course you want to know how your pocketbook will fare in the latest exchanges
in the IRS
dispute with the government that runs your community. The answer is it's too
early to tell.
However, a recent series of letters from the Internal Revenue Service did
reveal how the agency wants to solve its problems with the tax-exempt bonds
that built much of The Villages and made its developer fabulously rich.
The IRS thinks $448 million borrowed through tax-exempt bonds since 1993
should be taxable. That's because, the agency contends, the
community-development districts, which run operations at the retirement
community and sold the bonds, don't qualify as "real" governments
and shouldn't get tax-free loans as cities and counties do.
officials say the governments are being operated according to state law, but
the IRS contends that the districts are controlled by the developer and the
bonds benefited him, not residents. In addition, the transactions were far too
cozy and fail to meet federal tests of an "arm's length"
"If I was a resident of The Villages, I would be outraged," agent
Dominick Servadio Jr. wrote to the chairman of the Village Center Community
Development District on May 4.
and costly step
someone has just out and said it. The agent is right. Developer Gary Morse's
use of the districts over the years could end up crippling the community and
tormenting decent people who just want to retire quietly and play golf.
A spokesman for the developer did not return calls for comment.
In the revenue agent's May 18 letter, he urged the districts to take a
dramatic and enormously costly step: recall and pay off $355 million worth of
outstanding tax-free bonds that paid Morse for everything from golf courses to
swimming pools, utility plants to guard houses.
The agency also wants back taxes from one bond issue amounting to
$2.8 million, chump change for the company that posted 2008 revenues of
$696 million, up 9 percent from last year.
And the IRS wants the districts to promise never again to issue tax-free
bonds, which would suddenly and drastically turn off the cash tap for Morse
and his family, who own The Villages and are still developing it.
could be worse
suggestion is staggering. But his alternative is even more chilling.
If the two districts — Village Center and Sumter Landing — decide to
appeal, the agency will begin officially examining eight more bonds, deepening
the districts' possible tax liability to
While you're calming the heart rate and sucking down the Valium, here are a
few things to consider:
First, this IRS examination is in the negotiation stage. Shortly, however, the
agency likely will put its conclusions firmly in writing, starting a 90-day
clock for the districts.
District officials then will have to decide whether to appeal the ruling,
risking even more extensive IRS scrutiny, or negotiate a settlement that will
the moment, the official word from Village Center District Administrator Janet
Tutt is that the district (politely, of course) thinks that the agent is all
bluster. It's way too early to even talk about what the district might do,
"The District continues to believe there will be a positive resolution to
this issue and at this time there are no further developments to change that
belief," Tutt wrote in an e-mail.
OK, now the fantasy portion of the program is concluded.
recent letters show a degree of disgust with The Villages and its lawyers that
is more than warranted.
the May 4 letter, he accused the district of making a "misleading and
incomplete disclosure" in bond documents for a $64 million issue in 2003.
He remarked at one point that Villages residents "let the district and
the developer off easy" when last year they settled a lawsuit over
amenity fees for
And he poked fun at the district's high-paid tax-controversy lawyer who he
said submitted to the IRS "a sort of sophisticated version of the
I-did-the-homework-but-my-dog-ate- it excuse" when he was forced to admit
that appraisers who valued the properties for the sales could not provide
backup documents. The California lawyer then asked the appraisers to
"recreate" their calculations.
"Issuers of tax-exempt bonds don't get 'do-overs,'" Servadio fired
At one point, the agent suggested The Villages engage in a "reality
check" when trying to determine whether the Village Center District is a
valid issuer of tax-exempt bonds.
"What is the "district?" ... It's really nothing more than a
five-member governing board populated with developer employees or related
parties that have a history of approving an unlimited amount of tax-exempt
bonds to purchase assets from the developer in transactions that in the real
world would never pass scrutiny as arm's length transactions.
"This doesn't sound like an entity that the Service wants to be
considered as a valid issuer of tax-exempt bonds."
Servadio is no renegade revenuer out to get the Big Republican Money of the
Morse family. IRS officials have said publicly and in published documents that
one of the agency's goals this year is to closely examine tax-exempt bonds
from governments such as the community-development districts of The Villages.
So, the orders are coming from the top down, not vice versa. If they weren't,
this touchy investigation would have vanished months ago.
what might happen if the district takes the IRS suggestion and decides to
recall the $355 million that the agency wants out of the bond market?
Bond experts asked earlier this week about the situation were flabbergasted by
the amount of money involved. Expect repercussion in the bond markets, they
said, if the IRS stands firm. The availability of money to such districts
likely would drop and the interest rate that such districts would have to pay
would rise, they speculated.
Typically, when the IRS deems tax-exempt bonds as taxable, it demands that
bonds be taken off the market. The usual process is that the issuer would go
back into the bond market and borrow enough to pay off the first set of bonds.
So, theoretically, The Villages could sell, say, $355 million worth of taxable
bonds and use the proceeds to pay off the tax-exempt ones.
Two catches: First, is the money available? Bond markets are very tight at the
moment, experts said. So maybe, maybe not. Second, do the Village Center and
Sumter Landing districts have enough bucks to back the second loan?
The district has two main ways of getting money. First, it receives the
amenity fees that residents pay, which totaled $33 million last year.
Second, it has the authority to levy property taxes inside its geographic
boundaries. But considering that Morse controls 88 percent of the property in
the Village Center District, and the board of supervisors is made up of his
employees and business associates, a vote to levy property taxes seems a tad
the district back a new bond issue using just the $33 million in annual fee
collections? Apparently. Consider that roughly half of the amenity fees, about
$16 million, go to repay current loans. The other $17 million operates The
Villages. The math works only if the new bonds are sold and the old bonds are
Afterward, The Villages likely would have to operate on less money because
taxable bonds would cost the district more than tax-free ones.
The other option is that the district decides to get arrogant and fight the
IRS. Bond experts didn't even want to speculate what might happen then.
Typically, it's just not done for the simple reason that the IRS seldom loses.
God save the golf courses.
What is conspicuously absent from the revenue agent's scenarios is what role
Morse might have in this, if any. The agent spent considerable time and energy
building a case that the developer is the district, and the
district is the developer. If so, shouldn't the developer
— the biggest beneficiary in this arrangement by far — bear some
responsibility? Or is he absolved by declaring his profits from the bonds as
taxable? Morse declared
$53 million as profit in the one issue the IRS examined closely.
No one is saying, especially Morse himself. The developer has kept silent
since the examination began in January 2007. Perhaps all will be revealed in
Or perhaps this will be settled with a friendly handshake, and we can all just
go merrily to our next tee time.
Pay off $355 million, IRS tells