Very basically, the Village Community Development Districts has asked the IRS for technical advice on whether the VCDD is a political subdivision for purposes of the IRS tax code on revenue.
Based on the IRS' own "laws" and codes, the VCDD is allowed to do this. That is where the issue stands now. The VCDD is waiting for a reply.
The question you asked, does the IRS understands the rules they police, doesn't take into account that people in the United States can appeal or petition decisions by the IRS. They may do many things to petition or contest the IRS decision. One of the things they may do is ask for a TAM. Have you ever heard of the United States Tax Court?
This is from the IRS: A technical advice memorandum, or TAM, is guidance furnished by the Office of Chief Counsel upon the request of an IRS director or an area director, appeals, in response to technical or procedural questions that develop during a proceeding. A request for a TAM generally stems from an examination of a taxpayer's return, a consideration of a taxpayer's claim for a refund or credit, or any other matter involving a specific taxpayer under the jurisdiction of the territory manager or the area director, appeals. Technical Advice Memoranda are issued only on closed transactions and provide the interpretation of proper application of tax laws, tax treaties, regulations, revenue rulings or other precedents. The advice rendered represents a final determination of the position of the IRS, but only with respect to the specific issue in the specific case in which the advice is issued. Technical Advice Memoranda are generally made public after all information has been removed that could identify the taxpayer whose circumstances triggered a specific memorandum.
http://www.irs.gov/irs/article/0,,id=101102,00.html