On April 17, 2019 the Internal Revenue Service released the long-anticipated second set of proposed regulations (the Additional Regulations) supplementing, and in some instances replacing, guidance provided in its initial proposed regulations released on October 29, 2018 (the Initial Regulations) with respect to qualified opportunity funds (“QOF”) under Sections 1400Z-1 and 1400Z-2 of the Internal Revenue Code (Code). The Additional Regulations provides some much needed clarity on issues such as:
- applicable use and holding period standards for QOF assets,
- the “original use” standard for property in a QOZ,
- treatment of property leased by a QOF,
- sourcing of gross income of a QOF, and
- the period within which a QOF can reinvest asset sale proceeds and avoid a penalty for holding disqualifying assets.
The Additional Regulations also provide some unexpected but welcomed flexibility on qualifying contributions of property to a QOF while instituting a complex regime for triggering inclusion of deferred capital gain by a QOF investor.
The Additional Regulations confirm that Code Sections 1400Z-1 and 1400Z-2 seek to encourage economic growth and investment in designated qualified opportunity zones (QOZ) by providing income tax benefits to taxpayers investing new capital in businesses located within QOZs through a QOF.
However, the Additional Regulations did not provide expected guidance on the standard for an “active” trade or business within a QOZ.
Because the Additional Regulations are voluminous and cover numerous areas of concern for investors, we will address the guidance in the proposed regulations in two Alerts. This first Alert analyzes QOF and QOZ business qualifications issues addressed in the Additional Regulations and can be accessed below. The second Alert will analyze QOF investor and taxpayer issues addressed in the Additional Regulations.
In addition, we will host a teleconference at 12:00 pm ET on Tuesday, April 30 to provide a high level review of the Additional Regulations and answer callers questions. Please join Dave Lionberger and Jamie Canup by calling 1-877-699-4804 and using passcode 8047719518#.
Luis F. Ruiz