The Second Set of Proposed Opportunity Zone Regulations

Proskauer - Tax Talks

On April 17, 2019, the Internal Revenue Service (the “IRS”) and the U.S. Department of the Treasury (the “Treasury”) issued a second set of proposed regulations (the “Proposed Regulations”) under section 1400Z-2 of the Internal Revenue Code (the “Code”) regarding the qualified opportunity zone program, which was enacted as part of the law commonly referred to as the “Tax Cuts and Jobs Act” (“TCJA”).[1]

The Proposed Regulations are very taxpayer friendly, and address some, but not all, of the questions that were left unanswered by the first set of proposed regulations issued in October 2018 (the “Initial Proposed Regulations”). The Initial Proposed Regulations were discussed here.

The Proposed Regulations generally are proposed to be effective on or after the date of the publication of final regulations. Nevertheless, taxpayers and qualified opportunity funds (“QOFs”) may generally rely on the Proposed Regulations, so long as the taxpayer and/or the QOF applies the Proposed Regulations consistently and in their entirety. However, taxpayers may not rely on the rules that permit a QOF partnership, S corporation, or REIT whose owners have held their QOF interests for at least 10 years to sell assets without its owners recognizing capital gains on the sale, until the Proposed Regulations are finalized.

Some states conform to federal tax law with respect to QOFs (and grant equivalent tax benefits); others do not and tax gains that would otherwise be deferred, reduced or eliminated under the opportunity zone program.

This blog summarizes some of the important aspects of the Proposed Regulations. It assumes familiarity with the opportunity zone program. For background, see our prior blog post.

1.              All Gain on the Sale of an Interest in a QOF After 10 Years is Excluded; Depreciation Recapture is Not Taxed.

Under section 1400Z-2(c), a taxpayer that has held a qualifying interest in a QOF for at least 10 years may elect to treat its basis in the interest in the QOF as an amount equal to the fair market value of the interest in the QOF on the date of its sale or exchange (the “step-up election”).[2] The legislative history to section 1400Z-2(c) provides that only capital gain may be excluded as a result of the step-up election.[3] Accordingly, the legislative history suggests that a taxpayer would be required to include in income any depreciation recapture or other ordinary income realized in connection with the sale of an interest in a QOF.

In a very taxpayer favorable rule, however, the Proposed Regulations provide that if a taxpayer makes the step-up election, then all gain may be excluded, including any gain attributable to depreciation recapture or ordinary income assets.[4] Accordingly, under the Proposed Regulations, a taxpayer that sells an interest in a QOF that has been held for at least 10 years may avoid all tax on appreciation.

2.              No Tax on Capital Gains from the Sale of the Underlying Assets of a QOF Partnership, S Corporation, or REIT Held for At Least 10 Years; However, Depreciation Recapture and Ordinary Income is Taxed, and Restrictions Apply.

The Proposed Regulations permit an investor that has held a qualifying interest in a QOF partnership or a S corporation for at least 10 years to elect to exclude capital gains realized by the QOF partnership or S corporation on the sale of the underlying QOF assets to the extent the QOF partnership or S corporation separately states the capital gain arising from the asset sale on the investor’s Schedule K-1 (the “asset sale election”).[5] Accordingly, so long as an investor has held its investment in a QOF partnership or S corporation for at least 10 years, if the QOF sells its individual assets after that 10-year mark and separately states the capital gain arising from the sale on a Schedule K-1, then the investor can elect to exclude the capital gain on the sale from its income. In addition, under the Proposed Regulations, a QOF that is a real estate investment trust (a “QOF REIT”) may sell individual assets at different times and declare capital gain dividends. In this case, shareholders who have held the QOF REIT shares for at least 10 years will not be taxed on the capital gains dividends.

The asset sale election introduces an exit strategy that allows a QOF to sell underlying assets one at a time and relieves investors from having to find a buyer for their QOF interests. However, in contrast to the step-up election for interests in a QOF, the asset sale election permits only capital gains to be excluded; the investor must recognize any depreciation recapture or other ordinary income realized on the underlying asset sale.[6] It is unclear whether this distinction was intentional, and whether the final regulations will also permit depreciation recapture and other ordinary income to be excluded in connection with an asset sale election. In addition, an asset sale election may only be made in respect of property generating section 1231 gain to the extent of the net section 1231 capital gain reported by a QOF partnership or S corporation on a Schedule K-1 for the year.[7] Finally, the Proposed Regulations expressly permit only the sale of underlying QOF assets by a QOF, and not by a lower-tier “zone entity” held by the QOF (as defined below). Accordingly, investors in a QOF that operates through zone entities may benefit from the asset sale election only if the QOF sells its assets (including its interest in a zone entity); however, gain on assets sold by a zone entity remains subject to tax under the Proposed Regulations.

In contrast to the Initial Proposed Regulations and the rest of the Proposed Regulations, taxpayers cannot rely on these rules until the Proposed Regulations are finalized.[8] Although these rules will not be relevant for ten years, they could affect QOF structuring decisions.

