Possible IRS Troubles Ahead for WDW/RCID

[flavious27]

This won't be all that interesting to most people here as it's a pretty dry technical story and it doesn't yet affect WDW directly, but very well could. And it may affect Disney Springs and the plan to issue $360M in tax free bonds.

Disney tax lawyers are spinning it that they don't think this will affect the company, but at the same time, they're warning potential investors in their tax frees that it might.

From the 7/14 O'Sentinel, headline and a few paragraphs:

As IRS cracks down on The Villages, Disney World watches

"The federal government recently cracked down on a lucrative tax break used by the developer of The Villages, the sprawling community northwest of Orlando that has been called Disney World for retirees.

That could be an ominous sign for the real Walt Disney World.

In a scathing decision issued in May, the Internal Revenue Service ruled that The Villages did not have the right to use tax-free debt to finance golf courses, swimming pools and other assets. The reason: The Villages sold the debt through an obscure government district whose leaders were ultimately controlled by the developer, rather than the general public, and therefore couldn't be considered real governments.

That's a lot like Disney World's personal government, the Reedy Creek Improvement District, which also gets to use tax-free debt — and whose leaders are all handpicked by Disney."

For those of you who care to slog through the full article, here it is:

Orlando Sentinel

Couple things. The bonding that rcid has used in the past is issued by florida. How Florida determines who gets what kind of bonding under their structure is a florida thing. Second, rcid is more of a government entity than a glorified HOA. RCID provides most of the municipal services that a town would provide. Also the setup for how the villages is sounds shady enough that trump would avoid what is going on there.

 

[rael ramone]

Couple things. The bonding that rcid has used in the past is issued by florida. How Florida determines who gets what kind of bonding under their structure is a florida thing. Second, rcid is more of a government entity than a glorified HOA. RCID provides most of the municipal services that a town would provide. Also the setup for how the villages is sounds shady enough that trump would avoid what is going on there.

It would sound, then, the chances that that the RCID muni's being charged regular federal income for their bondholders are just slightly higher than anyone else being charged regular fed income on their other muni bonds. The chance is enough for a 'risk factor disclosure' on the issues, but if you look at a 10k from any company, some risk factors that they list can be quite remote.

At present, the IRS does not charge taxes on income earned on muni's, but they *do* on treasuries. So in the end anything is possible.....

 

[ParentsOf4]

Couple things. The bonding that rcid has used in the past is issued by florida. How Florida determines who gets what kind of bonding under their structure is a florida thing. Second, rcid is more of a government entity than a glorified HOA. RCID provides most of the municipal services that a town would provide. Also the setup for how the villages is sounds shady enough that trump would avoid what is going on there.

The Constitution gives the Federal Government extremely broad powers to collect taxes. It's why the IRS is so powerful.

The State of Florida can define its taxes anyway it wants but the Federal Government will use its own judgment when it comes to collecting Federal taxes. Referring to the IRS ruling:

"We believe that an entity that is organized and operated in a manner intended to perpetuate private control, and to avoid indefinitely responsibility to a public electorate, cannot be a political subdivision of a state," the IRS wrote in its ruling.​

All word games aside, The Walt Disney Company (TWDC) controls who's a "resident" of Reedy Creek and, ultimately, controls RCID. In the end, RCID is beholden to TWDC's "private control" and can "avoid indefinitely responsibility to a public electorate".

 

[lazyboy97o]

All word games aside, The Walt Disney Company (TWDC) controls who's a "resident" of Reedy Creek and, ultimately, controls RCID. In the end, RCID is beholden to TWDC's "private control" and can "avoid indefinitely responsibility to a public electorate".

I think the key difference between the Reedy Creek Improvement District and the Villages is that there are not people living within the Improvement District without a [token] say. The Villages has people living there who are impacted by decisions and who are not at all allowed to be involved in the decision making.

 

[rael ramone]

ParentsOf4 said: ↑

All word games aside, The Walt Disney Company (TWDC) controls who's a "resident" of Reedy Creek and, ultimately, controls RCID. In the end, RCID is beholden to TWDC's "private control" and can "avoid indefinitely responsibility to a public electorate".​

I think the key difference between the Reedy Creek Improvement District and the Villages is that there are not people living within the Improvement District without a [token] say. The Villages has people living there who are impacted by decisions and who are not at all allowed to be involved in the decision making.

I'm so back and forth on this.....

