A long-running dispute between The Villages Community Center Development District and the Internal Revenue Service is grinding toward a final agency ruling with new filings issued this spring.
Millions of dollars are at stake and, if the IRS issues a final ruling against the district in the seven-year-old dispute, the next step likely would be for the district to challenge the ruling in federal court, which would add more time before a final outcome.
A decision by the IRS associate chief counsel could occur as early as this summer.
“I think they’re as far as they can go with the IRS,” said Elaine Dreidame, president of the Property Owners Association, who has followed the case closely.
The dispute centers on whether about $426 million in bonds issued by the Village Center Community Development District between November 1993 and June 2004 are tax-exempt. The bond proceeds were used for commercial development in the Spanish Springs area.
So far, the IRS has said that the bonds are not tax-exempt and, therefore, interest paid to bondholders is taxable because the district does not qualify as a political subdivision. Only political subdivisions can issue tax-exempt bonds.
The district’s governing board is chosen by landowners. The IRS says governing boards should be chosen by voters in order for an entity to be a political subdivision. No residences are located in the 166-acre Center District.
If the district ultimately loses the battle, thousands of bondholders could be hurt by declining bond values and back taxes owed on the interest they earned. The bonds also might have to be recalled and reissued as taxable bonds.
Homeowners in The Villages are not liable for taxes on the bond interest. But the Center District uses a portion of the amenity fees homeowners pay to provide fire, police and recreational services.
A 2009 proposed settlement that was rejected would have required the remaining 30-year bonds to be recalled and reissued and the cost would be paid by amenity fees from homeowners living north of County Road 466 unless another party, such as Bond Counsel, was found to be culpable.
“It could be very expensive,” Dreidame said. If the bonds were reissued, residents would not have their amenities fee increased due to the CPI cap on amenity fee increases, she said, although the Center District could be forced to offset the costs by reducing services.
The latest filings in the dispute center on whether the development district qualifies as a political subdivision under IRS regulations. The Villages requested tax relief and received a negative response from the IRS Office of Tax Exempt Bonds on April 30. On May 20, The Villages replied to the office’s recommendation to deny tax relief.
The IRS report offers refutation of 10 arguments by the district in an earlier brief on why relief should be granted.
“We believe that all of the arguments set forth by Center District in support of its request for relief… are incorrect or otherwise without merit,” the report stated.
In its reply, the district’s attorney reiterated the stance that relief is appropriate because the dispute meets a requirement of “rare and unusual circumstances.” He also argued that requiring a general electorate standard to define a political subdivision would be a new interpretation of the law and that it is inequitable to single out the Center District for this new standard.
“No other entity has ever been held to be disqualified as a political subdivision because it was not ‘answerable to a general electorate,’” the reply stated.
But the IRS report maintained the interpretation is not new.
A year ago, another IRS letter said that the district was not a political subdivision and that interest on $426 million in bonds it issued would be taxable. In another ruling at that time that favored the district, an IRS appraiser found that the purchase prices of property bought by the district from the developer were not out of line.
The district’s latest filing said court cases as early as 1951 have been decided in favor of special taxing districts with a single owner of nearly all of the property. A 1963 case dealt with the owner of 95 percent of the land in a Florida drainage district. In another case, the U.S. Supreme Court decided that a board elected by California landowners did not violate the 14th Amendment’s equal protection clause.
So how long will will the dispute continue?
District Manager Janet Tutt on Friday was asked about it in the Community Development District 7 meeting.
She indicated it is difficult to predict the timing of such legal proceedings.