Tax-exempt bonds lost their tax exemption.
The IRS said in a technical advice memorandum issued to a bond issuer in late May, but not formally released yet to the public, that community development districts formed in Florida to issue tax-exempt bonds to finance real estate projects are not subdivisions of the state and, therefore, the interest on bonds issued by such districts must be reported by the bondholders as taxable income.
A technical advice memorandum is a ruling by the IRS national office to settle a dispute between a taxpayer and an IRS agent in an audit.
The IRS looked at 12 special districts set up to finance projects by billionaire real estate developer H. Gary Morse. Morse, family members and employees control the districts.
The IRS memorandum focused on one of the 12 districts that issued $426.2 million in bonds over time to finance a retirement community called The Village in Lake County in central Florida. The bond proceeds were used to buy real estate and a right to collect amenities fees from existing residents for use of recreational facilities like the golf course. Morse retained the rights to amenities fees from future residents.
The bond proceeds substantially exceeded the cost of the real estate. The bonds were issued in multiple tranches over time.
They were trading at an average yield of around 5% earlier this summer, or 2.07% above an index of benchmark municipal bonds with similar maturity. Holders as of April 30 included Goldman Sachs Asset Management and Nuveen Asset Management.
The National Association of Bond Lawyers says the decision could affect bonds issued by hundreds of similar entities.