Last updated: June 1, 2019
In 2008, the IRS asked The Villages to pay back more than $400 million in loans it received through the use of tax free bonds issued between 1993 and 2004.
These tax free bonds are more commonly referred to as CDD's…if you own my book you know what I'm talking about…there is a whole chapter devoted to this topic.
The proceeds from these bonds were used to pay for the development and construction of just about everything in The Villages.
Golf courses, town centers, recreation facilities, and more were all built using this money. About the only thing the money wasn't used for is to build the homes that are in The Villages.
In addition the IRS wanted nearly $3 million in back taxes.
While this type of financing arrangement is perfectly legal under Florida's Special Districts laws (there are more than 500 other special districts in Florida), the IRS challenged the legality of how closely the special districts were controlled in The Villages.
In addition, the IRS also challenged the value of recreational assets sold to the community development districts.
This issue dragged on for years and had been a concern for current and potential future residents, mainly wanting to know if it will be the residents themselves footing the IRS bill.
As of late 2015, positive progress had been made on this matter and the question as to the value of the recreational assets had been resolved, and there was an offer on the table from the IRS to settle the whole thing for $1.5 million. The District countered at $300,000.
By the summer of 2016, after 8 long years, the IRS probe into the legality of The Villages CDD’s was finally over.
In a letter to residents announcing the IRS decision, District Manager Janet Tutt wrote:
“Although the IRS still believes the original bonds should have been taxable, and the Districts still believe the IRS analysis and position were incorrect, on July 14, 2016, the Districts received letters from the IRS that state: We have concluded that closing the examination without further IRS action supports sound tax administration.”
The closed examination applies to all tax exempt Recreational Revenue Bonds issued by the Village Center Community Development District and the Sumter Landing Community Development District.”
If you're interested, you can learn more by following the links below to various articles and forum threads about this topic.
Timeline and articles about this topic:
The Village Center Community Development District (VCCDD) received an inquiry and a request for documents from the Internal Revenue Service pertaining to the VCCDD’s bonds issues for the purchase of Amenity Fees and Utilities.
The Villages Under IRS Investigation – Leisureville USA September 11, 2008
Bond Issue Today $355 Million Due
The Villages and The IRS
The proposed IRS settlement was ignored/rejected and led to complaints about the agent working the case. The agent in turn accused The Villages of trying to intimidate him and hinder his investigation.
The original agent assigned to the case has been promoted. A new agent out of the Charlotte, NC field office was assigned to the case, and after less than 6 months working the case has also been promoted.
Last year, the District sent the IRS a request for a “Technical Advice Memorandum” (TAM) to spell out the facts of the case (as the IRS sees it). We know that since that time, a new IRS agent has taken over the case, so this may be one reason why it has taken so long to receive a response.
The current agent did finally respond to the District’s TAM in March. But according to officials representing the District, the TAM from the IRS was “full of misinformation” and contained facts and statements that had nothing to do with the issues at the center of the dispute.
In early April the attorney for the District sent the IRS a letter outlining the mis-stated facts and asking for the IRS to consider dropping their inquiry.
You can read a more in-depth article on these most recent developments in the May edition of the POA Bulletin at: http://www.poa4us.org/bulletins_files/bulletin201105.pdf
The Villages has sent the IRS another “Request for Technical Advice”. You can read the 21-page letter, which gives some great background information as to ownership and operation of The Villages, on the District website at: http://districtgov.org/images/IRSupdates/20110614%20-%20IRS%20Update.pdf
The most recent technical review from the IRS contained what the Center District calls “significant flaws” which will result in more discussion.
Florida Governor Rick Scott Launches Probe to Examine Special Taxing Districts:https://www.floridaforboomers.com/florida-cdd-bonds/
The District issued an IRS update in July stating that they recently supplied the IRS’ Area Counsel updated responses and information at the end of June and beginning of July.
You can read the full response here: http://districtgov.org/images/IRSupdates/20120718_165420.pdf
The most important thing to note is the Florida State Attorney’s office seems to have thrown their support behind the District by issuing an opinion that the Center District, just like all other CDD’s, should be treated as a political subdivision under Florida law.
The IRS contends that the Center District should not be treated as a political subdivision for federal tax purposes. The Center District and the IRS also remain at odds over the valuation of the properties purchased with the bonds.
