WASHINGTON -- Sen. Bill Nelson is urging the head of the Treasury Department to carefully consider the Internal Revenue Service’s tentative decision that the Village Center Community Development District in Florida is not a political subdivision, warning that it contradicts state law and would chill investment in the state.
Nelson, a Florida Democrat on the Senate Finance Committee and its taxation and IRS oversight panel, made the appeal in a one-page letter sent Oct. 26 to Treasury Secretary Timothy Geithner.
The letter was sent before the Village Center CDD disclosed on Oct. 31 that the IRS’ office of chief counsel had tentatively concluded it did not qualify as a political subdivision because “a controlling portion of the governing board of the center district at the time it issued bonds was elected by one property owner.”
The tentative decision could mean that at least $364 million of bonds issued by the CDD between 1998 and 2003 are no longer tax-exempt.
The CDD, represented by Perry Israel, a tax lawyer in Sacramento, is contesting the IRS’ position.
The Villages is a retirement community that consists of at least 10 residential and two commercial districts on 21,464 acres, with housing, golf courses, swimming pools, stories and other facilities.
In his letter to Geithner, Nelson noted that CDDs are “expressly authorized under Florida law” and said they “are a critical component of Florida’s economic growth.”
“CDDs help ensure that new residential and commercial developments are matched with necessary infrastructure and public services,” he said, adding, “Florida statutes expressly designate CDDs as “local unit[s] of special-purpose government” and empower them “to manage and finance basic services for community development.”
CDDs in Florida have issued more than $9 billion in tax-exempt bonds since 1999, Nelson told Geithner.
“I am troubled by recent reports that the IRS has tentatively concluded a CDD established pursuant to a Florida municipal ordinance lacks the attributes of a ‘political subdivision’ required by section 103 of the tax code,” Nelson said.
“Notwithstanding the unique facts and circumstances of any particular case, such a far-reaching conclusion by the IRS, in the form of guidance that could be extended and applied to other cases, has the potential to paralyze bond markets for new CDD issuers and create a chilling effect on investment in my state,” he wrote.
“In light of the significant implications of this issue for federal tax policy and our economic recovery, I request that this issue and its potential downstream consequences be carefully considered by Treasury’s Office of Tax Policy and Office of Economic Policy as well as the IRS Chief Counsel before guidance is issued,” Nelson said.
Nelson sent the letter after the National Association of Bond Lawyers wrote the IRS on Oct. 16 warning the chief counsel’s decision could have far-reaching adverse effects on special purpose districts set up for municipal bond issues nationwide.
The dispute between the IRS and the Village Center CDD has been ongoing since at least 2008.
In January 2009, an IRS agent told the Village Center CDD in a series of letters that it “effectively perverts” Florida law by allowing the developer of the Villages retirement community to “engage in unchecked self-dealing.” Servadio claimed the board of supervisors for the CDD, which issued the bonds, was made up entirely of high-ranking employees or people affiliated with the developer.
Under a Florida law enacted in 1980, a developer can create a CDD to finance public infrastructure projects with tax-exempt debt, either by directly financing the projects or purchasing them from the developer. But the district must eventually consist of a five-member board of supervisors elected every two years.
The agent also claimed the bonds were over-issued, and could be taxable arbitrage bonds, because 19 of the Village Center CDD facilities acquired with the bond proceeds were overvalued.
Israel had requested a technical advice memorandum from the chief counsel’s office in 2010, hoping to settle the dispute, according to documents.
Israel claimed the Village Center CDD had a substantial amount of three of the sovereign powers needed to be a political subdivision. The CDD can take property relating to water and sewer management or roads within its jurisdiction via eminent domain, he said. It also can provide security, including guardhouses, fences and patrol cars. In addition, the CDD can establish and collect fees or other charges for facilities and services as well as collect special assessments to finance roads, schools, and waste collection, among other things, he said.