IRS Expands Florida CDD Audits

WASHINGTON - The Internal Revenue Service has expanded its audit of bonds issued by the Village Center Community Development District in Florida to include six more bond issues, as well as two sets of bonds issued by the related Sumter Landing Community Development District, to finance projects at the Villages retirement community. The amount of debt under audit is now nearly $400 million.

The CDDs disclosed the IRS action in three notices filed with the Municipal Securities Rulemaking Board's EMMA system last week.

The IRS notified the districts of the expanded audit in three letters dated July 2. The letter addressing the inclusion of six Village Center CDD issues states that the audit of the 2003 bonds led it to "conclude" the other issues ran afoul of the tax code, whereas the two letters addressing the Sumter Landing CDD bonds states the IRS has information that "causes a concern" that the bonds may violate the tax code.

The IRS is now examining $398.74 million of bonds issued by the districts between 1998 and 2005 - a 520.5% increase from the original audit of $64.26 million of recreational revenue bonds issued in 2003.

Specifically, the IRS is now examining these Village Center CDD issues: $71.09 million of 1998 recreational revenue refunding bonds; $31.16 million of 1998 utility revenue refunding bonds; $21.89 million of 1999 recreational revenue bonds; $38.47 million of 2001 recreational revenue bonds; $86.4 million of 2003 utility revenue bonds; and $50.59 million of 2004 recreational revenue bonds. It is also auditing $65 million of 2005 recreational revenue bonds and $34.16 million of 2003 special assessment revenue bonds issued by Sumter Landing.

But Janet Tutt, manager of the Village Center, said Friday the expanded examination did not come as a surprise. She said IRS agent Dominick Servadio Jr., who is conducting the audit, warned the district last month that if it did not want to consider a settlement he had proposed to maintain the tax-exempt status of the bonds or wanted to appeal any IRS determination of taxability, he would have to expand the probe to cover additional similar bond issues. Seven additional bond issues could be examined, Servadio warned, but the letters indicate eight have been selected for examination.

Servadio told the Village Center CCD in May it could settle the audit by redeeming $355.35 million of bonds it issued from 1993 to 1995, paying the federal government at least $2.85 million, and agreeing to refrain from issuing any more tax-exempt bonds. The VCCCD did not consider his offer, and noted in a material event notice announcing that decision that the IRS has yet to declare any of its bonds taxable.

The Bond Buyer reported in February that the IRS had sent the district a letter Jan. 23 that identified three concerns the IRS had with the $64.3 million of 2003 bonds sold to finance the acquisition of golf courses, parks, and facilities for the Villages.

One concern is that the VCCDD does not qualify as a political subdivision or as an "on behalf of" issuer of tax-exempt bonds. Another is that the appraisals of property do not support the prices the issuer paid to the developer for facilities, and the purchases did not constitute governmental use of bond proceeds. A third IRS concern is that the bonds benefit a private entity and as a result are are private-activity bonds but are not tax-exempt, because they are not "qualified."

Under a Florida law enacted in 1980, a private development can create community development districts to finance public infrastructure projects with tax-exempt debt, either by financing the projects directly or by purchasing them from the developer. The districts must consist of a five-member board of supervisors that is elected every two years.

But Servadio had complained in correspondence with the VCCDD that the board of supervisors is made up mostly of people affiliated with the developer. As a result, the board of supervisors could not have exercised independent oversight of the bond transaction, he told the district.

Servadio told the VCCDD that the bonds appear to have been overissued, because at least 19 facilities acquired with the 2003 bond proceeds were overvalued.

Appraisals provided to the district had established a purchase price for the facilities of about $60 million. However, Servadio told the VCCDD that he determined through a third-party contact that the facilities were worth only between $6.8 million and $7.5 million. As a result, the bonds appear to be taxable arbitrage bonds, he wrote in his correspondence with the district.

Servadio wrote that the bonds met the private payment and use tests for private-activity bonds, but they did not fall within one of the PAB categories for tax-exemption.

The bonds were all underwritten by Prager Sealy & Co. Akerman Senterfitt was bond counsel.

Perry Israel, a lawyer with his own firm in Sacramento who is representing the CCDs before the IRS, could not be reached for comment.

There are almost 600 other community development districts in Florida, according to the state's Department of Community Affairs, but it's not clear how similar they would be to the setup for the Villages retirement community.

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