Recently representatives the IRS Tax Exempt Bond Enforcement Division advised that the IRS is inclined to take the position that a special district is not a political subdivision for purposes of Section 103(a) of the Internal Revenue Service 1986, a determination that could potentially be troublesome for the Village Center Community Development District (VCCDD) should the IRS stick to that position.
After learning this, a meeting was held between VCCDD reps and IRS reps, which resulted in the VCCDD being requested to prepare further analysis of Florida Statute Chapter 190, applicable case law, and information pertaining to the hundreds of Special Districts that have issued tax exempt bonds in the State of Florida in addition to Special Districts throughout the country… which is pretty much what they’ve been doing for the last several months.
One bright spot for VCCDD though came in the form of a letter that the National Association of Bond Lawyers sent to the IRS, stating that taking such a position “could substantially undermine the market for Special District bonds, a long-standing form of financing utilized by a wide range of issuers in many States.
The Villages developer Gary Morse is taking this fight to D.C., as he recently hired Washington lobby shop Cardenas Partners. The firm’s head Al Cardenas, is a former chairman of the Florida Republican Party and current chairman of the American Conservative Union. He also advised Mitt Romney’s campaign this year, as well as in 2008, so one can assume Morse knows him well enough to trust his help in this matter.
According to a Cardenas Partners’ filing with the Senate, Morse will pay Cardenas to represent him on tax issues, and lists The Villages’ areas of concern as “Community Development Districts and IRS interpretations.”
Villages government plays waiting game in IRS dispute over bonds:
The Villages Homeowner’s Association (VHA) and The Villages Daily Sun proclaim “District Prevails in IRS Finding”, and “Analysis of IRS appraisal vindicates developer, district” …
But the Property Owner’s Association (POA) says “not so fast”.
Wait, huh? Here’s what’s going on.
According to the POA, the IRS specifically is looking at three things:
1. Is the VCCDD, the Issuer of the Bonds under investigation, a qualified issuer of tax exempt bonds?
2. Did the Series 2003 facilities acquisition price reflect the fair market value of the assets? (Basically did the district pay a fair price for the facilities or did they overpay.)
3. Were the Bond proceeds used for an essential governmental function or do the nature of the facilities acquired with the Bonds result in private business use, and hence are these Bonds Private Activity Bonds?
So what brought on the headlines proclaiming victory?
The IRS submitted its Appraisal Reviews with Opinion of Value for the above, and the tax attorney for the District completed an analysis of same which shows that the value the IRS places on the properties (Item #2 above) exceeds what the District actually paid for the facilities.
(You can download a copy of these documents from the IRS Appraiser and the District's attorney here.)
Which sounds like a win, but as we are reminded by the POA above, this is only 1/3 of the equation.
Unfortunately, I don’t think the results of this analysis is reason enough to break out the champagne and cigars just yet.
After a 5-year investigation into how the CDD borrowed money, in a memorandum dated May 30, the IRS says:
“We believe that an entity that is organized and operated in a manner intended to perpetuate private control, and to avoid indefinitely responsibility to a public electorate, cannot be a political subdivision of a State.”
According to published reports this decision could prompt The Villages government to strike a deal to pay the taxes on the bonds.
What Key Figures Said About the 2013 Ruling:
The following quotes are pulled from some of the early stories published about this decision.
“I hope the developer steps up…[the Developer]… should pay to get us out of this problem rather than pledge the amenity fees.”
-Elaine Dreidame (President of The Villages Property Owner’s Association)
“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.”
– Bill Nelson (Democrat – U.S. Senate)
“I’m concerned that the IRS appears to be making new law through an enforcement process” … “options include getting the IRS to change the decision or asking bondholders to pay the taxes” … “Village Center Community Development District could try to settle the case but that could result in an expense that may ultimately be paid by area residents.”
– Perry Israel (Bond attorney representing the district)
In a savvy move, the District takes advantage of historically low interest rates and refinances the bonds, paying off the original bonds that were under investigation.
This move accomplished two things. 1) It removed the bonds from the IRS investigation, and 2) because of lower interest rates, it actually saved residents money in the long run.
The IRS offers to settle the matter for $1.5 million. The District counters at $300,000.
The Districts received letters from the IRS that state: “We have concluded that closing the examination without further IRS action supports sound tax administration.”
Read: IRS Examination Over