A case pending in a federal court in California could severely limit the Internal Revenue Service's ability to financially penalize bond lawyers and other transaction participants responsible for abuses in municipal bond deals done before 2004. But market participants are still unsure of what the final fallout from the case will be or how it might change IRS practices.

In the case, Richard H. Hargrove, a former bond lawyer at now-defunct Hargrove & Costanzo PC, is challenging an IRS order that he pay $1.9 million in penalties under Section 6700 of the tax code for willfully or recklessly giving tax-exempt bond opinions for 18 fraudulent land-based bond deals.

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