WASHINGTON -- The Internal Revenue Service has notified the Trinity Housing Finance Corp. that its $27 million Overton Ridge Square multifamily housing issue is no longer tax-exempt and that bondholders will be taxed if all or a portion of the deal's arbitrage profits are not rebated to the federal government by Sept. 30.
The IRS made the warning made in an Aug. 8 letter sent to officials with the Trinity housing authority, saying the bond issue was one of about two dozen deals Matthews & Wright Inc. 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. The bonds, therefore, are subject to arbitrage rebate requirements that took effect for all multi-family housing bonds issued after Dec. 31, 1985, the IRS said.
"Generally, we would be willing to enter a closing agreement only if the issuer was to pay the United States all or an appropriate percentage of the impermissible arbitrage profits," the IRS told officials.
"However, unless we are able to conclude an agreement by Sept. 30, 1991, we will pursue our remedies against the holder of the authority bonds," the IRS said. The letter was addressed to Louis J. Zapata, former presidnet of the authority who has sinve been replaced by Eugene McCray.
Officials in Forth Worth said Friday that the Trinity authority cannot afford to rebate arbitrage profits from the deal, which they estimated would total about $1.5 million. But they said they were discussing the IRS letter with their attorneys.
"We'd be glad to share any arbitrage profits. Unfortunately, we didn't get any," said Judson Bailiff, the city's finance director.
Typically, in such deals, the arbitrage profits are used to pay the fees of the firms that were involved, not the issuer. The issuer was promised that the financing and the arbitrage profits would cover all of the expenses associated with the deal.
Overton Ridge Square is the 10th bond deal that has been declared taxable by the IRS. Of the 10 deals, seven were underwritten by Matthews & Wright, and six of those are among the roughly two dozen deals the firm closed without cash.
Trinity's $27 million issue was sold to finance the Overton Ridge Square apartments in southwest Forth Worth. The project was to be developed and managed by a partnership and corporation created by Leonard E. Briscoe.
Mr. Briscoe is the real estate developer who was indicted last month by a federal grand jury with 23 counts of bribery, fraud and conspiracy in connection with three projects in Palm Beach County, Fla. that received funding from the Department of Housing and Urban Development. Mr. Briscoe is alleged, among other things, to have submitted false statements to HUD.
But Overton Ridge Square was never built. and the deal was collapsed in December 1988. The bonds were called and the bondholders were paid in full.
In its letter to Trinity officials, the IRS said that bond proceeds were, in effect, unavailable for construction of the project. The bonds were issued at a 5.625% interest rate. The proceeds were invested at a rate of 8% in a certificate of deposit with The Toronto-Dominion Bank in New York.
Under the bond documents, the proceeds could not be used for construction unless the developer found an alternate security for the bonds comparable to the certificate of deposit. "At the time of issuance of the bonds, alternate security to permit the use of the bond proceeds to finance the project was not available," the IRS said.
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.
Other deals among the more than two dozen closed without cash by Matthews & Wright that the IRS has declared taxable are: a $335 million resource recovery issue for Chester, Pa.; a $223.735 million port deal for East St. Louis, Ill.; a $29.29 million governmental improvement bond issue for Galt, Calif.; the $17.5 million Whitewater Garden issue for the Riverside County, Calif., Housing Authority; and the $6.8 million Heather Estates issue for the Housing Authority of Clearfield City, Utah.
In addition, the IRS has declared four other deals taxable after charging that there were no reasonable expectations at the time of issue that the proceeds would be used for housing. These deals are: a $300 million multifamily housing deal for the Guam Economic Development Authority; $368.4 million of multifamily housing bonds for three industrial development authorities; $42.58 million of multifamily housing bonds for the Louisiana Public Facilities Authority; and a $34 million hotel expansion and rehabilitation deal for the Sevier County, Tenn. Industrial Development Board.