WASHINGTON -- U.S. attorneys are now arguing that a federal law would allow the Riverside County Housing Authority to rebate $2.25 million of arbitrage profits from the Whitewater Garden multifamily housing deal and then seek a refund through the U.S. Claims Court.
This latest argument that the authority has alternative remedies to an injunction against the Internal Revenue Service and the Treasury, was first raised by the U.S. attorneys after last week's hearing in the U.S. District Court for the Central District of California and has led lawyers on both sides of the case to propose a week's delay in the proceedings.
During last week's hearing, the U.S. attorneys cited two federal statutes that they said would allow the authority to rebate arbitrage and then seek a refund in a federal district court. Afterward, they cited another federal law -- Section 1491 of Title 28 of the U.S. Code of Law -- that would allow for a refund from the claims court.
The lawyers have asked Judge Consuelo B. Marshall to allow the U.S. attorneys to have until July 15 to file written arguments with the court and to allow the Riverside County authority to have until July 22 to respond. Judge Marshall would have until July 29 to rule on the authority's request for a preliminary injunction.
The injunction would bar the IRS and the Treasury from either collecting arbitrage profits from the Whitewater Garden issue or revoking the tax-exempt status of the bonds.
The authority asked Judge Marshall for the injunction last month after the IRS warned that the Whitewater Garden bonds would no longer be tax-exempt if the arbitrage profits from the deal were not rebated to the federal government. The IRS contends the bonds are subject to arbitrage rebate requirements, that they were not validly issued until after those requirements took effect.
The $17.5 million Whitewater Garden deal is one of 26 deals totaling $1.3 billion that were closed without cash and rushed to market by Matthews & Wright Inc. in the mid-1980s to beat arbitrage restrictions.
The Whitewater Garden deal was closed on Dec. 31, 1985. But the bonds were purchased with checks from an undercapitalized credit union and then temporarily warehoused with an unlicensed offshore shell bank. The bonds were not sold to public investors for cash until Feb. 20, 1986.
The authority and its lawyers say the bonds were validly issued on Dec. 31, 1985, because that is when they were purchased with a check and that, under IRS rules and case law, bonds are "issued" when they are exchanged for a check, regardless of whether that check is backed with sufficient funds.
But the IRS says the bonds were not validly issued until Feb. 20, 1986, because only then did the deal have any economic substance. The IRS had threatened to tax bondholders if the arbitrage was not rebated by June 14.
Judge Marshall issued a temporary restraining order against the IRS and the Treasury last month and then extended that order last week until she could hear further arguments on jurisdictional issues.
Lawyers from Brown & Wood, which represent the authority, have argued that arbitrage rebate is not a tax and that the authority, therefore does not have the traditional remedies available to taxpayers who want to pursue a tax dispute with the IRS.
They have argued also that the authority will suffer irreparable harm without an injunction because it can not afford to rebate the $2.25 million of arbitrage and because its reputation in the municipal market would be ruined if its bonds were taxed.
U.S. attorneys, however, have argued that the authority cannot, under federal law, prohibit the IRS from collecting taxes from bondholders. They have also argued that the authority has options other than an injunction under federal law to resolve its dispute with the IRS and Treasury.