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Law Firm Seeks Guidance, Clarity Under O-Zone Regs

DEC. 28, 2018

Law Firm Seeks Guidance, Clarity Under O-Zone Regs

DATED DEC. 28, 2018
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December 28, 2018

Associate Chief Counsel (Income Tax and Accounting)
Attention: Ericka C. Reigel and Kyle C. Griffin
Internal Revenue Service
1111 Constitution Avenue, N.W.
Washington, DC 20224

CC:PA:LPD:PR
(REG-115420-18)
Room 5203
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

In Reference To: Comments on REG 115420-18 — Investing in Qualified Opportunity Funds

Dear Ms. Reigel and Mr. Griffin:

I appreciate the opportunity to provide feedback regarding the above-referenced rulemaking under new Code Section 1400Z, as published in the IRB on October 29, 2018. The proposed regulations, as well as Revenue Ruling 2018 — 29, are very helpful and should spur positive development and redevelopment of low income areas of the southeastern states in which we practice.

Vacant Land and Abandoned Structures — Original Use and Use in a Qualified Opportunity Zone (QOZ)

We note that often an opportunity zone will have land available for development in which there may be (a) one or more structures which have been abandoned, decaying, damaged, or condemned; or (b) a tract which is physically larger than that necessary for a use which might be completed within 30 months, but which might over time be developed over a longer time frame as the market is able to absorb the first phase of development. In addition, many of the designated tracts in South Carolina, where we practice, include extensive areas of agricultural land in which the highest and best use might be in tree groves or timber (nuts, fruit, lumber, pulp) which are often considered to be part of the land. We ask that the Service consider the following questions:

(1) If a structure has been built upon land which has never been placed in service, might its “original use” be with the Qualified Opportunity Fund which acquires it from a non-related party?

(2) If a structure (picture a closed textile mill in the Carolinas) has been abandoned, destroyed by fire or other casualty, condemned, or otherwise taken out of service and is acquired by a Qualified Opportunity Fund from a non-related party for use as a retail, office, residential rental, or other completely new use, might its “original use” be with that Fund?

(a) Does it matter how long the property has been out of service prior to its acquisition by the Fund?

(b) In the case of damaged property, does the extent of the damage matter?

(3) If a parcel of 10 acres is developed with 5 acres used for a qualified use (picture a 144 unit apartment complex), and the other 5 acres held for future development of a phase two, will the phase two acreage be treated as used in the QOZ prior to the future development?

(a) Does it matter if the phase two acreage is used as a playground, overflow parking, or other overflow use?

(b) If the timber on the 5 acre parcel is cut and sold to create the playground or parking area, could that income disqualify the Fund under the income test?

(4) Can the acquisition of vacant land and improving it for crops, timber, or nursery/grove use constitute an “original use”?1

Substantially Used, Substantially All, and a Substantial Portion

We note that many other commentators have requested more specific guidance in the form of either bright-line tests or examples regarding the statute's somewhat confusing use of various forms of a substantiality test for the improvement of property, the time during the holding period, the location of the property within a QOZ, and the portion of the property used (as for intangible property). Many parcels of property which are economically or geographically integrated can straddle a boundary line, and additional guidance would assist Funds in dealing with this issue. In addition, intangible property used by a Fund can include assets, such as trademarks, licenses, and the like which are nationwide or worldwide in scope, (picture a hotel flag or reservation system for a major chain), whose use might be quite substantial in importance for the use in the QOZ, but the portion of the use might be quite insignificant compared to the total annual use of the intangible property. Finally, many an opportunity zone property is economically depressed because the infrastructure in its location is inadequate or nonexistent. Additional guidance regarding the cost of improvements necessary to connect the infrastructure, such as utilities, roads, etc. to the QOZ would be helpful.

Qualified Opportunity Fund/LLCs/LLC owned by two spouses

We request clarification that a limited liability company owned by two spouses in a noncommunity property state which has chosen the default tax status of a partnership filing form 1065 may elect qualified opportunity fund status even though the two spouses file as married filing jointly on their form 1040. While we realize that the Service might believe that this question is related to a particular client situation, we assure you that this question has been raised by virtually every client and fellow practitioner with whom we have discussed the requirements of the statute for a qualified opportunity fund.

We appreciate the helpful efforts the Service has made toward making this complex but well-intentioned legislation more usable by the development and fund sponsor community, and look forward to additional guidance in the future.

Sincerely,

Richard E. Marsh, Jr., Member and Manager
MARSH & HOOGLAND, PLLC
Charlotte, NC

FOOTNOTES

1We note that the Florida Bar Tax Section has already raised this question more specifically in paragraph 7 of its letter of November 16, 2018, and we join in its concern.

END FOOTNOTES

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