WASHINGTON — The Florida Village Center Community Development District and its lawyer are challenging the Internal Revenue Service chief counsel’s tentative decision that the CDD is not a political subdivision and its bonds are not tax-exempt.
“A conclusion that an entity is not a political subdivision because the property in the geographic area of the entity is entirely or largely owned by a single person would be a startling conclusion, inconsistent with prior cases, the Service’s own prior rulings and legislative history,” Perry Israel, the Sacramento-based lawyer representing the CDD, said in an 11-page letter to the IRS.
Such a conclusion would have a “major impact not only in Florida but across the country and would be a surprise and suggest a change in law that is contrary to all existing guidance and authority,” he added.
Israel submitted more than 100 pages of supporting documents and examples on Nov. 1 to James A. Polfer, the IRS chief counsel.
Israel had requested a technical advice memorandum from the chief counsel on Jan. 21, 2010 after the IRS launched an audit in January 2008 focusing on the Sumter Landing bonds, issued to finance projects in a portion of the Villages, a retirement community. The Village Center CDD, which also issues bonds to finance land and projects within the Villages as well as provides services to the retirement community, and Israel have worked with three different IRS agents since then.
The Village Center CDD had verbally told district officials that the IRS chief counsel had “tentatively” concluded the CDD was not a political subdivision, jeopardizing the tax-exempt status of at least $364 million of bonds it issued between 1998 and 2003.
Israel’s 11-page letter was in response to the IRS’ tentative ruling. The Village Center CDD now awaits a final conclusion from the chief counsel on the status of its bonds.
When CDDs issue bonds, it is normal that all of the land or the vast majority of the land in the district is owned by one entity or a group of related entities, Israel argued in the letter.
This norm applies for all or nearly all bonds issued by both residential and commercial community development districts in Florida and by other special districts in other areas of the country, he said.
There are more than 1,000 independent special districts in Florida, with the vast majority of them having issued bonds where there is only one landowner, he said.
“It is not surprising that it is the broadly held and well-established view of the entire bond community that such an arrangement is permissible: case law, previously published guidance, and legislative history describe and approve this type of governance structure in the context of bonds and other political subdivision analysis,” he said.
The letter notes that the IRS has previously ruled that a single landowner district can be a political subdivision. Israel said he and his client did not find any precedents that suggested where an entity is held not to be a political subdivision because it has a single or majority-controlled elector.
Israel also highlighted that IRS Revenue Ruling 83-131 supports the position that the Villages CDD is a political subdivision.
A reading of this ruling and its history “does not even remotely suggest that control of landowner votes causes an entity to no longer be under the control of a state or political subdivision,” Perry said in the letter.
A single important factor that determines whether an entity is controlled by another government entity is what happens to the assets of the subject entity upon dissolution, the letter said, adding that there is no support for the proposition that “controlled” is determined by reference to the means of voting for the governance of the entity.
“To suggest that is the deciding factor comes from thin air and is not grounded on any precedent,” Israel wrote.