IRS relentless in probe of Villages bond transactions

Article Courtesy of The Orlando Sentinel
By Lauren Ritchie
Published September 3, 2010



A year has passed since the Internal Revenue Service suggested that The Villages retirement community redeem more than $344 million in bonds the IRS says were improperly issued as tax-free.

The agency wanted $16 million in back taxes and a promise by community development districts never again to masquerade as a legitimate government.

The Villages thumbed its proverbial nose at such a notion, and then it was on.

What's happened in the interim may be entertaining for those of us watching from the outside but probably isn't amusing for 80,000 residents of the community that sprawls over Lake, Sumter and Marion counties.

It's got to be unsettling and frightening to wonder what's in store. Not to mention expensive. The district already has spent more than $209,000 of residents' money so far, nearly all on high-powered lawyers on both coasts.

Here's a refresher on the situation:

As The Villages was built, its developer Gary Morse created a form of government called community development districts, the same type scrutinized in this column last week.

Some 294 of these Florida districts have issued bonds, and 42 percent of them are in trouble. Either the districts cannot collect enough assessments to pay for the bonds or the reserve accounts have been raided to make the payments, or the developers behind the communities have gone bankrupt, leaving unsold lots and unpaid assessments.

Villagers can take a deep breath on those fronts. Morse and his family are extremely well capitalized fabulously wealthy is probably a better description and because homes in The Villages continue to sell, default on the bonds is an extremely remote possibility.

'Blue-sky' transactions

In the Villages, two main community development districts have sold bonds to buy the infrastructure and recreational facilities things like lights, roads, sewer and water plants, clubhouses, golf courses, gatehouses and more from the developer.

That's the way it worked, too, in the other Florida districts that have issued bonds. However, The Villages bond deals differ in two key ways and that has brought them a load of continuing trouble from the IRS, which contends that the developer perverted law to make himself rich at the expense of retirees who buy homes there.

First, the seats on the district governing boards in other developments typically are turned over to the residents as buyers purchase lots and move in. Not so in The Villages, where the districts selling the bonds in question are controlled by the developer and deliberately are set up so he can keep them out of the hands of residents for as long as he wants.

Second, these districts remember that they're controlled by the developer are using part of the bond money to buy "blue sky" from the developer. In this case, it is simply the right to collect assessment fees from residents. The developer gets all the fees in his bank account now instead of having to wait for them to dribble in over 30 years. Lucky residents get to repay the bond through fees with interest for 30 years to come.

What a beautifully magnificent source of unfettered, risk-free cash for the developer. The other districts in Florida buy things they can touch, such as water plants. "Blue-sky" transactions haven't been included in their bond deals.

Community development districts that buy infrastructure from developers are a rip-off to the consumer, never mind The Villages' "blue sky" purchases, which are just a secondary piece of legal thievery.

In subdivisions without districts that issue bonds, buyers pay for the infrastructure in the price of the house. In those with districts, they do, too. But in addition, they pay a second time for that infrastructure with interest as they pay off the bonds, which often add an extra $20,000 to the price of a house.

Three-year probe

All of this caused the IRS to start looking into the district's bonds three years ago and asking questions about who the district really is and who it benefits. It came to the conclusion that a developer-controlled district benefits only the developer and should not be viewed as a real government with the privilege of the ability to sell tax-free bonds.

The district has contended that it is, indeed, a legitimate government under Florida law and as such, should be recognized as such by the IRS.

Oh, my. What a mess.

Now that you are up to speed on the background, we'll take a look Wednesday at the latest moves on both sides and what they might mean for the average homeowner.



In May, the Internal Revenue Service agent conducting the review of $355.4 million in outstanding bonds issued by the Village Center and the Sumter Landing community development districts suggested a settlement in the ongoing war between the two.

The district should redeem all its bonds and repay the debt. It should pony up $16 million in back taxes on the bonds and should agree never to issue tax-free bonds again.

The settlement suggested by the agent wasn't received with dancing in the streets. Though there is no written rejection in the files at the district office, the answer that filtered back to the IRS was quite clear.

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And it touched off a new set of skirmishes in what has become an expensive battle already $209,000 spent in mostly lawyer fees that I described in Sunday's column.

IRS Agent Dominick Servadio responded to the district's disdain for his idea in July by officially opening new investigations on another $60 million worth of bonds issued by the Sumter Landing Community Development District.

Complaints about agent 

The district retaliated by calling Servadio's boss and complaining.

On July 20, he fired back in a letter: "All of the complaints/issues you have raised are totally without merit, and I would only hope that in the future you would have the courtesy to direct any similar comments or complaints to me instead of going behind my back.

"I can only assume that the intent of these recent phone calls is to distract attention away from the examination issues, or possibly to indirectly intimidate me or impede me in the performance of my officials duties.

"I can assure you that you will accomplish none of those things."

He stated that "everyone's best interest" would be served if the district honored his request to deal directly with him and quit calling his bosses.

The district's next move was to file a Freedom of Information Act demand, wanting to know with what third parties (especially the evil media) Servadio had discussed the case. That's because the district seemed convinced from the beginning that this is all about a conspiratorial smear campaign by Villages haters or else a career-building maneuver by the agent. (That's standard response to criticism in The Villages. Anyone who questions the financial structure is either jealous or has a secret agenda to destroy the happiness of 80,000 lucky people. It couldn't be anything else.)

The IRS just laughed and said no. It wasn't releasing any documents from an ongoing review to determine whether nearly a half billion dollars in bonds should be considered tax-free.

Outcome of dispute unclear 

Since then, Servadio has been promoted. A field agent in Charlotte, N.C., was assigned the case, and in March she asked for hundreds of pages of information about how the districts function and what they own.

The agent wants evidence of the written consent for establishing the districts from all the landowners whose property is included in the district, a legal description of the external boundaries of the district and a land-use plan showing what is intended for the property in the future.

Meanwhile, an IRS appraiser from Palm Beach County came to calculate the value of what the district bought from the developer with the bond money. Part of the dispute involves the IRS contention is that the developer made as much as 700 percent profit, which Servadio said would never have happened if the developer hadn't controlled the district.

So, there you have it. Nobody's position has changed much, and the dispute is just humming along through the system.

Millions of dollars are still at stake, and the future for homeowners in The Villages is no more clear when this investigation started several years ago.