U.S. Attorneys want Riverside suit dismissed because housing authority has other relief.

WASHINGTON -- U.S. attorneys asked a U.S. district court yesterday to dismiss the Riverside County Housing Authority's lawsuit against the Internal Revenue Service and Treasury Department because alternative relief is available to the authority in the Whitewater Garden bonds tax dispute.

The Riverside County authority is seeking a court injunction against the two U.S. agencies to block them from either collecting $2.25 million in arbitrage profits from the $17.5 million Whitewater Garden bond issue or revoking the tax-exempt status of the bonds.

But U.S. attorneys, in a brief filed yesterday with the U.S. District Court for the Central District of California, said the authority "does have alternative relief available if it makes the arbitrage rebate payment."

The attorneys argued that two federal laws permit the authority to seek a refund of the $2.25 million in arbitrage the government wants the authority to rebate. If the refund were denied, them the authority could sue for a refund in the U.S. Claims Court or a U.S. District Court, the brief said.

The suit could be brought under section 1491(a) of title 28 of the U.S. Code, the attorneys said. This law historically has been used for disputes "not expressly addressed elsewhere" involving money that has been taken by, or handed over to, the federal government. The law provides, in part, that "The United States Claims Court shall have jurisdiction to render judgment upon any claim against the United States founded ... upon ... any Act of Congress," according to the attorneys.

The Whitewater Garden dispute would "fall squarely within the "any Act of Congress"" language in the law, the attorneys argued, because arbitrage rebate is necessary in the case of the Whitewater Garden bonds "to satisfy one of the preconditions for the tax exemption of the bonds" under Section 148 of the Internal Revenue Code.

Another federal law that would permit a lawsuit for a refund, the attorneys said, is Section 1346(a)(1) of title 28 of the U.S. Code, which gives concurrent jurisdiction to the federal district courts and the U.S. Claims Court for a civil action over "any sum alleged to have been excessive or in any manner wrongfully collected under the internal revenue laws."

"The Supreme Court has recognized that this 'any sum' language means something other than taxes or penalties," the attorneys said. And all of the parties in the Whitewater Garden case, they said, "are in agreement that the arbitrage rebate payment would not be a tax."

Since the authority has an alternative to seeking the injunction, the U.S. attorneys said, the authorty's lawsuit should be dismissed under the Anti-Injunction Act. That act prohibits lawsuits against the government from tax collection activities. The authority does not have the right to block the agencies from collecting taxes against bond-holders, the lawyers said.

The Whitewater Garden tax dispute stems from the IRS contention that the bonds are subject to arbitrage rebate requirements because 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 the arbitrage rebate restrictions. The 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 without being sold to public investors for cash until Feb. 20, 1986.

The IRS says the bonds were not validly issued until Feb. 20, 1986, because only then did the deal have any economic substance. But 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.

The authority filed its lawsuit against the IRS and the Treasury after the IRS warned it would tax the bondholders if arbitrage was not rebated from the Whitewater Garden deal.

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