WASHINGTON -- Want a good definition of chutzpah and the clearest reason to date why the Internal Revenue Service continues to vigorously go after abusive black-box and escrow housing deals from the mid-1980s?

You don't have to look far for the answers.

Both can be found in the revelations surrounding the IRS's recent decision that the 1985 black-box bond issues by two Texas housing authorities -- the Galveston County Housing Finance Corp. and the Baytown Housing Finance Corp. -- are not tax-exempt.

The IRS found that the apartment projects they were supposed to finance had already been built with tax-exempt bonds sold in 1982 by the Southeast Texas Housing Finance Corp., which has close administrative ties to the other two authorities.

The IRS told both the Galveston and Baytown authorities it will go after the bondholders of the Raintree and Huntcliff apartment projects if the authorities do not agree by the end of this month to rebate to the government the arbitrage earned from the two 1985 deals.

The amazing revelation in the case is that the three authorities had two sets of bonds outstanding at the same time for the same projects.

Although Bill Eiland, the executive director of Southeast who handles the administrative affairs of the other two boards, said the 1985 bonds were to be used to refinance and pay off the old bonds, he admitted that the refinancing never took place. A subsequent investigation by Lynn Stevens Hume, a reporter for The Bond Buyer, revealed that the proceeds of the 1985 bonds are locked into guaranteed investment contracts that do not mature until 1993 and the documents for the issues say nothing about any refunding plans.

The 1982 issue, which was to mature on Dec. 1, 1992, was finally called on Sept. 4, 1990, but only after the IRS began probing the 1985 issues.

It is not surprising that the two 1985 Texas deals included a familiar cast of characters -- Matthews & Wright Inc. and the bond counsel firm of Stubbeman, McRae, Sealy, Laughlin & Browder -- involved in numerous other abusive escrow deals.

What is most revealing is that this case shows for the first time that some issuers of black-box and escrow deals were not the naive, innocent victims of overly aggressive underwriters and bond counsel that some would like the rest of us to believe.

The revelations show that the two Texas authorities appeared to be willing participants in the arbitrage scam.

While going after bondholders in abusive deals has been the primary enforcement tool available to the IRS, the details that have emerged about the Texas deals point up the desperate need for the development of alternative enforcement penalties that the agency could use to penalize the real participants in abusive deals, including, in this case, the issuers.

The latest revelations make it imperative that the IRS and responsible market participants start working together to develop a system tha goes after the real abusers in a deal and not the individual bondholders.

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