Promote Planning to Opportunity Zone Participants, Attorney Says

November 5, 2018

Charles P. Retting, Commissioner
Internal Revenue Service
Office of the Commissioner
1111 Constitution Avenue, NW
Washington, DC 20224-0002

Opportunity Zone Provisions

Dear Commissioner Retting:

I am certain that the IRS is expediting desperately needed guidance for IRC Section 14002-2 (the "Opportunity Zone Provisions"). These provisions are laudable and implement a logical approach to the incentive. In providing this guidance, however, I respectfully request that the IRS consider strong measures that promote planning before building. The "ready-fire-aim" approach will undermine the incentive and may backfire tragically.

IRC Section 14002-2(d)(2)(D)(ii) allows a 30-month period for construction of substantial improvements. While many may wish that this period were longer, 30-months seems like a reasonable compromise among the various issues. However, I suggest that future notices, regulations, or other guidance ("Guidance") create a pre-construction period of up to one year, which I will refer to as the FUND ("Fulfilling Urgent Needs Determination") Period. The FUND Period would be a period in which a qualified opportunity fund ("QOF"): (i) consults with a designated state agency ("DSA") regarding the urgent needs of a particular opportunity zone; (ii) engineers and designs a project to meet one or more of these urgent needs; and (iii) receives a certificate of endorsement from the DSA for the project.

Initially, the Guidance might allow the state agency in charge of low-income housing credits to be the DSA until a state designates a new DSA. Because low-income housing may not be the most urgent need and will not be the only urgent need in opportunity zones, the Guidance should urge each state to designate or create as soon as possible a DSA that has the resources to take a comprehensive view of the relevant needs. If possible, the DSA should publish its tentative list of urgent needs for each opportunity zone in order of priority.

The FUND Period would last from the date of the OSF's initial contact with the DSA until the earlier of the date of the certificate of endorsement or one year. To encourage OSFs to follow this procedure, the Guidance should provide, at a minimum:

Even if the DSA does not certify the project, the FUND Period should still be valid if the QOF diligently pursued the certification. Only if the DSA determines that the certification was not diligently pursued and provides that determination to the IRS (a "Negative Determination") is the FUND Period not valid.

Although I enjoyed the movie Field of Dreams, "if you build it, they will come" is not what Congress intended or the appropriate approach here. We remember the see-through office buildings in the mid-80's that were vacant for years and that resulted partially from too rapid cost recovery. A tax incentive that creates wasteful spending, or at least, misguided spending is a wasteful provision.

Besides the two minimum incentives previously mentioned, the Fund Period, or some analogous approach, is critical and should receive greater encouragement. If the project related to the FUND Period results in at least 90% of the QOF's assets, then for a taxpayer investing in that QOF, the five-year, seven-year, and 10-year periods in IRC Sections 1400Z-2(b)(2)(B)(iii); (b)(2)(B)(iv); and (c), respectively, should include the FUND Period occurring before such investment.

Because of the nature of this last incentive, it may be impossible to adopt through Guidance but may require additional congressional action. However, I urge you and the IRS to promote its enactment. Although laudable, the Opportunity Zone Provisions may create a rush to construct rather than an incentive to plan thoroughly.

Kurt R. Magette
Senior Counsel
Spotts Fain
Richmond, VA

c:
Erika C. Reigle, Esq.
Office of Associate Chief Counsel Income Tax & Accounting (via email)