Tax Lawyer's Blog

The Orlando Sentinel reports today that,

The IRS wants the governments that run [The Villages] to pay off $355 million in loans after an investigator concluded they improperly issued tax-free bonds to buy recreational facilities such as golf courses and swimming pools.

In addition, the IRS wants the two Villages governments to pay $2.8 million in back taxes and to cease issuing tax-exempt bonds. The demands resulted from a 20-month IRS investigation into tax-exempt bonds transactions involving the playground for 77,000 retirees about 60 miles northwest of Orlando.

Most of the infrastructure of the The Villages, including 2 dozen golf courses, numerous swimming pools, community centers and utility plants has been financed by tax free bonds.

The IRS claims that the Village Center and the related community development districts are not valid issuers of tax-exempt bonds.

IRS Revenue Agent, Dominick Servadio, Jr., said that the districts that issued the bonds do not meet the test for a genuine “political subdivision” because their governing boards are not chosen by residents, they do not have the authority to exercise police power and their power to seize private property for public projects is limited.

The IRS contends that the governing boards of the community development districts are controlled by the developer, Gary Morse, and that the bond sales benefited him and not community residents.

The Sentinel reports that,

The IRS is expected within weeks to make [its] conclusions formal. Afterward, the districts will have 90 days to decide whether to negotiate a settlement . . . . or to appeal the decisions.

The governing bodies of The Villages disagree with the agent’s conclusions:

They contend that Florida statutes view them as a lawful “political subdivision,” giving them the right to issue tax-exempt bonds like any other government.

In an e-mail, Village Center District Manager, Janet Tutt, who also oversees the Sumter Landing district, said Servadio’s opinion isn’t the final word. She stated she understood that the IRS was asking its experts in other areas to examine the agent’s conclusions.

“Discussion of a settlement offer . . . is premature,” Tutt wrote. “The District continues to believe there will be a positive resolution to this issue . . . .”

Author’s Observations:

There has to be a tax lawyer out there somewhere who is breaking out in hives. 

I have to believe that the developer was at least smart enough to have obtained a legal opinion as to the tax-exempt character of the bond issuances before issuing them.

And did that lawyer recommend that the developer obtain a private letter ruling from the IRS before issuing the bonds?

It seems to me that a bond issuance of the magnitude involved here should not have been undertaken without first obtaining prior approval from the IRS. 

Then again, maybe the developer didn’t want to ask the IRS about the validity of the bond issuance because he already knew what the answer would be.

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