On October 19, 2018, the Internal Revenue Service (the “IRS”) and the Treasury Department issued proposed regulations apropos to the new Befalling Area program.1 The Befalling Area affairs is advised to animate investments in economically afflicted able befalling zones (“QOZs”) by acceptance taxpayers to adjourn and, in some cases, abate or annihilate tax on basic assets if they reinvest their assets aural 180 canicule in able befalling funds (“QOFs”), which, in turn, about are appropriate to advance at atomic 90% of their assets in (1) assertive business acreage amid in a QOZ (“QOZ Business Property”) and/or (2) disinterestedness in assertive entities that authority QOZ Business Acreage (“QOZ Subsidiaries” and, calm with QOZ Business Property, “QOZ Property”).
The proposed regulations action accessible advice on several issues apropos to the Befalling Area program. However, a cardinal of questions abide unanswered, and the conference to the proposed regulations indicates that the IRS and the Treasury Department intend to affair added guidance, including added proposed regulations, in the a future.
Part II of this announcement provides an overview of the Befalling Area program, as adapted by the proposed regulations. Allotment III summarizes some of the best important aspects of the proposed regulations.
II. Overview of the Befalling Area Program
A. In General
Under the Befalling Area program, if a aborigine realizes basic accretion on a auction of accepted assets to an different actuality and reinvests the basic accretion in a QOF aural 180 canicule of the date that the aborigine would contrarily admit the accretion for U.S. tax purposes,2 again the afterward tax incentives are accessible to the taxpayer:
In addition, the bulk of any accretion that the aborigine is appropriate to admit if the aborigine disposes of the QOF afterwards December 31, 2026 (the “Second Acceptance Date”) is bargain by:
For example, accept that a aborigine recognizes $100 of basic accretion on a auction of accepted balance on December 31, 2018. If the aborigine invests the $100 in a QOF on or afore June 1, 2019, again the aborigine may accept to adjourn advantageous tax on the $100. If the aborigine holds the QOF until December 31, 2026, then, at that time, the aborigine charge admit $85 of accretion (i.e., $100 deferred accretion beneath 15% of $100). If the aborigine sells the QOF for $200 in 2027, again the aborigine is appropriate to admit alone $100 of added accretion (i.e., $200 bulk realized, beneath $85 accretion accustomed on the Aboriginal Acceptance Date, beneath $15 base step-up). If, instead, the aborigine sells the QOF for $200 in 2030 (i.e., at atomic 10 years afterwards its advance in the QOF), again the aborigine is not appropriate to admit any added accretion on the sale.
B. Able Befalling Funds
1. In General
At the affection of the Befalling Area affairs is the abstraction of QOZs, which are low-income demography tracts nominated by governors and certified by the Treasury Department.7 There are currently over 8,700 QOZs in all 50 states, the District of Columbia, Puerto Rico, and the Virgin Islands.
An article that is organized in the United States or a U.S. control and is advised as a association or affiliation for U.S. tax purposes about is acceptable to be a QOF if at atomic 90% of its assets abide of QOZ Property.8
Under the proposed regulations, an article self-certifies as a QOF by filing IRS Form 8996 with its U.S. tax return.9 In affiliation with arising the proposed regulations, the IRS and the Treasury Department appear a abstract of IRS Form 8996.10
2. 90% Asset Test
The 90% asset analysis is a semi-annual analysis based on the boilerplate of the allotment of QOZ Acreage that the QOF holds.11 In addition, if the QOF fails to amuse the asset analysis at the end of any one month, it is accountable to a amends according to (1) the balance of 90% of its assets over the bulk of its QOZ Property, assorted by (2) the federal concise bulk additional 3%, unless the abortion is due to reasonable cause.12
Under the proposed regulations, a QOF about charge actuate the bulk of its assets by advertence to banking statements that the QOF files with the U.S. Balance and Barter Commission or accession U.S. federal agency, or added audited banking statements that are able in accordance with U.S. GAAP. If the QOF does not accept any such banking statements, again it charge use the bulk of its assets.13
3. QOZ Business Property
As mentioned above, QOZ Acreage includes QOZ Business Acreage and disinterestedness interests in QOZ Subsidiaries. Actual acreage about qualifies as QOZ Business Acreage if:
For this purpose, a QOF or QOZ Subsidiary about is advised as accepting “substantially improved” acreage if, aural 30 months of accepting the property, its basic expenditures with account to the acreage beat its bulk base in the property.15
4. QOZ Subsidiaries
An article about qualifies as a QOZ Subsidiary if:
A QOZ Subsidiary about is advised as actuality affianced in a QOZ Business if:
III. Summary of Proposed Regulations
Some of the best important aspects of the proposed regulations are:
1 The Befalling Area affairs appears in sections 1400Z-1 and 1400Z-2 of the Internal Revenue Code (the “Code”), and was codification as allotment of the Tax Cuts and Jobs Act of 2017.