3.              Debt-Financed Distributions from QOF Partnerships Are Permitted.

The statute provides that an investor’s initial basis in a QOF interest is zero.[9] Prior to the issuance of the Proposed Regulations, it was unclear whether an investor’s basis in a QOF partnership interest would be increased by the investor’s share of partnership debt, and, therefore, whether QOF partnerships could make tax-free debt-financed distributions. The Proposed Regulations provide that a partner’s initial basis in its QOF partnership interest is increased by the partner’s allocable share of QOF partnership liabilities,[10] thereby generally allowing a QOF partnership to make debt-financed distributions to its partners without triggering income recognition to the partners.[11] However, the Proposed Regulations provide that, to the extent a QOF partnership makes a debt-financed distribution that is treated as a “disguised sale” pursuant to existing partnership disguised sales rules (which presume that any distribution within two years of a contribution is a disguised sale), the partner’s contribution will not be eligible for the tax benefits of the opportunity zone rules.[12]

4.              Leasing (But Not Triple-Net-Leasing) is an Active Trade or Business.

A QOF can invest indirectly through a partnership (a “zone partnership”) or a corporation (a “zone corporation” and collectively, “zone entities”), each of which must be engaged in a “qualified opportunity zone business” (“zone business”). One of the requirements for a zone business under the statute is that at least 50% of the total gross income of a zone entity must be derived from the active conduct of a trade or business within a qualified opportunity zone (“QOZ”).[13] Prior to the Proposed Regulations, it was unclear whether leasing activities qualified as an active conduct of a trade or business.

The Proposed Regulations provide that leasing real property qualifies as the active conduct of a trade or business solely for purposes of satisfying this active trade or business requirement,[14] however, merely entering into a triple-net-lease with respect to real property owned by a taxpayer is not the active conduct of a trade or business by that taxpayer. While the Proposed Regulations do not define a “triple-net-lease”, IRS Notice 2019-07, released concurrently with the recently proposed regulations under section 199A, provides that a triple-net-lease includes a lease agreement requiring the tenant or lessee to pay taxes, fees and insurance, and to be responsible for maintenance activities for a property in addition to rent and utilities.[15] IRS Notice 2019-07 also contains a safe harbor that provides that spending 250 hours a year on leasing activities gives rise to a trade or business for purposes of section 199A. The Proposed Regulations contain no similar safe harbor.

5.              90% Test: Six-Month Relief for Newly Contributed Assets and One-Year Reinvestment Grace Period; However, Gain Recognized on Sale of Assets before 10 Years.

At least 90% of a QOF’s assets are required to consist of qualified opportunity zone property (the “90% test”). [16] Qualified opportunity zone property is qualified opportunity zone stock, qualified opportunity zone partnership interests or qualified opportunity zone business property (“zone business property” and collectively, “zone property”). The 90% test is measured semi-annually on (x) the last day of the first six-month period of the taxable year of the QOF; and (y) on the last day of the taxable year of the QOF (e.g., June 30 and December 31 would be the relevant testing dates for a calendar-year QOF).[17]

Six-Month Relief From 90% Test for Newly Contributed Assets. The Proposed Regulations provide that a QOF may choose to exclude any contribution of assets received during the prior six months for purposes of determining its compliance with the 90% test, so long as the contribution is continuously held in cash, cash equivalents, or debt instruments with a term of 18 months or less.[18] Accordingly, QOFs will have at least six months, and as long as one year, after the contribution of assets before the 90% test must be satisfied taking into account those assets. Thus, if assets are contributed on June 30th, a calendar year QOF will have until December 31st to satisfy the 90% test, taking into account the June 30 assets. If assets are contributed on July 1st, a calendar year QOF will have until the following June 30th to satisfy the 90% test, taking into account the July 1st assets.

One-Year Reinvestment Grace Period. A QOF that sells an asset for cash immediately before a measurement date could have difficulty meeting the 90% test. However, the statute authorizes the IRS to issue regulations to ensure that a QOF has a “reasonable period of time to reinvest the return of capital” from investments in zone property.[19] Pursuant to this authority, the Proposed Regulations provide a QOF with a one-year grace period to reinvest proceeds from the interim sale or disposition of zone property without the uninvested proceeds causing the QOF to fail to meet the 90% test, (as long as the proceeds are continuously held in cash, cash equivalents, or debt instruments with a term of 18 months or less until reinvestment).[20] The one-year grace period is extended if the failure to reinvest the proceeds by the deadline is attributable to a delay in government action on an application (e.g., for a building permit) that is completed during the one-year period.[21]

These interim asset sales do not reset an investor’s holding period with respect to its investment in the QOF and do not trigger the inclusion of any gain deferred in connection with the investment in the QOF (so long as the sale proceeds are timely reinvested in zone property by the QOF).

Nevertheless, the Proposed Regulations generally require investors to recognize gain on the QOF’s sale of the zone property. For example, if a QOF partnership sells zone property and realizes gain on that sale, the investor will have to recognize its allocable share of the realized gain unless it (i) has held its interest in the QOF partnership for at least 10 years (and, in this case, as discussed above, under the Proposed Regulations only capital gain could be excluded), or (ii) elects to defer tax on any realized capital gain by reinvesting a corresponding amount in a QOF (either the same QOF partnership or a different QOF) within the relevant 180-day period.[22] In the event that an amount corresponding to the capital gain is reinvested in a QOF, the investor would have a new QOF interest with a holding period that begins on the date of the reinvestment.

6.              Unimproved Land and Buildings Vacant for Five Years Can Be “Good Assets”.

Under the statute, in order for property to qualify as zone business property, either the “original use” of the property in a QOZ must begin with a QOF or a zone entity (the “original use requirement”) or, if property that existed in the QOZ is purchased, an amount equal to the purchase price of the property must be used to improve the property (the “substantial improvement requirement”).[23]

Unimproved Land. It was uncertain under the statute and Initial Proposed Regulations whether an investment in unimproved land could qualify as zone business property. The Proposed Regulations clarify that unimproved land within a QOZ that is acquired by purchase does not need to satisfy the original use test or be substantially improved to qualify as zone business property,[24] so long as the land is used in a trade or business of a QOF or zone business and, at the time of acquisition, the QOF or zone business has an expectation, an intention, or a view to improve the land by more than an insubstantial amount within 30 months after the date of purchase. [25] It is unclear how much improvement is needed to satisfy the “more than an insubstantial amount” test. Nevertheless, if a significant purpose of a QOF or zone business for acquiring unimproved land was to achieve an “inappropriate tax result”, the general anti-abuse rule set forth in the Proposed Regulations (discussed below) would apply to disqualify the unimproved land as zone business property.[26]

