Every golfer knows there is a penalty attendant to hitting the ball out-of-bounds. In business, as with golf, being "out-of-bounds" when dealing with the Internal Revenue Code has penal consequences too. But there the analogy falters when applied to opportunity zones, because while golfers can see the out-of-bounds markers and the other staked penalty areas, for opportunity zones those stakes are not yet visible.

In its recently issued guidance, Treasury gently warned taxpayers that it has its eyes on several potential "out-of-bounds" schemes. More than once, Treasury spoke to "tax results that are inconsistent with the purposes of section 1400Z-2." Whether the subject was "land banking" or leases with provisions to purchase the underlying property for less than fair market value, Treasury has said "beware." Moreover, Treasury has crafted into the proposed regulations some anti-abuse rules and requested comment on whether the rules announced are needed, whether they go for enough and what other approaches are recommended to prevent abuse.

As with all penalties, one can ask "does the penalty fit the crime?" In the case of leases that are abusive, the Treasury’s stated penalty is quite draconian – "…the leased property (may not be) qualified opportunity/zone business property at any time."

After specifying that rules set forth by Treasury for opportunity zone activities "must be applied in a manner consistent with section 1400Z-2," Treasury announced its general anti-abuse rule

"…[I]f a significant purpose of a transaction is to achieve a tax result that is inconsistent with the purposes of section 1400Z-2, the Commissioner can recast a transaction (or series of transactions) for Federal tax purposes as appropriate to achieve tax results that are consistent with the purposes of section 1400Z-2. Whether a tax result is inconsistent with the purposes of section 1400Z-2 must be determined based on all the facts and circumstances."

Whether the general rule will be sufficient or whether Treasury will find it necessary to adopt more elaborate rules, time will tell. Suffice it to say, and mixing sports analogies, in this month of the Indianapolis 500, the cautionary (yellow) flags are out.

As Treasury’s guidance respecting opportunity zones becomes more refined, and more fact-specific questions get answered, the need for reliable tax and deal-structuring advice becomes paramount.