Novogradac’s Opportunity Zones Working Group Seeks Relief, Guidance in Face of COVID-19 Pandemic

Published by John Sciarretti, Karen Destorel on Monday, May 4, 2020
Journal Cover Thumb May 2020

In a recent letter, the Novogradac Opportunity Zones (OZ) Working Group submitted a request to the Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) seeking relief from certain provisions concerning the opportunity zones incentive due to the COVID-19 pandemic.

The OZ Working Group asked Treasury to provide relief under authority of Internal Revenue Code (IRC) Section 7508A, which is triggered by a federally declared disaster. The request also asks Treasury and the IRS to explicitly approve penalty relief provided for under the statute and certain extensions provided for under the regulations. Finally, the OZ Working Group asked that Treasury and the IRS make certain temporary modifications and clarifications to other regulatory guidance.

Deadline Extensions

The OZ Working Group letter cites authority for its extension requests under IRC Section 7508A, which grants the Secretary of the Treasury (Secretary) the authority to postpone certain deadlines for taxpayers affected by a federally declared disaster. The OZ Working Group perceives this authority was triggered by the president’s March 13 declaration of a national emergency, which includes his instruction to the Secretary to provide relief from tax deadlines under IRC Section 7508A. As of April 15, all states and a number of tribal governments have been officially declared federal disaster areas due to COVID-19, which demonstrates a correct presumption.

The OZ Working Group letter requests the following IRC Section 7508A relief:

  • A six-month extension to the end of the 180-day investment period for any capital gains in which the investment period otherwise would end during the incident period (defined by the Federal Emergency Management Agency as beginning Jan. 20, 2020, and continuing until further notice). 
  • A six-month extension to the option for qualified opportunity funds (QOFs) to disregard recently contributed property in determining compliance with the 90 percent investment standard by excluding (for up to 12 months), from both the numerator and denominator, any contributions that are held continuously in cash, cash equivalents or debt instruments with a term of 18 months or less that would otherwise be required to be included during 2020.
  • A 12-month extension to the 30-month substantial improvement period for property that is undergoing substantial improvement during the incident period, such that QOFs and qualified OZ businesses have a 42-month period to substantially improve such property.

Not long after the submission of the OZ Working letter, the IRS issued Notice 2020-23, which extended the 180-day deadline to invest capital gains in QOFs until July 15 for taxpayers whose deadlines originally fell between April 1 and July 15.  OZ Working Group members feel this extension is not nearly enough time and are hopeful that IRS provides for future extensions that allow for the start of the 180 period to begin after the declaration period.

In addition to the above requests, the OZ Working Group letter asks Treasury and the IRS to explicitly approve that taxpayers automatically qualify for the following disaster relief extensions provided for in the OZ regulations:

  • More time to reinvest. The OZ regulations provide that QOFs may receive up to an additional 12 months, for a total of 24 months, to reinvest proceeds from the return of capital or the sale or disposition of some or all of its qualified OZ property if the QOF’s plan to reinvest some or all of the proceeds is delayed due to a federally declared disaster.
  • Tolling for project delays. The OZ regulations provide that a qualified OZ business may receive up to an additional 24 months, for a total of 55 months, to consume its working capital assets under the working capital safe harbor if the qualified OZ business is located in an OZ within a federally declared disaster area. The OZ Working Group believes this extension also extends the maximum 62-month period for multiple working capital safe harbors to 86 months.

The OZ Working Group believes that its requests for IRC Section 7508A extensions and explicit regulatory approvals will enable QOF investors and QOFs to hit the pause button until the economic outlook is more certain rather than abandoning, redeeming or hastily making OZ investments. This relief will also give taxpayers additional time to get businesses up and running following the disaster period.

Reasonable Cause Exception

The OZ statute provides a reasonable cause exception to a penalty that would otherwise be imposed on QOF for failing to satisfy the 90 percent investment standard. The OZ regulations do not define “reasonable cause” for purposes of this exception. The OZ Working Group letter requests that Treasury and IRS explicitly provide that delays due to the COVID-19 pandemic be considered “reasonable cause.” Providing QOFs with this certainty is very important in the event that the requested deadline extensions are not granted or do not provide a sufficient time for investments to be made or businesses to get up and running.

Additional Requests for Relief

In addition to the requests outlined above, the OZ Working Group letter recommends that Treasury and the IRS make the following temporary modifications to OZ regulations to ensure OZ stakeholders can proceed with more certainty during periods affected by the COVID-19 pandemic.

  • Gross income safe harbors. Treasury and the IRS are asked to clarify that services that would normally have been performed within the OZ, but must now take place outside the zone due to the COVID-19 pandemic (as a result of stay-in-place and/or work-from-home orders), will temporarily be considered in compliance for the purposes of the 50 percent gross income requirement.
  • Intangible property requirements. Treasury and the IRS are asked to clarify that the use of intangible property that contributes to the generation of gross income for the trade or business that must take place outside of the OZ due to the COVID-19 pandemic be temporarily considered in compliance for the purpose of the intangible property requirement.
  • Cure period for qualified OZ businesses. Treasury and the IRS are asked to provide QOFs with an additional cure period equal to 12 months for each trade or business that causes a QOF to fail the 90-percent investment standard because of deficiencies caused by the COVID-19 pandemic.
  • Redemptions causing inclusion events. Treasury and the IRS are asked to clarify that a return of investment capital due to delays caused by the COVID-19 pandemic that are in excess of stock or partnership basis are considered an “inclusion event,” resulting in a new 180-day investment period, instead of a disguised sale or a disregarded transfer, resulting in a loss of a new 180-day period to reinvest the return of capital.

The OZ incentive has proven to be an effective tool to stimulate investment in distressed communities. It is critical that this incentive maintains its effectiveness during these uncertain times, especially because distressed communities are expected to be disproportionately impacted by the COVID-19 pandemic. The OZ Working Group’s requests, if granted, will go a long way to preserving this effectiveness by giving investors and QOFs additional time to make investments and giving businesses additional time to get up and running.

The OZ Working Group COVID-19 relief request, as well as previously submitted comment letters addressing a wide range of topics, are available online on the OZ Working Group webpage: Letters submitted on behalf of the OZ Working Group represent the collective input of member firms. Founded in 2016, the OZ Working Group includes investors, syndicators, lenders, community development entities, community development financial institutions, for-profit and nonprofit developers, consultants, law firms and other community development professionals. Members work together to suggest consensus solutions to technical and administrative OZ incentive issues and provide recommendations to make the OZ incentive more efficient in delivering benefits to the communities in which the QOZs are located.

For more information about becoming a member, please contact Karen Destorel at [email protected].