WASHINGTON -- The trial of the first bondholder lawsuit against the Internal Revenue Service over a black box issue has been postponed as the U.S. Tax Court wrestles with jurisdictional issuers.
The lawsuit, brought against the IRS last year by Harbor Bancorp and, Subsidiaries of Long Beach, Calif., in a dispute over Whitewater Garden bonds, had been on the October docket of the tax court in Los Angeles.
But earlier this month Judge Larry L. Nameroff of the tax court in L.A. ordered that the lawsuit be removed from the court's docket and sent for review to the main tax court in Washington, D.C.
Tax court officials here said that the Harbor Bancorp case, like all large tax court cases in which disputes exceed $10,000 in taxes and penalties per year, must come before the main tax court.
Eventually, the case will probably be sent back to Los Angeles for trial, they said, but not to Judge Nameroff who typically only hears small- and medium-size cases.
Harbor Bancorp & Subsidiaries, of Long Beach, Calif., filed suit against the IRS last year after the agency tried to collect $19,763 of taxes on interest earned from $250.000 of Whitewater Garden bonds the bank held from 1988 through 1990.
The IRS began taxing the interest earnings of bondholders last year after charging that the $17.5 million Whitewater Garden issue violated the tax law's arbitrage rebate requirements.
The bonds were issued by the Riverside County, Calif., Housing Authority on Dec. 31, 1985, to finance an apartment complex. But the apartments were never built. The bond proceeds were unavailable for the project because they were used, instead, to acquire a long-term guaranteed investment contract.
The bond issue was closed without cash in late 1985 by Matthews & Wright, Inc., a former municipal underwriting firm, in a rush-to-market transaction that was designed to avoid the arbitrage rebate requirements.
The bonds were not sold to public investors for cash until February 1986.
The IRS contends that the bonds were not validly issued until February of 1986, two months after the arbitrage requirements took effect for new housing bond issues. The agency demanded that the Riverside county authority rebate $2.25 million in arbitrage profits from the issue. The authority refused.
The authority filed suit against the IRS in a U.S. district court in 1991 to prevent the IRS from either collecting the arbitrage or revoking the tax-exempt status of the bonds. The suit was dismissed last year and the IRS began taxing the interest earnings of bondholders.