WASHINGTON The Village Center Community Development District in Florida is asking the Internal Revenue Service for legal advice on whether it is a political subdivision an issue critical to the tax-exempt status of million of bonds it issued.
Documents indicate that the Village Center CDD recently submitted a formal request for a technical advice memorandum on the political subdivision question to the IRS chief counsels office.
The CDD is in the midst of an IRS audit and tax dispute over its bonds. The outcome could have an impact on other such districts in Florida. There are 576 in the state that collectively have sold more than $6.5 billion of municipal bonds, according to Floridas Department of Community Affairs.
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 central Florida. At least $300 million of the bonds are still outstanding, according to the documents.
The Villages consists of 10 residential and two commercial districts on 21,464 acres with 42,585 houses, roughly 83,000 residents, golf courses, swimming pools, stores and other facilities. The complex is still under development and is expected to contain 56,508 residences at completion in 2018, according to CDD officials.
The dispute between the CDD and IRS focuses only on the bonds issued by the two commercial districts: $426.2 million by the Center CDD, in the northern portion of the complex, and $65 million by the Sumter Landing CDD, in the southern portion. The IRS launched the audit in January 2008, focusing on the Sumter Landing bonds, according to CDD officials.
IRS agent Dominick Servadio Jr. later expanded the audit to all of the bonds issued by the two districts and charged they appeared to violate tax laws. He claimed, among other things, that the districts were not political subdivisions or nonprofits permitted to issue tax-exempt bonds on behalf of a state or political subdivision.
That issue still appears to be at the center of the dispute although the more recent documents only focus on the Center CDD bonds and do not mention Sumter Landing or Servadio. Sources said the audit is focusing on the Center CDD bonds.
Perry Israel, a Sacramento lawyer representing the Center CDD, would not comment on the dispute.
But documents show Israel initially requested the technical advice memorandum on Jan. 21, 2010, and since then has been working with IRS agents to come up with an agreed upon set of facts to put in the recent formal request for the TAM.
Market participants said some lawyers are worried about the audit because the structure of the Village Center CDD is similar to other districts in Florida and if the IRS finds its bonds are not tax-exempt, that could spell trouble for them.
The Village Center CDD is one of 576 districtss that have issued more than $6.5 billion of tax-exempt bonds.
Under federal tax law, for bonds to be tax-exempt they must be issued by a state, a political subdivision or a nonprofit issuing bonds on behalf of a state or political subdivision.
A political subdivision is a state or local governmental unit that has a substantial amount of one or more of three sovereign powers: the ability to tax, the power of eminent domain, and police powers, the latter of which means the ability to write rules and regulations related to the use of property rather than having a police force.
Certain nonprofits and authorities whose directors are appointed by governmental officials can also issue bonds on behalf of states and local governments. Israels initial request focused only on the political subdivision question.
In documents sent to the IRS, Israel claimed the Center CDD, which like other districts was created under the Floridas Uniform Community Development District Act of 1980, has a substantial amount of all three of the sovereign powers needed to be a political subdivision.
Israel said the act delegates to the Central CDD certain powers of eminent domain, including the power to acquire by condemnation any public easements. It also delegates to the district the power to take by eminent domain any property within the jurisdiction relating to water and water management, sewers, and roads.
Israel said that, while the act states CDDs may not exercise any police power, that appears to mean the power to arrest individuals because it permits districts to have other police-type powers. The act authorizes the Central CDDs to provide, security, including but not limited to guardhouses, fences and gates, electronic intrusion detection systems, and patrol cars when authorized by proper governmental agencies, he told the IRS.
CDDs also are authorized under the act to establish and collect fees, rentals or other charges for facilities and services, as well as to provide fire prevention and control, including fire stations, trucks and water mains. In addition, they can adopt and enforce rules in connection with providing water, sewer and other services, under the act.
As for taxing powers, the act authorizes the Central CDD to determine, order, levy, impose, collect, and enforce special assessments on property owners to finance roads, water supply and transportation systems, schools, fire prevention facilities, and waste collection and disposal.
The special assessments are liens against the property assessed that are coequal with the lien of all state, county, district and municipal taxes, Israel told the IRS. They are enforced in the same manner as municipal taxes.
CDDs also are permitted to assess and impose ad valorem taxes on land in the districts. These are levied and collected in the same manner as county taxes.
Another issue arising from the audit is whether the appraisals of the complexs physical assets and amenity fees the district collects from property owners to pay for maintenance were overvalued and the Central CDD paid too much to the developer.
Documents show the Central CDD acquired the rights to receive the amenity fees from property owners.
It is not clear when the IRS might respond to the TAM. Sources said lawyers representing both sides of a tax dispute typically meet to discuss the facts case then each present legal arguments supporting their views before any decision is made.