WASHINGTON -- The Riverside County Housing Authority has not posted the $2.25 million needed to put into effect a court injunction that would keep the Internal Revenue Service and Treasury from collecting arbitrage or taxing the interest earnings from the Whitewater Garden bonds.
Lawyers for the authority, which is still suing the agencies, said they currently have no plans to post the money.
The $2.25 million bond equals the amount of arbitrage from the deal the IRS was seeking. Judge Consuelo B. Marshall of the U.S. District Court for the Central District of California -- who issued the preliminary injunction in July -- had said a bond in that amount would have to be posted with the court for it to take effect.
"We don't want to put it up," said Henry S. Klaiman, a partner with Brown & Wood, the law firm representing the authority. "We don't think the bond is necessary. The government doesn't need the bond to protect itself."
The authority had challenged the need to rebate the arbitrage and had contended that it did not have the money to make any such payment.
The authority's refusal, or inability, to post the bond has led U.S. attorneys defending the IRS and Treasury to declare a victory of sorts.
"All I know is that I don't have any injunction. That's the important thing. There is no injunction," said Edward M. Robbins Jr., the assistant U.S. attorney handling the case for the government. "Nor does it look like there will be one, because I don't think they can afford to post the bond."
Meanwhile, the case is proceeding. The U.S. attorneys last week filed a request with the court for more than 50 documents associated with the Whitewater Garden bond deal. Mr. Robbins said it could take a long time for both sides to gather the information needed to support their claims.
"The case will move. But it may take years," he said.
And without a preliminary injunction against them, the IRS and Treasury are free to pursue enforcement action against the authority or bondholders if they chose to do so.
The Riverside county authority had filed the lawsuit against the agencies in June after the IRS threatened to tax investors' interest earnings from the Whitewater Garden bonds.
Whitewater Gardens is one of 26 deals totaling $1.3 billion that Matthews & Wright Inc., the former municipal bond underwriter, rushed to market and closed without cash in the mid-1980s to beat arbitrage rebate restrictions pending in Congress. In these deals, Matthews & Wright purchased the bonds with a check on an undercapitalized credit union and then temporarily warehoused them with an unlicensed, offshore shell bank. The bonds were not sold to public investors for cash until weeks or months later.
The IRS said that while the Whitewater Garden deal closed on Dec. 31, 1985, the bonds were not validly issued until Feb. 20 when they were sold to public investors for cash. The agency said that since the bonds were subject to rebate requirements, $2.25 million of arbitrage profits would have to be rebated to the federal government. If the amount was not rebated, it would revoke the tax-exempt status of the bonds.
But the authority has claimed that the bonds were validly issued on Dec. 31, 1985, because that was when they were purchased with a check. Under IRS rules and relevant case law, they have said, bonds are "issued" when they are exchanged for a check regardless of whether that check is backed with sufficient funds.
The Whitewater Garden deal was a black-box deal. In these deals -- so named because the deals have a complicated structure and the bond proceeds seem to disappear -- participation interests in the mortgage note to the property being financed were supposed to be sold to third-party investors for cash to buy credit enhancement.
But in the Whitewater Garden deal, as with many of the black-box deals done in the mid-1980s, the mortgage note was never sold.