It is entirely unclear what an inappropriate tax result would be in this context. For example, assume that property has an existing building on it. It is uncertain whether the buyer could require the seller to demolish the building before the buyer purchases the land so that the buyer need only improve the land by more than an insubstantial amount (rather than by the value of the building). Similarly, after the purchase, it is unclear whether the buyer could pave the land and operate a parking lot business, or lease it to a related party and treat that lease as a trade or business.[27]

Vacant Building. Notwithstanding the “original use” or “substantial improvement” requirements of the statute, the Proposed Regulations contain a generous rule that (i) permits a QOF or zone business to treat an investment in a previously used building or other structure that has been vacant for at least five consecutive years before the QOF or zone business places the property in service in the QOZ as an original use of the asset, and (ii) does not require the QOF or zone business to invest any additional amount to substantially improve the building or other structure.[28]

7.              Certain Leased Property is Eligible Zone Business Property.

In order for tangible property to be considered zone business property, the statute requires the property to have been acquired by the QOF or zone business by purchase after December 31, 2017.[29] Commentators questioned whether tangible property leased by a zone business could satisfy this requirement. The Proposed Regulations provide helpful guidance that generally treats tangible property leased pursuant to a contract entered into after 2017 as zone business property so long as (i) the terms of the lease are arm’s length and reflect a market rate, and (ii) substantially all (i.e., 70%) of the use of the leased property is in a QOZ during substantially all (i.e., 90%) of the period for which the zone business leases the property.[30]

There is no original use or substantial improvement requirement with respect to leased tangible property.[31] In other words, a QOF or zone business can lease tangible property that has previously been used in the QOZ and does not need to make any improvements to the property for the leased property to be zone business property. Any improvements to the leased property made by the lessee are treated as original use property purchased by the QOF or zone business for an amount equal to the unadjusted cost of the improvements.

In addition, unlike purchased property, leased tangible property can be leased from a related party so long as (i) the QOF or zone business does not prepay more than 12 months of the lease at a time, and (ii) the QOF or zone business purchases additional tangible property with a value at least equal to the value of the lease no later than the earlier of the end of the lease or 30 months after the date the QOF or zone business takes possession of the leased property and there is substantial overlap of zones in which the purchased and leased property are used.[32] Accordingly, these rules seem to allow a taxpayer who has operated a business in a QOZ, and has owned property used in that business in the QOZ since before 2017, to sell the property to an unrelated party, create a QOF, and cause the QOF to lease the property back from the purchaser and run the business.

8.              Safe Harbors for 50% Gross Income Test.

As mentioned above, a zone entity must derive at least 50% of its gross income from the active conduct of a trade or business.[33] The Proposed Regulations provide three safe harbors and a facts and circumstances test that would allow a zone entity to satisfy the 50% active trade or business requirement. A trade or business will qualify for a safe harbor if:

  • At least 50% of the services performed – based on hours – for the business by its employees and independent contractors (and their employees) are performed within the QOZ (the “hours safe harbor”),
  • At least 50% of the services performed – based on amounts paid by the trade or business – for the business by its employees and independent contractors (and their employees) are performed within the QOZ (the “compensation safe harbor”) or
  • (1) the tangible property of the business located in the QOZ and (2) the management or operational functions performed for the business in the QOZ are each necessary to generate 50% of the gross income of the trade or business (the “management and property safe harbor”).[34]

A trade or business that does not meet any of the safe harbors may alternatively rely on a facts and circumstances test.[35]

Assume a startup business located in a QOZ develops software applications for global sale. So long as the employees and independent contractors of the startup devote the majority of their time developing the software within the QOZ, the startup business would satisfy the hours safe harbor, even if the sales are made outside the QOZ. Alternatively, if the startup business uses a service center located outside the QOZ and the majority of the total hours spent by the startup’s employees and independent contractors occur at the service center, so long as the business pays 50% of its total compensation for software development services to employees and independent contractors in the QOZ, the business could satisfy the compensation safe harbor.

These rules would also permit an investment fund manager to be organized as a QOF. The manager could lease space in a building located in a QOZ and either ensure that (i) 50% of the total number of hours of services are provided by employees or independent contractors within the QOZ (i.e., lower-compensated employees could be in the QOZ and highly compensated employees could remain outside of the QOZ) or (ii) 50% of the value of services are performed by employees or independent contractors within the QOZ (i.e., highly compensated employees would be in the QOZ). Moreover, amounts contributed to the QOF and used to pay salary and rent could allow deferral of an equal amount of the owner’s capital gains. Finally, organizing an investment fund manager as a QOF would allow the owners of the manager to avoid tax on a sale of their interests in the manager after 10 years.

9.              Secondary Market Purchases Eligible for Deferral.

The statute generally provides that a taxpayer may elect to defer capital gain from the sale or exchange of property with an unrelated person by investing all or part of the capital gain in a QOF within 180 days after the sale or exchange.[36] The Proposed Regulations allow a taxpayer to treat the purchase of a QOF interest from another person as a qualifying “investment” in a QOF equal to the amount paid for the QOF interest.[37] Thus, secondary market purchases of eligible QOF interests from a person other than a QOF are treated as investments in a QOF, with an amount equal to the purchase price eligible for the deferral election.

10.           Expansion of the 31-Month Working Capital Safe Harbor for Zone Entities, But Remains Unavailable for Opportunity Funds.

