WASHINGTON -The Village Center Community Developer District in Florida is not considering an Internal Revenue Service proposal to settle alleged tax-law violations over $64.26 million of 2003 recreational revenue bonds that financed the acquisition of golf courses and other facilities for its retirement community, the CDD's manager said yesterday.

"We are not at the point of having a discussion regarding a settlement," Janet Tutt said in a material event notice posted yesterday by DPC Data Inc., a nationally recognized repository. "Discussion of a settlement offer which was proposed by the agent prior to being approved by senior management is premature. We understand from additional discussion with the IRS that this issue has been referred to other IRS legal and technical staff to address matters relating to law and valuation."

IRS agent Dominick Servadio Jr. had proposed the settlement in a two-page May 18 letter sent to Charles H. Smith, chairman of CDD's board of supervisors and a broker at Morgan Stanley Smith Barney at the Villages, a large retirement community near Orlando.

The agent told Smith that the CDD and the Sumter Landing Community Development District could settle the alleged tax violations on the 2003 bonds by redeeming most of the bonds they issued between 1993 and 1995 -$355.35 million - as well as by paying the federal government at least $2.85 million for tax exposure and agreeing to refrain from issuing any more tax-free bonds.

Servadio - who has been investigating the 2003 bonds, according to correspondence released by the CDD and the Orlando Sentinel - warned the district that if it either did not want to consider a settlement or wanted to appeal any IRS determination of taxability, then he would have to expand the probe to cover another seven bond issues. Altogether those nine issues would total $355.35 million and would have a total tax exposure of $16.46 million, or more than five times the $2.85 million in the proposed settlement.

But Tutt said in the notice that "no determination has been made" by the IRS regarding the taxability of the bonds and that "discussion regarding a settlement is not appropriate until all matters have been reviewed by the appropriate IRS personnel."

"The district continues to believe there will be a positive resolution to this issue and at this time there are no further developments to change that belief," she said.

Tutt's notice refers to three Form 5701s that Servadio sent the CDD. These forms replace the letters the IRS used to send issuers stating it had preliminarily determined that their bonds were taxable.

The preliminary determination letters were sometimes brief. Form 5701, in contrast, lays out the IRS' detailed concerns about the bonds and gives the issuer a chance to respond to those concerns. It is not unusual for the IRS to refer certain issues in dispute in bond audits to various experts within theagency. Tutt's notice indicates that some of the issues raised in Servadio's Form 5701s have been referred to IRS legal and technical staff.

Servadio sent three separate Form 5701s to the district outlining three separate concerns about the bonds.

One claimed the Village Center CDD does not qualify as a political subdivision or as an "on behalf of" issuer of tax-exempt bonds because its board of supervisors is made up primarily of people affiliated with the developer.

A Florida law enacted in 1980 allows developers to create community development districts to finance public infrastructure projects with tax-exempt debt. The districts must have a five-member board of supervisors elected every two years. Though landowners can initially serve on the boards, developers are supposed to turn over control of them to residents of the communities once they have been established.

Servadio also was concerned that appraisals drastically overvalued the properties that the issuer purchased from the developer and that the purchases did not constitute governmental uses of bond proceeds, in part because the golf courses and other facilities can only be used by CDD residents rather than the general public.

A third concern was that the debt consists of private-activity bonds but is not tax-exempt because the financed projects do not fall into any of the categories that qualify for tax-exemption.

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

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.