Quote:
Originally Posted by RVRoadie
If the bonds were found to be improperly issued, and were required to be redeemed and reissued as taxable bonds, it is more than likely that the new bonds would be priced at rates that may be equal to or lower than the original municipal rate. After all, rates are much lower now than they have been over the past 10 years, and the bonds would still be secured by the revenue stream of our amenity fees. The back taxes owed to the IRS from current bondholders who did not pay taxes on their interest earned would be relatively small and could be rolled into the new bond issue.
I just don't see much liability for village residents.
|
I wish I could share your optimism, but my view of the possible scenarios ensuing IF the IRS prevails is somewhat different. Here are my thoughts regarding the points you raise:
First, a clarification for some of our readers. Technically, there should never be any liability to the IRS on the part of the Villages residents, at least not direct liability. The risk to us is that the Center Districts incur such a large liability to the IRS and to the bondholders (who would sue the Center Districts if the tax-exempt bonds turn out to be taxable) that the Center Districts can no longer afford to run the amenities system. Remember that amenity-fee increases are capped by the CPI, and the Center Districts can only tax within their borders.
You are correct that today's low interest rates would mitigate the "hit" that the Center Districts would take. However, given the scandal that would underlie any issue of the replacement taxable bonds, one would think that the taxable bonds might require a relatively high interest rate in order to find buyers. More importantly, the taxable bonds, are not being issued at today's interest rates. If they are ever issued, they will be issued at tomorrow's interest rates-- whenever "tomorrow" is. (Let's hope it never comes.) Those interest rates are probably going to lot higher than today's interest rates.
In addition, your analysis (in addition to assuming no penalties are imposed) implies that the liability of the Center Districts is limited to paying the back taxes on the original bonds. Remember that the bond holders, who got a warranty from the Center Districts that the bonds were tax exempt will (if the IRS prevails) also lose future tax-exempt income and will, one would think, try to hold the Center Districts liable for that as well.
Finally, as I recall, the interest on the existing bonds goes back as far as 8 years. It will be even longer if the controversy continues to drag on. If the average bondholder is in the 33% marginal tax bracket and the taxpayers have to pay interest to the IRS, as well as the taxes, I am not sure that we are talking about a "relatively small amount" that can be "easily rolled into the new bond issue". Have you run any numbers? (I have not tried, but intuitively, it would seem that we are talking about a lot of money.)
Despite my concerns, I hope that you right, and more importantly, I hope that the IRS does not prevail, or that if it does prevail, that it prevails in a way that places the costs of its victory directly on the Developer. It is the Developer who should, after all, be liable for all the damages in the event that the IRS prevails in this matter. But as shown by the circumstances surrounding the class action lawsuit, collecting from the Developer may not be that easy. The fact that the VCCDD (out of our amenity fees), not the Developer, is paying the legal fees to defend the tax-exemption of the existing bonds does not bode well in this regard.