The statute permits a QOF to invest directly in zone property or a zone entity. However, a QOF that invests directly in zone property must be engaged in a trade or business and no more than 10% of its assets may consist of cash. A zone entity in which a QOF invests must also be engaged in a trade or business and less than 5% of the unadjusted basis in its assets may be attributable to financial property (including cash), other than a reasonable amount of working capital.[38] These rules restricted the ability of QOFs and zone entities to receive capital and develop new businesses or construct or rehabilitate real estate and other tangible property. The Initial Proposed Regulations partially addressed this concern by permitting a zone entity that acquires, constructs, and/or substantially rehabilitates tangible business property to treat cash, cash equivalents and debt instruments with a term of 18 months or less as a reasonable amount of working capital for a period of up to 31 months if certain requirements are satisfied (the “working capital safe harbor”).[39] In addition, under the working capital safe harbor, tangible property that is being acquired, constructed and/or substantially improved with the working capital and that is expected to qualify as zone property after the expenditure of the working capital is treated as being used in the active conduct of a trade or business during the construction and improvement period.[40] Accordingly, if a zone entity raises cash that satisfies the working capital safe harbor and uses that cash to construct a building that is expected to qualify as zone property, the partially completed building will qualify as zone property during the construction phase.  Moreover, any income earned on the working capital counts toward satisfying the 50% gross income test described above and the intangible property use requirement is generally deemed satisfied during the working capital safe harbor period.[41] However, the safe harbor does not apply to a QOF that directly holds working capital or constructs property.

The Proposed Regulations expand the working capital safe harbor beyond the acquisition, construction and/or substantial improvement of tangible business property to include the development of a trade or business in an opportunity zone,[42] and extend the 31-month period to the extent of governmental inaction or delay so long as the application for governmental action (i.e., for building permits, etc.) was completed within the 31-month period.[43]  In addition, the Proposed Regulations provide that a zone business may benefit from multiple or sequential applications of the working capital safe harbor, so long as each application independently complies will all of the requirements of the safe harbor. However, the Proposed Regulations do not extend the working capital safe harbor to the QOF itself; it remains available only to zone entities.

11.           Transactions that Trigger Recognition of Deferred Capital Gain.

The QOZ rules allow taxpayers to defer tax on capital gains to the extent a corresponding amount is used by the taxpayer to purchase interests in a QOF. The statute requires that the deferred capital gain be included in a taxpayer’s income in the taxable year that includes the earlier of (i) the date on which the taxpayer’s qualifying investment in a QOF is sold or exchanged, or (ii) December 31, 2026.[44] However, the statute does not directly address whether a non-sale or other disposition of an interest in a QOF requires a taxpayer to recognize its deferred gain.

The Proposed Regulations contain a broad and nonexclusive list of “inclusion events” that generally require the inclusion of deferred gain in income.[45] This list generally includes a gift or charitable contribution of a qualifying QOF investment, a section 332 liquidation of a QOF corporation,[46] various types of reorganizations and recapitalization of QOF corporations, and section 351 transactions involving the transfer of a taxpayer’s qualifying QOF stock.[47]

The Proposed Regulations also provide specific exceptions to the list of inclusion events. For instance, death is not an inclusion event.[48] A gift of a qualifying investment by a taxpayer to a grantor trust of which the taxpayer is the deemed owner is not an inclusion event.[49] Certain section 381 transactions are not inclusion events.[50] Spinoff transactions are also excluded from the list of inclusion events so long as both the distributing and controlled corporations are QOFs immediately after the spinoff transaction.[51] Lastly, a section 721(a) contribution of a QOF interest to a partnership is not an inclusion event. [52] Thus, it appears that an investor may contribute its QOF interest to a feeder fund or other partnership entity without triggering recognition of any deferred gain or disqualifying the interest from the QOZ benefits. However, the Proposed Regulations do not appear to permit investors to initially invest in a feeder fund that, in turn, invests in a QOF and so, absent additional guidance, this aspect of the Proposed Regulations will have only limited applicability.

12.           General Anti-Abuse Rule.

The Proposed Regulations include a general anti-abuse rule that gives the IRS broad discretion to disregard or recharacterize any transaction if, based on the facts and circumstances, a significant purpose of the transaction is to achieve tax results inconsistent with the purposes of section 1400Z-2.[53] The Preamble provides that Treasury would apply this anti-abuse rule to the passive ownership of land for speculation in which no new investment is made (i.e., “land banking”).[54] However, it is unclear what would be considered “land banking” and whether, for example, a taxpayer could buy raw land, pave it, and open a parking lot business, or lease the paved land. Moreover, because section 1400Z-2 is a highly technical statute containing arbitrary rules and with purposes that are unclear, it will be very difficult for taxpayers and the IRS to apply the anti-abuse rule.

13.           “Substantially All” Means 90% for Purposes of Holding Period and 70% for Purposes of Use.

The phrase “substantially all” appears in various places throughout the statute. The Proposed Regulations, together with the Initial Proposed Regulations, provide that the meaning of the phrase in different contexts is as follows:

  • During 90% of a QOF’s holding period for the interests in a zone entity, the zone entity must qualify as a zone business.[55]
  • At least 70% of the tangible property owned or leased by the zone entity must be zone business property.[56]
  • During 90% of a QOF’s or zone entity’s holding period for zone business property, 70% of the use of the property must be in the QOZ as part of a trade or business.[57]

To summarize, if the term “substantially all” relates to holding period, it means 90% and if it relates to use of property (either directly owned by a QOF or owned or leased by a zone business), the term means 70%. Because of the way these different threshold requirements interact, a qualifying QOF could potentially hold less than 40% of its assets effectively in use within a QOZ. This could occur if (1) 90% of a QOF’s assets are invested in a zone business, in which 70% of the tangible assets of that business are zone business property, and (2) the zone business property is 70% in use within a QOZ for 90% of the zone business’ holding period of that zone business property (i.e., 90% x 70% x 70% x 90% = 39.7%).