2 As discussed in Allotment III of this memorandum, the proposed regulations adapt the 180-day aeon for ally in a partnership. In addition, the proposed regulations accommodate that the 180-day aeon for adapted futures affairs and added “section 1256 contracts” begins on the aftermost day of a taxpayer’s taxable year. Taxpayers about may adjourn alone the basic accretion net assets from area 1256 affairs on an accumulated base (and not on a per-contract basis) for anniversary taxable year. Taxpayers additionally about may not adjourn accretion from any position that is or has been allotment of an offsetting-positions transaction (generally, a transaction in which a aborigine has essentially beneath its accident of accident from captivation one position by captivation one or added added positions). Proposed Treasury regulations area 1.1400Z-2(a)-1(b)(2).
3 Area 1400Z-2(b)(1). The conference to the proposed regulations provides that the aborigine makes the cessation acclamation on IRS Form 8949, which the aborigine attaches to its U.S. federal assets tax acknowledgment for the taxable year in which the aborigine would accept accustomed the accretion in the absence of Area 1400Z-2(b)(1).
4 Area 1400Z-2(b)(2)(A). The proposed regulations accommodate that any accretion accustomed on the Aboriginal Acceptance Date has the aforementioned “attributes” as the deferred accretion would accept had. Proposed Treasury regulations area 1.1400Z-2(a)-1(b)(5). The proposed regulations additionally accept a first-in, first-out (“FIFO”) access to accretion acceptance if a aborigine sells beneath than all of its absorption in a QOF afore December 31, 2026.
5 Area 1400Z-2(b)(2)(B).
6 Area 1400Z-2(c). Beneath area 1400Z-1(f), a demography tract’s appellation as a QOZ terminates no afterwards than December 31, 2028. The proposed regulations would analyze that, admitting this termination, tax-free acknowledgment beneath area 1400Z-2(c) continues to be accessible until December 31, 2047. A aborigine is acceptable for tax-free acknowledgment alone with account to an advance in a QOF that it fabricated with deferred basic gains. Proposed Treasury regulations area 1.1400Z-2(c)-1(a).
7 The Economic Innovation Group has appear a accessible alternate map of befalling zones, which is accessible at https://eig.org/opportunityzones. For added befalling area resources, see https://www.cdfifund.gov/Pages/Opportunity-Zones.aspx.
8 Area 1400Z-2(d). Beneath the proposed regulations, a QOF may be organized in a U.S. control alone if its purpose is to advance in QOZ Acreage that relates to a barter or business operated in that U.S. possession. Proposed Treasury regulations area 1.1400Z-2(d)-1(e).
9 Proposed Treasury regulations area 1.1400Z-2(d)-1(a). Beneath the proposed regulations, a above-mentioned article may become a QOF; however, taxpayers that invested their basic assets in the article afore it became a QOF are not acceptable to adjourn any taxes with account to those basic gains. Proposed Treasury regulations area 1.1400Z-2(d)-1(a)(3); Proposed Treasury regulations area 1.1400Z-2(d)-1(a)(1)(iii)(B).
10 The abstract is accessible at https://www.irs.gov/pub/irs-dft/f8996–dft.pdf.
11 Area 1400-2(d)(1). The proposed regulations would analyze that the aboriginal six-month aeon of a QOF’s aboriginal taxable year is the aboriginal six-month aeon aural that taxable year during which the QOF qualifies as a QOF. Proposed Treasury regulations area 1.1400Z-2(d)-1(b). Accordingly, if (for example) a calendar-year article chooses a ages afterwards June as the aboriginal ages for which it qualifies as a QOF, again its alone testing date for that taxable year is December 31.
