|WASHINGTON - TAXATION
IRS Rules Florida Villages CDD Not a Political Subdivision
by: JENNIFER DEPAUL Bond Buyer
Wednesday, June 5, 2013
WASHINGTON — In a precedent-setting decision that could have major ramifications for other issuers, the Internal Revenue Service has ruled that a Florida Community Development District is not a political subdivision that can issue tax-exempt bonds.
The decision, made in a 12-page technical advisory memorandum the IRS' chief counsel's sent to the Village CDD on May 30, means that approximately $364 million of the CDD's bonds could be declared taxable and threatens the tax-exempt status of bonds issued by thousands of organizations with similar structures around the country.
Debbie Arceneaux, an internal revenue agent, with the IRS' tax-exempt bond office, signed the TAM.
Capping a five and a half year long examination, the IRS said that the Villages CDD board was controlled by the private developer for many years during the time the bonds were issued.
"The mere delegation of sovereign power is not sufficient to create a political subdivision," the IRS said in the TAM. "If it were sufficient, then a clearly private entity with powers of eminent domain, including some railroads and utilities, could issue bonds without any political oversight."
"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," the IRS said.
Sacramento lawyer Perry Israel, who is representing the CDD, said the CDD is disappointed in the TAM's conclusion and is concerned the IRS may be making new rules or laws through the examination process.
The CDD has several options including settling with the IRS to preserved the tax-exempt status of the bonds, appealing to the agency's Office of Appeals, or allowing the IRS to go after the bondholders who could in turn challenge the ruling in court. The issuer does not have the ability to fight the IRS in court, only taxpayers can do that, sources said.
Under federal tax law, only taxpayers are allowed to go to court.
The District is still considering its options, Israel said.