Firm Asks IRS to Address 21 Issues With O-Zone Regs

April 26, 2019

CC:PA:LPD:PR (REG-120186-18)
Room 5203, Internal Revenue Service
PO Box 7604, Ben Franklin Station
Washington, DC 20044

Re: Comments on Opportunity Zone Proposed Regulations

To Whom it May Concern:

This letter provides comments and questions on the Opportunity Zone proposed regulations. For clarity, this letter uses the defined terms in the attached article.

1. If an Electing Taxpayer purchases property in a Zone and contributes it to a Fund, can the property be Zone Property, or is it automatically excluded because it is not purchased by the Fund?

2. We request conforming (a) the tax treatment of sales of property by a Fund to (b) the sale of a Fund Interest after holding it for ten years. Thus, there would be no tax to the Electing Taxpayer even on ordinary income items.

3. We request conforming (a) the 10% and 15% basis step-up upon the sale of assets by a Fund between five and ten years to (b) the result of a sale of assets by a Fund after ten years, so the Electing Taxpayer would get the benefit of the step-up on such sale of assets that occurs between five and ten years.

4. We request conforming (a) the rules for the sale of assets by Sub-Funds that are pass-through entities to (b) the rules for the sale of assets by Funds.

5. Please confirm that all the requirements of IRC §1400Z-2(d)(3) only apply to Sub-Funds, and not to Funds.

6. We request clarification that a Fund or Sub-Fund will be treated as engaged in a trade or business (or active trade or business for a Sub-Fund) during the period of construction of property in a Zone, even if no income has been received. This issue is critical to almost all development projects, since no income is received until the property is completed and rented.

7. We request clarification that the requirement that vacant land be “improved by more than an insubstantial amount" within thirty months does not require the improvements to be completed within thirty months. This issue is critical to almost all development projects, since construction usually takes longer than thirty months.

8. We request clarification that an “inclusion event" does not necessarily mean that there has been a partial disposition of a Fund Interest for purposes of the ten-year holding period requirement.

9. We request clarification that the tax exemption for sale of a Fund Interest after ten years also applies if there is debt in excess of basis due to an allocation of debt by the Fund, since the reference to “including debt” in the proposed regulations is vague.

10. We request permitting the conversion of a Fund from a partnership to a corporation for tax purposes to not be either an “inclusion event” or a disposition of a Fund Interest for purposes of the ten-year rule. This issue is critical for companies that may go public.

11. Please confirm that the deferral election applies to recognized gain even if the taxpayer might have net operating losses or capital losses that would otherwise offset the gain, and that the 180-day period starts at the time the gain is recognized.

12. Please confirm that a taxpayer could loan money to a Fund in advance of the sale of an asset, and after the sale the taxpayer could invest in the Fund, with repayment of the loan.

13. Please clarify whether the end of year start date of the 180-day period for trusts applies to grantor trusts.

14. Please clarify whether the “amount invested” in a Fund can include a note issued by the Electing Taxpayer to the Fund.

15. Please clarify whether the “organizing documents” referred to in Form 8996 refers to the articles or to the operating agreement for an LLC.

16. Do Sub-Funds need to have any Opportunity Zone statement in their “organizing documents”?

17. Please advise on how long a Fund can fail the 90% test and still qualify as a Fund. Is there some outside date by which it is no longer treated as a Fund, and if so, when do the Electing Taxpayers pay tax on the Deferred Gain?

18. When are the assets of a Sub-Fund measured, since they don't file Form 8996, and how does the IRS monitor compliance with the 70% tangible asset test for Sub-Funds?

19. Please confirm that the calculation of new investment in existing buildings includes all costs that would be capitalized to the buildings, such as the cost of new fixtures and costs relating to getting permits or plans to use the buildings for a different purpose.

20. Please confirm that “unimproved land" includes improved land if the improvements are to be torn down.

21. Please explain why agricultural land does not qualify and what the relevant factors are for “abuse.”

Sincerely,

Schuyler M. Moore
Greenberg Gluster Fields Claman & Machtinger LLP
Los Angeles, CA