Group Seeks COVID-19 Relief From O-Zone Consistency Requirement

May 6, 2020

Hon. David J. Kautter
Assistant Secretary for Tax Policy
Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220

Hon. Charles P. Rettig
Commissioner
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224

Re: Request to Provide Relief from the Substantial Consistency Requirement of the Working Capital Safe Harbor.

Dear Assistant Secretary Kautter and Commissioner Rettig:

In our letter dated April 7, 2020, the Novogradac Opportunity Zones Working Group requested relief from certain provisions under the Internal Revenue Code (IRC) section 1400Z-2 and the regulations thereunder due to ongoing and future business impacts of the current COVID-19 pandemic. We are writing this letter to make an additional request to provide temporary relief from the consistency requirement of the working capital safe harbor for certain businesses operating in qualified opportunity zones (QOZ) that find it necessary to change their plans due to the pandemic.

The regulations provide that working capital assets held by the business are treated as reasonable in amount for purposes of IRC sections 1397C(b)(2) and 1400Z–2(d)(3)(A)(ii) for a period of up to 31 months.¹ To qualify for this safe harbor, the qualified opportunity zone business: (1) must designate in writing that the working capital assets are for the development of a trade or business, including when appropriate the acquisition, construction, and/or substantial improvement of tangible property in a QOZ; (2) 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; and, (3) the working capital assets must be used in a manner substantially consistent with the written designation and schedule.

Many entities have found it necessary to rework or dramatically alter their plans for the development of a trade or business in response to the COVID-19 crisis so they can prosper in the post-pandemic world. As a result, these entities run the risk that the Internal Revenue Service (IRS) would conclude they did not use their working capital assets in a manner “substantially consistent” with their initial written plan and schedule and, as such, would not be in compliance with the working capital safe harbor. Such failures could cause many qualified opportunity funds to fail to satisfy the 90-percent investment standard.

Therefore, we recommend that the Treasury Department and IRS provide relief to businesses by confirming that entities that modify or change their business plans and, as a consequence, their written plans and schedules, as a result of the impact of the COVID-19 pandemic, are not considered to fail the working capital safe harbor requirement to use working capital assets in a manner “substantially consistent” with their written plan and schedule.

Thank you for your consideration of this request. Please contact us if you have any comments or questions.

Very truly yours,

Novogradac & Company LLP
By Michael J. Novogradac, Managing Partner

Novogradac & Company LLP
By John S. Sciarretti, Partner
NOVOGRADAC
Dover, Ohio

cc:
Hon. Michael J. Desmond, Chief Counsel, Internal Revenue Service
Krishna P. Vallabhaneni, Tax Legislative Counsel, Department of the Treasury
Michael Novey, Office of Tax Policy, Treasury
Julie Hanlon-Bolton, ITA, Internal Revenue Service