Council Seeks Regulatory Flexibility Analysis for O-Zone Regs

Public Comment on Proposed Rulemaking for Section 1400Z-2 of the Internal Revenue Code

Concerning the Regulatory Flexibility Act

Taxpayers who invest in opportunity funds and qualified opportunity businesses will have a significant future economic impact on a substantial number of U.S. small entities. Unfortunately, Treasury has certified that these proposed regulations, if adopted, would not have a significant economic impact on a substantial number of small entities that are directly affected by the proposed regulations.

Because of the certification inserted in the 1400Z-2 proposed regulation, the Small Business Administration (SBA) will not receive a Treasury regulatory flexibility analysis and the public will not have a chance to make a public comment on any findings. To justify this action, the Treasury Department and the IRS state that these funds will generally involve investments made by larger entities and investments are entirely voluntary. This response is in conflict with the White House's analysis of the revitalization impact represented by the Opportunity Zone legislation and statements made on the February 14 2018 Fact Sheet (https://www.whitehouse.gov/briefings-statements/president-donald-j-trump-expanding-entrepreneurial-opportunity-underserved-communities/):

• Opportunity Funds are Treasury-certified private investment vehicles that aggregate and deploy private capital into Opportunity Zones.

• Opportunity Zones exist to fund new and small businesses, develop blighted properties, invest in key local infrastructure projects, finance facility construction or refurbishment, and a number of other activities intended to revitalize and enhance local economic ecosystems.

BACKGROUND

The Regulatory Flexibility Act of 1980, as amended, is taken from Title 5 of the United States Code, sections 601–612. The Regulatory Flexibility Act was originally passed in 1980 (P.L. 96-354). The act was amended by the Small Business Regulatory Enforcement Fairness Act of 1996 (P.L. 104-121), the Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. 111-203), and the Small Business Jobs Act of 2010 (P.L. 111-240).

Congress found that failure to recognize differences in the scale and resources of regulated entities has in numerous instances adversely affected competition in the marketplace, discouraged innovation and restricted improvements in productivity. Consideration of alternative regulatory approaches to 1400Z-2, specifically those which do not conflict with the stated objectives of Section 1400Z-2, may further maximize the significant economic impact these proposed rules have on small businesses, small organizations, and small governmental jurisdictions. Therefore, it is the National Minority Technology Council's (NMTC) position that Treasury's certification mitigates the opportunity to solicit and consider flexible regulatory proposals to this important new IRS Code.

This notice of proposed rulemaking did not make available for public comment an initial regulatory flexibility analysis. Such an analysis would describe the impact of the proposed rule on small entities. This initial regulatory flexibility analysis or a summary would be published in the Federal Register at the time of the publication of general notice of proposed rulemaking for the rule but Treasury's certification precluded this process.

POLICY ANALYSIS

NMTC highly recommends Treasury and the SBA take immediate action to include an initial regulatory flexibility analysis to the Chief Counsel for Advocacy of the SBA. Additionally, Treasury must de-certify its position and consider the impact on the U.S. small business ecosystem. The NMTC estimates over 6,000 minority technology companies will be adversely impacted by this proposed ruling given Treasury's position that this rule only impacts large enterprises. Both Section 1400Z-1 and proposed rule 1400Z-2 will enable tens of thousands of small businesses an opportunity to create and earn a profit.

The new Section 1400Z-2 contains proposed regulations applicable to Qualified Opportunity Funds and guidance on Qualified Opportunity Zone Businesses. Section 1400Z-2 in conjunction with section 1400Z-1, seeks to encourage economic growth and investment in designated communities (Qualified Opportunity Zones) by providing Federal income tax benefits to taxpayers who invest in businesses located within these zones. This proposed rule, Section 1400Z-2, is an interpretative rule involving the internal revenue laws of the United States and is found published in the Federal Register for codification in the Code of Federal Regulations.

RECOMMENDATION

The missing regulatory flexibility analysis would allow specific public comment on significant alternatives to the proposed rule which accomplishes the defined objectives of the applicable statutes.

A flexibility analysis and subsequent public comments could provide alternatives such as:

SAMPLE REPRESENTATION OF QUALIFIED OPPORTUNITY ZONE BUSINESS AS A SMALL ENTITY

Treasury and the SBA could consider a flexibility analysis on how HubZone Certified Businesses located in an Opportunity Zone could be considered to be a Qualified Opportunity Zone Businesses. Below is a chart of the number of HubZone businesses listed in an SBA public database.

Significant Economic Impact

Below is an analysis of the Small Business Administration Dynamic Small Business Search (DSBS) database.

Reported metrics as of 12/27/2018 from a series of DSBS queries of Self-Registered HubZone-Certified Companies

HubZone (Active — Inactive)	HubZone (Active — All)	HubZone (Active — Minority)	HubZone (Active — Women)	HubZone (Active — Veteran)
30,316	6,555	540	2031	2233

CONCLUSION

As one of the country's fastest growth technology sectors, NMTC represents over 65,000 minority technology companies with total annual sales of over $100 Billion. NMTC has assessed this proposed rule (Section 1400Z-2) and Section 1400Z-1 both as high impact pieces of legislation. It is critical Treasury reconsiders its position to be in alignment with the White House's stated position that Opportunity Fund investments exist to, in part, fund new and small businesses. NMTC highly recommends Treasury and the SBA take immediate action to include an initial regulatory flexibility analysis to the Chief Counsel for Advocacy of the SBA. To accomplish this process Treasury must de-certify its position concerning the Regulatory Flexibility Act and consider the impact on the U.S. small business ecosystem.

Furthermore, more consideration is needed on how Treasury defines a Qualified Opportunity Zone Business.

Karl Cureton,
NMTC Chairman & CEO
National Minority Technology Council
Washington, DC