Address Critical Issues in Opportunity Zone Regs, Group Says

December 27, 2018

CC:PA:LPD:PR (REG11542018), Room 5203
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

To Whom It May Concern:

We write as a broad coalition of stakeholders to provide comments in response to the Notice of Proposed Rulemaking, Investing in Qualified Opportunity Funds, issued October 29, 2018 (NPRM). We are grateful for the work of staff at the Department of the Treasury and Internal Revenue Service (Service) to produce the NPRM and prioritize guidance that will facilitate the use of the Qualified Opportunity Zone (QOZ) tax incentives to the benefit of designated low-income communities nationwide.

We applaud the approach that Treasury has taken on a number of key issues. For example, the proposed 31-month safe harbor at the QOZ Business level will help many QOF investors to structure investments and time the acceptance of capital. Additionally, we strongly support the proposed definition of substantially all pertaining to the amount of a QOZ Businesss tangible assets located in a QOZ. The proposed 70-percent threshold achieves the right balance to ensure that Qualified Opportunity Funds (QOFs) will not be discouraged from investing in QOZ operating businesses as Congress intended. Both of these rules should be finalized and, as detailed in the attached comments, Treasury should consider whether additional guidance in these areas is needed.

The proposed regulations address a range of other issues, including that all capital gains are eligible for the incentive; that partners may invest and defer partnership level gains in QOFs if the partnership does not; that debt of a QOF taxed as a partnership is not treated as an additional investment by the partners; and that QOF investors may hold their interests in QOFs and make the basis step-up election until 2047. Final regulations should include all of these proposed rules.

Looking beyond the scope of the current NPRM, the lack of clarity on several other key issues is preventing many QOFs from forming and significantly limiting the nature and extent of new investment in designated communities. As detailed in the attached comments, guidance is urgently needed in the following areas:

Final regulations should remove barriers that prevent multi-asset QOFs from forming so that capital can flow to QOZ communities. Guidance providing a reasonable period of time for QOFs to invest and reinvest funds, as well as clarity that investors tax benefits will not be compromised when a QOF sells and reinvests in qualifying investments, will allow QOFs to form and invest as Congress intended.

Final regulations should interpret the statute in ways that encourage and enable QOF investments in operating businesses, as well as real estate projects. Clarity is needed regarding how operating businesses can meet the gross income test to qualify as a QOZ Business, and how their property can meet the substantial improvement test to be considered QOZ Business Property.

Future proposed regulations should include reporting requirements that will provide basic information about investments in QOZ communities to inform investment and policy decisions.

Additional guidance is welcome on a host of other important issues, a few of which we touch on in the attached comments. However, without adequate guidance in the three key areas noted above, the QOZ tax incentive will fail to achieve the impact Congress intended. The attached comments make recommendations for the content of final regulations, but we urge Treasury to move quickly on these critical issues and, if more expedient, to do so in subregulatory guidance.

Finally, we request the opportunity for John Lettieri, President and CEO of the Economic Innovation Group, to speak on behalf of this coalition at the public hearing (REG-115420-18) on January 10, 2019 for approximately 10 minutes. His comments will concern the priority issues included in this enclosed comment letter.

Thank you for the opportunity to comment on this NPRM. We appreciate your consideration of the attached recommendations, and look forward to the issuance of final regulations and future rounds of proposed rulemaking that will facilitate much-needed investment in communities across America. If you have any questions about this letter, please contact John Lettieri at john@eig.org or (202) 839-3713.

Sincerely,

EIG Opportunity Zones Coalition