WASHINGTON -- The interest earnings of bondholders will not be taxed under a tentative agreement reached between Hemet, Calif., and the Internal Revenue Service that will settle tax law violations in connection with two black box bond issues, a city official and other sources said this week.

Under the proposed agreement, participants in the $23.86 million Fountains and Willows multifamily housing black box deals would pay $1.1 million to compensate the IRS for lost taxes on the bonds. In return, the IRS will refrain from taxing the bondholders or taking any enforcement action against the city, sources said.

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