action against the issue. So far, it has failed to follow through on threats to tax the interest earnings of two other bond issues that did not rebate arbitrage earnings before an IRS-imposed deadline. They are a $335 million resouce recovery issue sold for Chester, Pa., in 1986 and a $223.73 million port issue sold for East St. Louis, Ill., the same year.

In all of these deals, the IRS is charging that bonds were not validly issued before arbitrage rebate requirements took effect. The deals were all closed without cash by Matthews & Wright Inc. and were not sold to public investors until weeks or months after the bonds were issued.

Matthews & Wright is no longer a broker-dealer under a settlement agreement reached with the Securities and Exchange Commission agreement over 26 such deals, which totaled $1.3 billion.

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