WASHINGTON - A technical advice memorandum concluding that the Village Center Community Development District in Florida wasn't a political subdivision that could issue tax-exempt bonds won't apply retroactively, the Internal Revenue Service chief counsel's office said.
The chief counsel's office made its conclusion in a TAM dated June 17. The three-page memo didn't go into detail about why relief from retroactive application was granted and only said that the criteria for such relief was satisfied "based on the circumstances of this case."
The IRS' earlier ruling, in May 2013, raised concern in the bond market as it appeared to create new requirements for qualifying for political subdivision status. That TAM found that the CDD was not a political subdivision from Nov, 29, 1993 to June 1, 2004 because its board was and always will be controlled by the developer rather than publicly elected officials.
As a result of the concerns about the May 2013 TAM, the IRS and the Treasury Department added a guidance project on political subdivisions to its priority guidance plan. A report from the House Appropriations Committee last year that accompanied an appropriations bill urged guidance on political subdivisions to be prospective.
Perry Israel, a lawyer representing the CDD, said the ongoing guidance project could have helped the CDD get relief from retroactive application, and the House committee's report couldn't have hurt the CDD's case.
The CDD made its request for relief from retroactive application in August 2013. The IRS' tax-exempt bond office, which is conducting a years-long audit of the CDD's utility and recreation bonds issued from 1993 to 2004, argued to the chief counsel's office in spring 2014 that the political subdivision ruling should be applied retroactively.
Since the 2013 ruling will not apply retroactively, the issue of whether the CDD was a political subdivision when it issued the bonds under audit has been favorably resolved. However, the audit of the CDD's bonds has not yet been concluded. In addition to contending that the CDD wasn't a political subdivision, TEB has also asserted that the CDD's recreational bonds are taxable private-activity bonds. The CDD disagrees with that assertion, and the latest ruling does not resolve the dispute over whether the bonds are PABs, Israel said.
"I am pleased to see that the IRS has decided that it would be unfair to apply a new definition of a political subdivision in the context of an audit," he said. "I hope that we can soon bring the remaining issues to a favorable close in this examination."
The latest TAM doesn't say anything about whether future bonds issued by the CDD could be tax-exempt. Israel said that the May 2013 TAM applies prospectively, but it is unclear how that would work because that ruling found that the district was not a political subdivision for a period in the past.
The CDD's bonds under audit were redeemed with the proceeds of taxable bonds last year.