14.           Only 40% of Intangibles Must Be Used in the Zone Business.

The statute requires a “substantial portion” of the intangible property of a zone entity to be used in the conduct by the zone entity of a zone business.[58] The Proposed Regulations provide that, for these purposes, the term substantial portion means at least 40%.[59]

15.           A QOF Corporation Cannot Be a Member of a Consolidated Group.

The Proposed Regulations provide that QOF stock is treated as not stock for purposes of the consolidated return rules.[60] Accordingly, while a QOF C corporation may be the common parent of a consolidated group, it may not be a subsidiary member of a consolidated group.[61] The Proposed Regulations also provide that the opportunity zone rules apply separately to each member of a consolidated group.[62] Therefore, the same member of the group must both engage in the sale of a capital asset giving rise to gain, and timely invest an amount equal to some or all of such gain in a QOF in order to benefit from deferral under the statute.[63]

16.           Mixed-Funds Investments; Carried Interest Not Eligible for Opportunity Zone Benefits.

The Proposed Regulations contain new details regarding the treatment of mixed-funds investments. In general, a mixed-funds investment is one in which a partner (i) contributes to a QOF property with a value in excess of its basis, (ii) contributes to a QOF cash in excess of the partner’s eligible gain for which a deferral election has been made, or (iii) receives a partnership interest in exchange for services (i.e., a carried interest).[64]

Thus, if an investment fund sponsor makes an investment in a QOF with funds attributable to capital gains for which a deferral election has been made and also receives a carried interest in the QOF in exchange for services, the sponsor will be treated as having a mixed-funds investment. The tax benefits of the opportunity zone rules only apply to the deferred capital gain amount and not the amount attributable to the carried interest. Under the Proposed Regulations, the amount attributable to the carried interest is the highest percentage interest in residual profits attributable to the carried interest.[65] The Proposed Regulations provide that a partner holding a mixed-funds investment will be treated as holding a single partnership interest with a single basis and capital account for purposes of subchapter K.[66] However, for purposes of section 1400Z-2, that partner will be treated as holding two interests—one interest attributable to the deferred gain (the “qualifying investment”) and the other interest attributable to the excess investment and/or service component (the “non-qualifying investment”).[67] All partnership items, including partnership debt, are allocated pro rata between the qualifying and non-qualifying investments, based on the relative allocation percentages of each interest.[68]

17.           Additional Reporting Requirements.

A QOF must file an IRS Form 8996 with its federal income tax return for initial self-certification of QOF status and for annual reporting of compliance with the 90% test. The Preamble provides that the Form 8996 could require additional information such as the employer identification number (EIN) of a zone business owned by a QOF and the amount invested by QOFs and zone businesses.[69] However, these requirements will not apply before tax year 2019.

[1] All section references are to the Internal Revenue Code of 1986, as amended, and the Proposed Regulations.

[2] Section 1400Z-2(c).

[3] Conf. Rep. No. 115-466, at 538 (2017).

[4] Prop. Reg. § 1.1400Z-2(c)-1(b)(2)(i).

[5] Prop. Reg. § 1.1400Z-2(c)-1(b)(2)(ii).

[6] Prop. Reg. § 1.1400Z-2(c)-1(b)(2)(ii)(A)(1).

[7] Prop. Reg. § 1.1400Z-2(c)-1(b)(2)(ii)(A)(2). “Section 1231 gain” generally means any recognized gain on the sale or exchange of real or depreciable property used in the trade or business and held over one year.

[8] Prop. Reg. § 1.1400Z-2(c)-1(f).

[9] Section 1400Z-2(b)(2)(B)(i).

[10] See Prop. Reg. § 1.1400Z-2(b)-1(g)(3).

[11] See Prop. Reg. § 1.1400Z-2(b)-1(f)(10), Example 10.

[12] Prop. Reg. § 1.1400Z-2(a)-1(b)(10)(ii)(A)(2).

[13] Section 1400Z-2(d)(3)(A).

[14] Prop. Reg. § 1.1400Z-2(d)-1(b)(4).

[15] IRS Notice 2019-07, For more on IRS Notice 2019-07, please see our prior blog post.

[16] Section 1400Z-2(d)(1).

[17] Section 1400Z-2(d)(1).

[18] Prop. Reg. § 1.1400Z-2(d)-1(b)(4).

[19] Section 1400Z-2(e)(4).

[20] Prop. Reg. § 1.1400Z-2(d)-1(b)(4)(A)-(C).

[21] Prop. Reg. § 1.1400Z-2(f)-1(b).

[22] Section 1400Z-2(a).

[23] Section 1400Z-2(d)(2)(D).

[24] Prop. Reg. § 1.1400Z-2(d)-1(c)(8)(ii)(B); -1(d)(4)(ii)(B).

[25] Prop. Reg. § 1.1400Z-2(d)-1(f).

[26] Prop. Reg. § 1.1400Z-2(f)-1(c) (general anti-abuse rule).

[27] As mentioned above, leasing (other than triple-net-leasing) is an active trade or business for purposes of the opportunity zone rules.

[28] Prop. Reg. § 1.1400Z-2(d)-1(c)(7).

[29] Section 1400Z-2(d)(2)(D)(i)(I).

[30] Prop. Reg. § 1.1400Z-2(d)-1(c)(4)(B).

[31] Preamble at 20-21.

[32] Prop. Reg. § 1.1400Z-2(d)-1(c)(4)(i)(B)(4), (7).

[33] Section 1400Z-2(d)(3)(A)(ii) (cross-referencing a requirement under section 1397C(b)(2)).

