WASHINGTON -- The Riverside County, Calif., Housing Authority yesterday disputed U.S. attorneys' claims that two federal laws would permit it to rebate $2.25 million of arbitrage profits from the Whitewater Garden bond issue and then seek a refund from a U.S. court.
In a memorandum filed with the U.S. District Court for the Central District of California, the authority's lawyers said neither of the federal laws applies to the Whitewater Garden case and that "injunctive relief is the proper -- and only -- relief available."
The authority is seeking a court injunction that would bar the Internal Revenue Service and the Treasury Department either from collecting $2.25 million in arbitrage profits from the Whitewater Garden deal or revoking the tax-exempt status of the bonds.
U.S. attorneys, however, contend that the district court has no jurisdiction in the matter. In a brief filed with the court last week, they argued that the court must dismiss the case because two federal laws -- section 1491(a) and section 1346(a) of title 28 -- provide the Riverside county authority with alternative relief to an injunction.
The U.S. attorneys said that section 1491(a) would allow the authority to rebate the arbitrage and then to seek a refund of that payment in the U.S. Claims Court. Lawyers representing the authority from Brown & Wood, however, said neither the language of that statute nor the case law supports that view.
The statute, in part, states, "The United States Claims Court shall have jurisdiction to render judgment upon any claim against the United States founded either upon the Constitution, or any act of Congress or any regulation of an executive department, or upon any express or implied contract with the United States, or for liquidated or unliquidated damages ..."
But the memo by the authority's lawyers says, "The courts have consistently held . . . that the Claims Court's jurisdiction is limited to such cases where the Constitution or federal statute requires the payment of money damages as compensation for the violation." The Claims Court clearly would not have jurisdiction in this case, they said, because the Treasury Department's arbitrage rebate rules state that "rebate payments are not refundable."
Further, they said, this statute "ignores" the authority's Fifth Amendment right to "due process" under the Constitution, because there is no guarantee that the Claims Court would consider a request for a refund even if Riverside rebated the arbitrage to the federal government.
"If Riverside pays the $2.25 million, it will be deprived of property without guarantee of any hearing," the authority's lawyers wrote.
The U.S. attorneys also said that section 1346(a) would permit the authority to rebate the arbitrage and then to sue for a refund in a federal district court.
Section 1346(a) states it applies to "Any civil action against the United States for the recovery or any internal-revenue tax alleged to have been erroneously or illegally assessed or collected, or any penalty claimed to have been collected without authority, or any sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws."
The U.S. attorneys and Riverside's lawyers have agreed that arbitrage rebate is not a tax. But the U.S. attorneys have argued that the phrase "any sum" in this statute means something other than taxes or penalties.
The authority's lawyers, however, disputed this view, saying, "The use of the word 'collected' makes it clear that the 'any sum' language relates to tax and tax-related payments and does not encompass arbitrage rebate payments which cannot under any circumstances be 'collected' by the IRS."
Recently, in the recent case of Flora v. United States, they said, the Supreme Court held that "any sum" would not apply to a partial tax payment. The word "sum" referred to items "to be added to the tax simply as a sum," the Supreme Court said.
"Every other court interpreting the word 'sum' has interpreted it ... as relating to tax or tax-related payments," the authority's lawyers said.
Now that the authority's lawyers have filed their memo, Judge Consuelo B. Marshall is expected to rule on the request for an injunction. But lawyers on both sides of the case were not sure when the ruling would come.
The authority asked the district court for an injunction in June, after the IRS sought arbitrage from the deal and warned that it would tax bondholders if the arbitrage was not rebated to the federal government.
The IRS contends the bonds are subject to arbitrage rebate requirements because they were not validly issued until after the requirements took effect. The Riverside county authority, however, claims the bonds were validly issued on Dec. 31, 1985, and are not subject to the rebate requirements.
This substantive dispute has become overshadowed by a court debate on whether the district court in California has jurisdiction in the case.