12 Area 1400Z-2(f).
13 Proposed Treasury regulations area 1.1400Z-2(d)-1(b).
14 Area 1400Z-2(d)(2)(D). Neither the Code nor the proposed regulations ascertain “substantially all” in this context, although they do ascertain the byword in an akin context, as discussed in Allotment III of this memorandum. The conference to the proposed regulations addendum that the byword “substantially all” appears several times in area 1400Z-2 of the Code, and requests comments on how the byword should be interpreted.
15 Area 1400Z-2(d)(2)(D)(ii). As discussed in Allotment III of this memorandum, Revenue Ruling 2018-29, which was issued forth with the proposed regulations, provides a safe anchorage with account to abundant improvements of absolute barrio purchased with land.
16 In the case of a accumulated entity, the QOF charge access the disinterestedness interests at aboriginal affair either anon or through an underwriter. Area 1400Z-2(d)(2)(B)(i)(I).
17 Area 1400Z-2(d)(2)(B)-(C). Beneath the proposed regulations, a QOZ Subsidiary may be organized in a U.S. control alone if it conducts a QOZ Business in the U.S. possession. Proposed Treasury regulations area 1.1400Z-2(d)-1(e).
18 Allotment III of this announcement discusses the proposed regulations’ analogue of “substantially all” in this context. Actual acreage that ceases to be QOZ Business Acreage will about abide to be advised as QOZ Business Acreage for bristles years or until the QOZ Subsidiary disposes of the property. Area 1400Z-2(d)(3)(B).
19 Nonqualified banking acreage about bureau debt, stock, affiliation interests, options, futures contracts, advanced contracts, warrants, abstract arch contracts, annuities, and added agnate property, added than reasonable amounts of alive basic captivated in cash, banknote equivalents, or debt instruments with a appellation of 18 months or less, or accounts receivable acquired in the accustomed advance of a barter or business. Area 1397C(e). As discussed in Allotment III of this memorandum, the proposed regulations accommodate a safe anchorage beneath which a QOZ Subsidiary may exclude assertive alive basic from the analogue of “nonqualified banking assets,” and amusement as QOZ Business Acreage any actual acreage that is actuality acquired, constructed, and/or essentially bigger with that alive capital.
20 Area 1400Z-2(d)(3). “Sin businesses” are clandestine or bartering golf courses, country clubs, beating parlors, hot tub facilities, beige facilities, racetracks or added accessories acclimated for gambling, or any abundance the arch business of which is the auction of alcoholic beverages for burning off premises. Area 144(c)(6)(B).
21 Area 1400Z-2(d)(3).
22 Proposed Treasury regulations area 1.1400Z-2(d)-1(d)(3). This allotment charge be affected by advertence to banking statements that the QOZ Subsidiary files with the U.S. Balance and Barter Commission or accession U.S. federal agency, or added audited banking statements that are able in accordance with U.S. GAAP. If the QOZ Subsidiary does not accept any such banking statements, again it about charge use the alignment acclimated by any 5% buyer that is a QOF and that produces the accomplished allotment of QOZ Business Acreage for the QOZ Subsidiary. Proposed Treasury regulations area 1.1400Z-2(d)-1(d)(3).
23 Proposed Treasury regulations area 1.1400Z-2(d)(5)(iv). Any assets on this alive basic additionally would calculation against acceptable the 50% gross assets analysis declared above. Proposed Treasury regulations area 1.1400Z-2(d)-1(d)(5)(v).
24 Proposed Treasury regulations area 1.1400Z-2(d)-1(d)(5)(vii)-(viii).
25 Area 1400Z-2(d)(2)(D)(ii).
26 Proposed Treasury regulations area 1.1400Z-2(a)-1(b)(3)(i).
27 Proposed Treasury regulations area 1.1400Z-2(a)-1(b)(3)(ii).
28 Proposed Treasury regulations area 1.1400Z-2(a)-1(b)(2)(i)(A).
29 Proposed Treasury regulations area 1.1400Z-2(a)-1(c).
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