WASHINGTON -- Some of the participants and institutional investors connected with the $335 million Chester, Pa., resource recovery bond deal are trying to negotiate a settlement with the Internal Revenue Service to prevent the agency from taxing the interest earnings of the bondholders, sources close to the negotiations said this week.

"We've met with the IRS several times to talk," said one source who did not want to be identified. "We believe that the bonds are tax-exempt, but sometimes it's easier to go the settlement reoute because the cost of legal fees would be so great" if the bonds were taxed or if the IRS was challenged, he said.

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