WASHINGTON – The Internal Revenue Service has closed two audits with no change to the tax-exempt status of a total of $117.73 million of utility revenue bonds issued by the Village Center Community Development District in 1998 and 2003, but retired in 2014.
The audit closures were disclosed by the Village Center CDD in event notices filed on the Municipal Securities Rulemaking Board's EMMA website.
Roughly $31.33 million of the bonds were issued in 1998 to finance the expansion of and improvements to a water and wastewater system the Village Center CDD acquired in 1993. Some the bonds were also to be used to advance refund $25.62 million of 1993 bonds that were still outstanding at the time.
The remaining $86.40 million of bonds were issued in 2003 to finance the acquisition of a separate water and wastewater utility system owned by Little Sumter Utility Co., a private utility affiliated with the developer, The Villages of Lake-Sumter, Inc., a Florida corporation owned by H. Gary Morse and his family Morse died in October 2014 at age 77.
However, all of the Village Center CDD bonds were refunded with taxable bonds in 2014, according to documents on EMMA.
The Villages is an adult retirement community on almost 20,000 acres in Lake, Sumter and Marion counties in Florida. It currently has more than 110,000 residents. Lawyers for the Village Center CDD and the Sumter Landing CDD say they are commercial districts so their boards have no residents on them.
In two separate letters on the audit closures sent to Village Center CDD manager Janet Tutt, IRS field operations manager Allyson Belsome noted that the IRS has concluded that the Village Center CDD is not a political subdivision that could issue tax-exempt bonds, throwing into question the tax-exempt status of millions of dollars of bonds.
The IRS chief counsel detailed the agency position in a controversial technical advice memorandum issued in May 2013, saying the Village Center CDD is not a political subdivision because its board is, and will always be, controlled by a developer rather than by residents or other publicly elected officials.
Bond lawyers opposed the TAM, arguing it was attempting to change existing standards retroactively through enforcement rather than rulemaking, which gives market participants a chance to comment.
Historically, the determination of whether an entity was a political subdivision was based on whether it had the right to exercise substantial sovereign powers, such as the power to tax for services.
Eventually the IRS said the TAM would only apply prospectively. The IRS and Treasury Department also started a rulemaking project to establish a new definition of political subdivision.
Treasury and IRS rules proposed in February, would add two new additional requirements – that political subdivisions serve a government purpose "with no more than an incidental private benefit" and that they be governmentally controlled.
Belsome indicated in the letters to Tutt that since the Village Center CDD had obtained relief from the retroactive application of the TAM, the IRS was closing the audit with no change to the tax-exempt status of the bonds. However, she stressed that "future noncompliance could result in penalties and/or the taxability of interest received by the beneficial owners of the bonds."
The IRS and the Village Center and Sumter Landing CDDs, beginning last November, had considered possible settlements on about $311.28 million of recreation amenity bonds issued from 1998 through 2005. The IRS had offered to settle the tax dispute and preserve the tax-exempt status of the bonds in exchange for a $1.5 million payment from the CDDs. The districts countered by offering to pay $300,000 -- the estimated legal fees they would have to pay if the IRS found the bonds were taxable and that the CDDs appealed that finding to the IRS Office of Appeals.
There has been no further discussion or action towards any settlement.
