Florida CDD Urges IRS End Audit After Review Shows It Didn't Overpay for Property

The Internal Revenue Service’s own appraisal valuations show the Village Center Community Development District in Florida did not overpay when purchasing four pieces of property with bond proceeds, according to the CDD’s lawyer.

“The Center District believes that those valuations ... support the view that the center district has not been ‘controlled’ by the developer in any manner that would impact its treatment as a political subdivision or its responsibilities as a political entity of the state of Florida,” wrote Sacramento lawyer Perry Israel in a March 8 letter to IRS chief counsel James Polfer.

Israel, who is representing the CDD, further concluded in a separate March 8 letter to Deborah Arceneaux, an agent with the IRS’ tax-exempt bond office, that “a prompt closure is warranted for this lengthy examination that has cost both the Center District and the IRS substantial resources.”

Israel would not comment on the dispute.

Alice Price, a valuation consultant with the IRS, began conducting the valuations of the appraisals on the CDD properties nearly four years ago and finalized the project last fall, according to documents. But Price didn’t send the valuations to a TEB examining agent until January and it wasn’t forwarded to the CDD until February. The original property valuations were done by a different IRS examining agent in 2009, and then were ultimately referred to Price.

The IRS has contended that the CDD overpaid for their properties and has suggested that the municipal bonds might have arbitrage or private-activity bond use problems. The chief counsel’s office also “tentatively” concluded that the CDD is not a political subdivision, and therefore at least $364 million of recreational revenue and subordinate recreational refunding bonds issued by the district between 1998 and 2003 are not tax exempt.

The Village Center CDD issued $426.2 million of tax-exempt bonds from late November 1993 through June 1, 2004 to finance the acquisition of recreational and other facilities as well as a utility system for the Villages, a retirement community in Florida.

Israel had requested a technical advice memo from the chief counsel after the IRS launched an audit in January 2008 focusing on the Sumter Landing bonds.

In the recent correspondence with the IRS, Israel said that the valuations show “that the Center District paid approximately the value of the assets it acquired with the 1998, 1999, 2001, 203 and 2004 bonds.”

The District and Israel contend that the IRS had unfounded accusations pertaining to the “alleged overpayment” for the amenity fee revenue stream, which was a critical component for the agency’s rationale that the District was not a political subdivision and therefore not qualified to issue tax-exempt bonds.

“The availability of these new findings and conclusion regarding the valuation of the acquired property constitutes new facts that require a re-evaluation and rebalancing of the facts and circumstances to be taken into account in the evaluation of the issue of control,” Israel wrote.

Meanwhile, Rep. Richard Nugent, R-Fla., wrote a letter to the Treasury Department’s acting secretary and deputy secretary Neal Wolin, urging the agency to consider implications of any federal tax policy that might jeopardize the ability of community development districts to continue to issue tax-exempt municipal bonds in Florida.

Nugent cited the CDD’s role in the financing of public infrastructure and in spurring Florida’s economic recovery.

“The nearly 580 CDDs operating in Florida rely on the IRS’ long-held position that they may issue tax-exempt bonds,” Nugent wrote in a March 5 letter. “Their ability to issue tax-exempt bonds has allowed Florida to maintain one of the nation’s lowest costs of living, in part, by keeping community assessment fees low for its residents.”

Nugent said that any changes to the tax exempt status of the bonds would “likely have a harmful impact on Florida homeowners already burdened by a weak economy.”

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