Even though the RCID seems to have been created primarily to have their own government to handle the red tape involved in creating EPCOT as a living breathing city on a larger property that is in 2 counties, the ability to issue 'munis' for cheaper access to the bond market is a bonus that they currently enjoy.

Based on the Parentsof4 interpretation and/or theory, RCID does not meet the 'federal' rules for being a political subdivision, and hence can't issue bonds that meet the federal definition of 'municipal'.

But with the way the legal system works, oftentimes violating the spirit of a law, even if deliberate and blatant, is moot if the actual letter of the law isn't crossed. If the residents of RCID meet the legal definition of a 'voting electorate', then perhaps the IRS can't pursue this (or it isn't worth fighting the mouses lawyers over it).

 

[flynnibus]

RCID is a "political subdivision of a state" without any residents! Sounds strange to me. Doesn't a "political subdivision of a state" have to have a "public electorate"?

But it does have residents - in LBV and Bay Lake. The only 'catch' is there is truly only one property owner, and they hand pick the residents they allow to make area within RCID their legal residence.

 

[HokieDevil]

I know I'm a huge Disney Geek but one would only have to look at the Tower of Terror to understand that Disney still has to follow those codes set by the State. There is a reason that building is 199 ft and not a foot taller.

 

[lazyboy97o]

I view it as 30,000 acres of land surrounded by a large citizenship with little say over what happens.

There are other extremely large land holdings by private corporations with no residents. Private citizens surrounding those land holdings often are greatly impacted by decisions within those boundaries; they don't have to be residents to be impacted. Yet WDW is one of the few to have its own government.

How is this much different from any major metropolitan area where the residents of the suburbs outnumber the central city but get no electoral say in the governance of the city that ultimately drives the area?

 

[rael ramone]

TWDC's attorneys will (and should) fight tooth and nail. Take everything they say with a grain of salt. It's their job to say "my client is innocent". They wouldn't be employed by TWDC for long if they said otherwise.

I view it as 30,000 acres of land surrounded by a large citizenship with little say over what happens.

There are other extremely large land holdings by private corporations with no residents. Private citizens surrounding those land holdings often are greatly impacted by decisions within those boundaries; they don't have to be residents to be impacted. Yet WDW is one of the few to have its own government.

RCID effectively insulates WDW from much democratic oversight. TWDC is not evil in doing so: they simply want to speed up the process and save money.

Once again referring to the IRS's ruling:

"We believe that an entity that is organized and operated in a manner intended to perpetuate private control, and to avoid indefinitely responsibility to a public electorate, cannot be a political subdivision of a state," the IRS wrote in its ruling.

RCID is a "political subdivision of a state" without any residents! Sounds strange to me. Doesn't a "political subdivision of a state" have to have a "public electorate"?

With all its powers for collecting taxes, it's difficult for me to understand why the IRS would feel obligated to honor a deal made between one company and the State of Florida in 1965 when it comes to Federal taxes when, by its very nature, RCID is not really a "political subdivision" governing its citizens.

Of course, we all know that the IRS is completely apolitical so I'm sure TWDC's considerable donations to Federal officials will play absolutely no roll in any future IRS action.

I'm not thinking of what *should* happen. I'm thinking of what *could* happen. And in the end, I think it will have to do setting *legal precident* (or avoiding a legal precident that is undesirable).

For the IRS, first off they have to win their case with the Villages. If they lose that one, they won't beat the Mouse.

Then, the IRS would have to get a lockdown unbeatable case. Winning tells other businesses (Apple, Caterpillar, McDonalds, etc) not to try to make their own municipality to have cheaper access to the bond markets. Losing would encourage them to try to do just that (and businesses just might tell their states of residence to give them their own ''city" or they will leave the state, taking the jobs, income taxes for those workers, and the corporate taxes with them).

For the Mouse, losing isn't just about losing access to the muni market. They could fear that the state would then decide if the feds don't consider Bay Lake & LBV municipalities, then maybe they shouldn't either, and then there goes *those* advantages that come from the State deal (their own inspectors, property decisions subject to the consent of their neighbors, etc).

 

[Jim Chandler]

If the IRS comes looking for more money than they already get they mayscrew themselves.
Story Howard Hughes owned Hughes aircraft in Tucson. When the local Tax man came for more. Hughes sold the land to the USAF and eliminated most if not all his tax obligations. WDW has smart tax people they will get it right.