[34] Prop. Reg. § 1.1400Z-2(d)-1(d)(5)(i)(A)-(C). For the purposes of meeting the third safe harbor, the Proposed Regulations provide that the presence of the PO Box or other delivery address alone, even if the mail received at that PO Box is fundamental to the income of the business, does not constitute a factor necessary to generate gross income by the business. Prop. Reg. § 1.1400Z-2(d)-1(d)(5)(i)(E)(2), Example 2.

[35] Prop. Reg. § 1.1400Z-2(d)-1(d)(5)(i)(D).

[36] Section 1400Z-2(a)(1)(A).

[37] Prop. Reg. § 1.1400Z-2(a)-1(b)(9)(iii) (Acquisition of eligible interest from person other than QOF); Prop. Reg. § 1.1400Z-2(a)-1(b)(10)(iii) (acquisitions from another person).

[38] Section 1400Z-2(d)(3)(A).

[39] In general, three requirements must be met in order to satisfy the working capital safe harbor. First, the working capital amounts must be designated in writing in a plan for the acquisition, construction, and/or substantial improvement of tangible property in a QOZ. Second, the business must have a written schedule consistent with the ordinary start-up of a trade or business for the expenditure of the working capital assets, and under the schedule, the working capital assets must be spent within 31 months of the receipt by the business of the assets. Finally, the working capital assets must actually be used in a manner substantially consistent with the plan and schedule. Prop. Reg. §1.1400Z-2(d)-1(d)(5)(iv).

[40] Prop. Reg. § 1.1400Z-2(d)-1(d)(5)(vii).

[41] Prop. Reg. § 1.1400Z-2(d)-1(d)(5)(v), (vi).

[42] Prop. Reg. § 1.1400Z-2(d)(5)(iv)(A).

[43] Prop. Reg. § 1.1400Z-2(d)(5)(iv)(C).

[44] Section 1400Z-2(b)(1).

[45] The Preamble generally provides that, subject to certain exceptions, the deferred gain will be included upon a transfer of a qualifying investment to the extent the transfer reduces the taxpayer’s equity interest in the qualifying investment for U.S. tax purposes. In addition, a transaction that does not reduce a taxpayer’s equity interest in the taxpayer’s qualifying investment is also an inclusion event if the taxpayer receives property from a QOF in a transaction that is treated as a distribution under the Code. For this purpose, property generally includes money, securities, or any other property, other than stock (or rights to acquire stock) in a QOF corporation that is making the distribution.

[46] A section 332 liquidation is generally defined as a liquidation in which an 80% or more owned subsidiary is liquidated into its corporate parent.

[47] Prop. Reg. § 1.1400Z-2(b)-1(c). A section 351 transaction is generally defined as a tax-free transfer of property to a corporation solely in exchange for its stock, if immediately after the transfer, the transferor(s) own at least 80% of the corporation.

[48] Prop. Reg. § 1.1400Z-2(b)-1(c)(4).

[49] Prop. Reg. § 1.1400Z-2(b)-1(c)(5).

[50] Prop. Reg. § 1.1400Z-2(b)-1(c)(10). A section 381 transaction generally refers to a tax-free acquisition of a corporation’s assets by another corporation (e.g., pursuant to a tax-free reorganization or liquidation) in which tax attributes of the selling corporation carry over.

[51] Prop. Reg. § 1.1400Z-2(b)-1(c)(11)(i)(B)(1).

[52] Prop. Reg. § 1.1400Z-2(b)-1(c)(6)(ii)(B).

[53] Prop. Reg. § 1.1400Z-2(f)-1(c)(1).

[54] Preamble at 14.

[55] Prop. Reg. § 1.1400Z-2(d)-1(c)(5).

[56] Prop. Reg. § 1.1400Z-2(d)-1(c)(6).

[57] Prop. Reg. § 1.1400Z-2(d)-1(c)(5).

[58] Section 1400Z-2(d)(3)(ii) (cross-referencing section 1397C(b)(4)).

[59] Prop. Reg. § 1.1400Z-2(d)-1(d)(5)(ii).

[60] Prop. Reg. § 1.1400Z-2(g)-1(b)(1).

[61] Prop. Reg. § 1.1400Z-2(g)-1(b)(1).

[62] Prop. Reg. § 1.1400Z-2(g)-1(c).

[63] Prop. Reg. § 1.1400Z-2(g)-1(c).

[64] Preamble at 48.

[65] Prop. Reg. § 1.1400Z-2(b)-1(c)(6)(iv)(D).

[66] Preamble at 49.

[67] Prop. Reg. § 1.1400Z-2(a)-1(b)(10)(i)(D).

[68] Prop. Reg. § 1.1400Z-2(a)-1(b)(10)(ii)(B)(4). For example, assume a partner contributes $100 to a QOF partnership, only $50 of which is a qualifying investment, and $20 of partnership liabilities is allocated to the partner, the partner’s outside basis for subchapter K purposes is $70 ($0 for the qualifying investment, plus $50 for the non-qualifying investment, plus $20 of the partner’s allocable share of the partnership debt). However, for purposes of section 1400Z-2, the partner’s basis in its qualifying investment is $10 with the remaining $60 attributable to the partner’s basis in its non-qualifying investment. See example in Preamble at 50.

[69] Preamble at 5.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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JD Supra Privacy Policy

Updated: May 25, 2018:

JD Supra is a legal publishing service that connects experts and their content with broader audiences of professionals, journalists and associations.

This Privacy Policy describes how JD Supra, LLC ("JD Supra" or "we," "us," or "our") collects, uses and shares personal data collected from visitors to our website (located at (our "Website") who view only publicly-available content as well as subscribers to our services (such as our email digests or author tools)(our "Services"). By using our Website and registering for one of our Services, you are agreeing to the terms of this Privacy Policy.

