WASHINGTON — The Internal Revenue Service sent an updated Form 5701 Notice of Proposed Issue to Florida's Village Center Community Development District this week with regard to it not being a political subdivision for tax-exempt financing purposes.

The Form 5701, is a preliminary determination that bonds are taxable and summarizes the facts, applicable law and analysis regarding the issues identified during the examination. The Village Center has 30 days from the date of the Aug. 7 letter to appeal to the IRS' internal administrative appeals office. The Village Center received the document on Aug. 13 and posted it to its website on Aug. 15.

"The facts in this case are distinguishable from many other cases, in Florida and nationwide, in which political subdivisions have been created to exercise powers related to orderly development," the IRS said in the Notice of Proposed Issue. "The facts in this case are unique. Our conclusion in this case does not challenge or endanger the status of other development districts that do not have a factual situation similar to that of the Center District."

Debbie Arceneaux, an agent with the IRS' tax-exempt bond office, signed the updated Form 5701. If the Village Center agrees with the information in Form 5701, they may be able to enter into a closing agreement to resolve the tax law dispute and ultimately avoid a proposed adverse determination.

Perry Israel, a tax controversy lawyer representing the Village Center, could not be reached for comment. "The attorneys are reviewing the document and are determining how a response will be structured," the Village Center said in a statement posted on its website on Aug. 15. They emphasized that this was just another procedural step in the audit process.

The IRS sent three Forms 5701 in 2009 to the Village Center, one on its status as a political subdivision, one regarding the valuation of the property and one on whether it had issued private-activity bonds.

The most recent updated Form 5701 sent this week includes arguments that are nearly identical to what was submitted in the technical advice memorandum from the IRS' chief counsel's office in June.

In that TAM, the IRS said that the CDD is not a political subdivision that can issue tax-exempt bonds, meaning approximately $364 million bonds could be declared taxable.

The IRS has had a five-and-a-half year long examination underway on the Village CDD over whether the issuer was a political subdivision within the meaning of Section 1.103-1(b) of the Income Tax Regulations during the period of Nov. 29, 1993, through June 1, 2004, when it issued a total of $426.2 million of tax-exempt bonds. Those bonds were issued to finance the acquisition of recreational and other facilities as well as a utility system for the Villages, a retirement community.

The Village Center is one of 576 community development districts, which as an aggregate have issued more than $6.5 billion of tax-exempt bonds, according to the IRS.

Under Florida law, CDDs are separate entities governed by a separate board of supervisors subject to the same financial planning and reporting requirements applicable to other Florida political subdivisions.

The IRS said that the Village Center was not a political subdivision during the time it issued bonds because it did "not qualify as a division of a state or local government unit, it did not possess two of the three generally recognized sovereign powers and possessed no more than an insubstantial amount of the third generally recognized sovereign power."

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