A Florida community development district's lawyer is urging the Internal Revenue Service's chief counsel to reconsider a ruling against the CDD, arguing it is incorrect, biased, lacks legal analysis and ignores precedent.

"The result of the failings of the [technical advice memorandum] ... is to target the [Village Center Community Development District] through innuendo and through the attempted creation of new legal standards not set forth in any previous law or guidance," Perry Israel, a lawyer based in Sacramento representing the CDD, wrote in a four-page letter to IRS chief counsel William J. Wilkins.

The IRS' technical advice memorandum is "very disappointing" and "very troublesome," he added.

Israel's letter focuses on the May 30 TAM the IRS chief counsel's office sent to the Village Center CDD that concluded it was not a political subdivision and could not therefore issue tax-exempt bonds.

If the TAM prevails, the Village Center CDD's roughly $364 million of bonds could be taxable.

The Village Center CDD is a commercial district that encompasses more than 21,000 acres, primarily in Sumter County, Fla.

The IRS' TAM claimed the CDD had changed its boundaries several times to ensure it would remain commercial and not include residents. The IRS concluded, after a five-and-a-half year audit, that the CDD's board was controlled by a private developer and was never intended to have members elected by public residents.

Israel said the IRS ruling does not include any specific analysis that would indicate being a 'division' of a state or local government is a separate substantive requirement that must be satisfied in order to be a political subdivision. Instead, he argues the ruling "solely analyzes whether an entity has been delegated enough sovereign powers in order to be treated as a political subdivision for purposes of the federal excise taxes."

Not only does it cite any authority supporting its conclusion, the TAM also fails to address any of the legal precedents supporting the CDD's position that were submitted to the chief counsel's office, Israel wrote.

These include a Supreme Court ruling, which establishes that an entity may be treated as a political subdivision for federal tax purposes even where the majority of the voting power is in the hands of a single business landowner.

"There is certainly no basis established in the TAM for the wholly original concept that only a 'general electorate' can support the valid issuance for tax exempt bonds," Israel wrote. "That stands as a strikingly novel and unsupported concept that borders on the creation of new law."

Israel claims the TAM, contains "incorrect and/or biased statements designed to color the perception" of the Village Center CDD. The most egregious statement is how much the CDD paid for the assets it acquired using the bond proceeds, he said.

"Despite the IRS' own valuation indicating the [CDD] paid fair market value for those assets, the chief counsel's office persists in statements that imply an inflated purchase price," Israel said. "These grossly misleading statements are apparently included to paint an unflattering, incomplete and inaccurate portrait" of the CDD, he added.

Israel also argued that the TAM misstates the powers of the Village Center CDD in a way that improperly limits them. For example, Israel said the IRS ignored the fact that the district has two independent sources of the power of eminent domain.

The CDD "requests a review of the TAM and its conclusions that fairly examines the facts and applies the applicable legal precedents," Israel concluded in the letter.

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.

Israel told The Bond Buyer it's unclear what the next steps will be for the Villages CDD.

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