Please note that if you subscribe to one of our Services, you can make choices about how we collect, use and share your information through our Privacy Center under the "My Account" dashboard (available if you are logged into your JD Supra account).

Collection of Information

Registration Information. When you register with JD Supra for our Website and Services, either as an author or as a subscriber, you will be asked to provide identifying information to create your JD Supra account ("Registration Data"), such as your:

  • Email
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Other Information: We also collect other information you may voluntarily provide. This may include content you provide for publication. We may also receive your communications with others through our Website and Services (such as contacting an author through our Website) or communications directly with us (such as through email, feedback or other forms or social media). If you are a subscribed user, we will also collect your user preferences, such as the types of articles you would like to read.

Information from third parties (such as, from your employer or LinkedIn): We may also receive information about you from third party sources. For example, your employer may provide your information to us, such as in connection with an article submitted by your employer for publication. If you choose to use LinkedIn to subscribe to our Website and Services, we also collect information related to your LinkedIn account and profile.

Your interactions with our Website and Services: As is true of most websites, we gather certain information automatically. This information includes IP addresses, browser type, Internet service provider (ISP), referring/exit pages, operating system, date/time stamp and clickstream data. We use this information to analyze trends, to administer the Website and our Services, to improve the content and performance of our Website and Services, and to track users' movements around the site. We may also link this automatically-collected data to personal information, for example, to inform authors about who has read their articles. Some of this data is collected through information sent by your web browser. We also use cookies and other tracking technologies to collect this information. To learn more about cookies and other tracking technologies that JD Supra may use on our Website and Services please see our "Cookies Guide" page.

How do we use this information?

We use the information and data we collect principally in order to provide our Website and Services. More specifically, we may use your personal information to:

  • Operate our Website and Services and publish content;
  • Distribute content to you in accordance with your preferences as well as to provide other notifications to you (for example, updates about our policies and terms);
  • Measure readership and usage of the Website and Services;
  • Communicate with you regarding your questions and requests;
  • Authenticate users and to provide for the safety and security of our Website and Services;
  • Conduct research and similar activities to improve our Website and Services; and
  • Comply with our legal and regulatory responsibilities and to enforce our rights.

How is your information shared?

  • Content and other public information (such as an author profile) is shared on our Website and Services, including via email digests and social media feeds, and is accessible to the general public.
  • If you choose to use our Website and Services to communicate directly with a company or individual, such communication may be shared accordingly.
  • Readership information is provided to publishing law firms and authors of content to give them insight into their readership and to help them to improve their content.
  • Our Website may offer you the opportunity to share information through our Website, such as through Facebook's "Like" or Twitter's "Tweet" button. We offer this functionality to help generate interest in our Website and content and to permit you to recommend content to your contacts. You should be aware that sharing through such functionality may result in information being collected by the applicable social media network and possibly being made publicly available (for example, through a search engine). Any such information collection would be subject to such third party social media network's privacy policy.
  • Your information may also be shared to parties who support our business, such as professional advisors as well as web-hosting providers, analytics providers and other information technology providers.
  • Any court, governmental authority, law enforcement agency or other third party where we believe disclosure is necessary to comply with a legal or regulatory obligation, or otherwise to protect our rights, the rights of any third party or individuals' personal safety, or to detect, prevent, or otherwise address fraud, security or safety issues.
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How We Protect Your Information

JD Supra takes reasonable and appropriate precautions to insure that user information is protected from loss, misuse and unauthorized access, disclosure, alteration and destruction. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. You should keep in mind that no Internet transmission is ever 100% secure or error-free. Where you use log-in credentials (usernames, passwords) on our Website, please remember that it is your responsibility to safeguard them. If you believe that your log-in credentials have been compromised, please contact us at

Children's Information

Our Website and Services are not directed at children under the age of 16 and we do not knowingly collect personal information from children under the age of 16 through our Website and/or Services. If you have reason to believe that a child under the age of 16 has provided personal information to us, please contact us, and we will endeavor to delete that information from our databases.

Links to Other Websites

Our Website and Services may contain links to other websites. The operators of such other websites may collect information about you, including through cookies or other technologies. If you are using our Website or Services and click a link to another site, you will leave our Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We are not responsible for the data collection and use practices of such other sites. This Policy applies solely to the information collected in connection with your use of our Website and Services and does not apply to any practices conducted offline or in connection with any other websites.

Information for EU and Swiss Residents

JD Supra's principal place of business is in the United States. By subscribing to our website, you expressly consent to your information being processed in the United States.

  • Our Legal Basis for Processing: Generally, we rely on our legitimate interests in order to process your personal information. For example, we rely on this legal ground if we use your personal information to manage your Registration Data and administer our relationship with you; to deliver our Website and Services; understand and improve our Website and Services; report reader analytics to our authors; to personalize your experience on our Website and Services; and where necessary to protect or defend our or another's rights or property, or to detect, prevent, or otherwise address fraud, security, safety or privacy issues. Please see Article 6(1)(f) of the E.U. General Data Protection Regulation ("GDPR") In addition, there may be other situations where other grounds for processing may exist, such as where processing is a result of legal requirements (GDPR Article 6(1)(c)) or for reasons of public interest (GDPR Article 6(1)(e)). Please see the "Your Rights" section of this Privacy Policy immediately below for more information about how you may request that we limit or refrain from processing your personal information.
  • Your Rights
    • Right of Access/Portability: You can ask to review details about the information we hold about you and how that information has been used and disclosed. Note that we may request to verify your identification before fulfilling your request. You can also request that your personal information is provided to you in a commonly used electronic format so that you can share it with other organizations.
    • Right to Correct Information: You may ask that we make corrections to any information we hold, if you believe such correction to be necessary.
    • Right to Restrict Our Processing or Erasure of Information: You also have the right in certain circumstances to ask us to restrict processing of your personal information or to erase your personal information. Where you have consented to our use of your personal information, you can withdraw your consent at any time.

