WASHINGTON — The Internal Revenue Service’s chief counsel has tentatively concluded that at least $364 million of recreational revenue and subordinate recreational refunding bonds issued by the Florida Village Center Community Development District between 1998 and 2003 are not tax-exempt.

The Florida CDD disclosed the IRS’ finding in an event notice filed with the Municipal Securities Rulemaking Board’s EMMA system late Wednesday evening, saying the chief counsel verbally communicated that it had “tentatively” concluded that the CDD is not a political subdivision.

The chief counsel said that the CDD does not qualify as a political subdivision under section 103 of the Internal Revenue Code because “a controlling portion of the governing board of the center district at the time it issued bonds was elected by one property owner.”

Under federal tax law, a “political division” is defined as “any division of state or local government unit which is a municipal corporation or which has been delegated the right to exercise part of the sovereign power of the unit.”

The Center CDD, like other districts in the state, was created under Florida’s Uniform Community Development District Act of 1980 and has a substantial amount of all three of the sovereign powers needed to be a political subdivision.

The districts must consist of a five-member board of supervisors that is elected every two years. Landowners can initially serve on such boards, but developers are supposed to turn over control of CDDs to residents of the community once they have been established.

If the IRS determines that the Village CDD is not a political subdivision, the bonds would not qualify for tax-exempt status.

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.

Perry Israel, a Sacramento attorney who is representing the Village Center CDD, said that he requested a technical advice memo from the chief counsel after the IRS launched an audit in January 2008 focusing on the Sumter Landing bonds.

The CDD officially requested the TAM on Jan. 21, 2010 and has been working with IRS officials since then.

Israel said that the CDD has provided the IRS with additional information which will be made public on Thursday.

“The concern is that this could be very broad and cover lots of development districts across the country,” he said.

Israel emphasized that even though the IRS has reached a tentative adverse ruling in the context of the TAM, it does not necessarily mean that their final conclusion will be adverse.

If the IRS issues an adverse TAM it could have repercussions that extend well beyond Florida and have a significant impact on the entire municipal bond market.

“It could well be that if they apply this same standard to other governments it could impact a lot of past, current and proposed future debt issues by different governments,” said David Miles, finance director for the Florida district governments.

If the IRS makes the determination on this, “it’s a real can of worms” and it will apply to every project, said Richard Lehmann, publisher of the distressed debt securities newsletter.

“It would shut off all future issuances of bonds by CDDs and raise costs significantly,” Lehmann said. He predicted that Congress might even intervene if the IRS issues a final adverse opinion on the political subdivision issue due to how many districts could be impacted nationwide.

The Village CDD is one of 600 such districts in Florida that have collectively sold more than $6 billion of tax-exempt municipal bonds, Lehmann said.

The Village CDD 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.

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