Pay off $355 million, IRS tells The Villages
By Stephen Hudak
Sentinel Staff Writer
7:28 AM EDT, May 30, 2009
The Internal Revenue Service wants the governments that run this massive retirement community 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.
Much of The Villages, including 24 executive golf courses, swimming pools, community centers and utility plants -- in fact, virtually everything but the 38,000 houses in "America's Friendliest Hometown" -- have been financed by various tax-free bonds.
As part of the potential deal, the IRS has offered to forgive another $14 million in taxes the agency says could be owed to the federal government. If a deal isn't reached, the IRS has threatened to look into eight similar loans obtained through bond sales. That could expose the governments to millions more in tax liability.
The settlement offer is outlined in public documents provided to the Orlando Sentinel after a public-records request to the Village Center Community Development District. They chronicle a bitter disagreement between the IRS and the Villages' governing bodies, called community development districts.
Created by Florida law, such districts are designed to help developers defray the cost of pricey infrastructure. The districts are considered governments and have the authority to issue bonds. In this case, the district bought recreational amenities from the developer in a transaction disputed by the IRS.
"If I was a resident of The Villages, I would be outraged by the transaction," IRS Agent Dominick Servadio Jr. wrote in a letter to the Village Center. Servadio, a certified public accountant and a revenue agent for 22 years, could not be reached for comment.
The district, however, contends that it followed state law and all the transactions are legal.
Villages residents are watching the investigation unfold, mostly with bewilderment. "First of all, this is a very serious matter," said Joe Gorman, president of the 5,500-member Property Owners' Association of The Villages, an independent group that has often clashed with the developer. Gorman would not comment on the IRS correspondence because he hadn't yet read it.
In total, The Villages' governments owe about $700ƒ|million to bond buyers.
The IRS insists the Village Center and Sumter Landing community development districts are not "valid issuers" of tax-exempt bonds, which are most commonly used by cities and counties to finance public projects.
Servadio contended that the districts that issued the bonds don't meet the test of a genuine "political subdivision." Its governing board isn't chosen by residents, it has no authority to exercise police power and its power to take private property for public projects is very limited.
The agent contends that the districts' governing boards are controlled by The Villages developer, Gary Morse, and their bond sales have benefited him, not residents.
The agent's letters represent preliminary conclusions. However, the IRS is expected within weeks to make those conclusions formal. Afterward, the districts will have 90 days to decide whether to negotiate a settlement such as the one proposed May 18 by the agent or to appeal the decisions.
For now, district representatives are challenging the IRS 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. ..."
Perry Israel, a California bond lawyer handling the matter for the districts, said he could not comment. Morse and Charles Smith, chairman of the Village Center district board, as well as Michael Williams, the district's Orlando bond attorney, couldn't be reached.
Servadio's probe focused on a 2003 tax-free bond issue that raised about $64ƒ|million to buy golf courses, swimming pools and other recreational facilities from the developer.
According to the IRS report, the proceeds should be taxed because only $7.5 million went to buy physical assets. Another $53.1 million bought the rights to collect residents' amenity fees. The sale prices were set by two appraisers using a complicated method that the IRS contends was incorrectly calculated.
Homeowners in The Villages pay up to $135 a month in amenity fees, which generated about $33 million in revenue last year. Servadio pointed out that about $16 million a year -- roughly half of the fees -- are used to repay a variety of bonds that the districts have issued.
"It (is) obvious that the residents' amenity fees could be much lower, or there would be a lot more of the fees available for maintenance of the facilities if these were arm's length transactions... " he wrote.
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