You can make a request to exercise any of these rights by emailing us at or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

You can also manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard.

We will make all practical efforts to respect your wishes. There may be times, however, where we are not able to fulfill your request, for example, if applicable law prohibits our compliance. Please note that JD Supra does not use "automatic decision making" or "profiling" as those terms are defined in the GDPR.

  • Timeframe for retaining your personal information: We will retain your personal information in a form that identifies you only for as long as it serves the purpose(s) for which it was initially collected as stated in this Privacy Policy, or subsequently authorized. We may continue processing your personal information for longer periods, but only for the time and to the extent such processing reasonably serves the purposes of archiving in the public interest, journalism, literature and art, scientific or historical research and statistical analysis, and subject to the protection of this Privacy Policy. For example, if you are an author, your personal information may continue to be published in connection with your article indefinitely. When we have no ongoing legitimate business need to process your personal information, we will either delete or anonymize it, or, if this is not possible (for example, because your personal information has been stored in backup archives), then we will securely store your personal information and isolate it from any further processing until deletion is possible.
  • Onward Transfer to Third Parties: As noted in the "How We Share Your Data" Section above, JD Supra may share your information with third parties. When JD Supra discloses your personal information to third parties, we have ensured that such third parties have either certified under the EU-U.S. or Swiss Privacy Shield Framework and will process all personal data received from EU member states/Switzerland in reliance on the applicable Privacy Shield Framework or that they have been subjected to strict contractual provisions in their contract with us to guarantee an adequate level of data protection for your data.

California Privacy Rights

Pursuant to Section 1798.83 of the California Civil Code, our customers who are California residents have the right to request certain information regarding our disclosure of personal information to third parties for their direct marketing purposes.

You can make a request for this information by emailing us at or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

Some browsers have incorporated a Do Not Track (DNT) feature. These features, when turned on, send a signal that you prefer that the website you are visiting not collect and use data regarding your online searching and browsing activities. As there is not yet a common understanding on how to interpret the DNT signal, we currently do not respond to DNT signals on our site.

Access/Correct/Update/Delete Personal Information

For non-EU/Swiss residents, if you would like to know what personal information we have about you, you can send an e-mail to We will be in contact with you (by mail or otherwise) to verify your identity and provide you the information you request. We will respond within 30 days to your request for access to your personal information. In some cases, we may not be able to remove your personal information, in which case we will let you know if we are unable to do so and why. If you would like to correct or update your personal information, you can manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard. If you would like to delete your account or remove your information from our Website and Services, send an e-mail to

Changes in Our Privacy Policy

We reserve the right to change this Privacy Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our Privacy Policy will become effective upon posting of the revised policy on the Website. By continuing to use our Website and Services following such changes, you will be deemed to have agreed to such changes.

Contacting JD Supra

If you have any questions about this Privacy Policy, the practices of this site, your dealings with our Website or Services, or if you would like to change any of the information you have provided to us, please contact us at:

JD Supra Cookie Guide

As with many websites, JD Supra's website (located at (our "Website") and our services (such as our email article digests)(our "Services") use a standard technology called a "cookie" and other similar technologies (such as, pixels and web beacons), which are small data files that are transferred to your computer when you use our Website and Services. These technologies automatically identify your browser whenever you interact with our Website and Services.

How We Use Cookies and Other Tracking Technologies

We use cookies and other tracking technologies to:

  1. Improve the user experience on our Website and Services;
  2. Store the authorization token that users receive when they login to the private areas of our Website. This token is specific to a user's login session and requires a valid username and password to obtain. It is required to access the user's profile information, subscriptions, and analytics;
  3. Track anonymous site usage; and
  4. Permit connectivity with social media networks to permit content sharing.

There are different types of cookies and other technologies used our Website, notably:

  • "Session cookies" - These cookies only last as long as your online session, and disappear from your computer or device when you close your browser (like Internet Explorer, Google Chrome or Safari).
  • "Persistent cookies" - These cookies stay on your computer or device after your browser has been closed and last for a time specified in the cookie. We use persistent cookies when we need to know who you are for more than one browsing session. For example, we use them to remember your preferences for the next time you visit.
  • "Web Beacons/Pixels" - Some of our web pages and emails may also contain small electronic images known as web beacons, clear GIFs or single-pixel GIFs. These images are placed on a web page or email and typically work in conjunction with cookies to collect data. We use these images to identify our users and user behavior, such as counting the number of users who have visited a web page or acted upon one of our email digests.

JD Supra Cookies. We place our own cookies on your computer to track certain information about you while you are using our Website and Services. For example, we place a session cookie on your computer each time you visit our Website. We use these cookies to allow you to log-in to your subscriber account. In addition, through these cookies we are able to collect information about how you use the Website, including what browser you may be using, your IP address, and the URL address you came from upon visiting our Website and the URL you next visit (even if those URLs are not on our Website). We also utilize email web beacons to monitor whether our emails are being delivered and read. We also use these tools to help deliver reader analytics to our authors to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

Analytics/Performance Cookies. JD Supra also uses the following analytic tools to help us analyze the performance of our Website and Services as well as how visitors use our Website and Services:

  • HubSpot - For more information about HubSpot cookies, please visit
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  • Google Analytics - For more information on Google Analytics cookies, visit To opt-out of being tracked by Google Analytics across all websites visit This will allow you to download and install a Google Analytics cookie-free web browser.

Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at:

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