New Opportunity Zone Guidance

April 17th saw the release of a second set of guidance for the “Opportunity Zone” (OZ) program. As we noted in testimony to the IRS on February 14th, we remain concerned that the OZ program diverts needed tax revenue from public purposes and places this revenue in the hands of a mainly wealthy and white demographic unrepresentative of the US population as a whole. As the Hill Newspaper noted, the program has "drawn criticism from those who argue it will primarily benefit wealthy investors rather than residents of low-income neighborhoods." Today's regs do nothing to change this concern.

The regs released today benefit Opportunity Zone Funds (as opposed to residents). These funds are the financial vehicle used to make investments in Opportunity Zone areas. Today's regs are "designed to make it easier for funds to ensure that they are complying with a requirement that they have 90 percent of their assets invested in opportunity zones." In other words, the focus of IRS activity remains on investors, not community residents (despite the fact that all US citizens contribute to and pay for the IRS, not just wealthy and white real estate interests.)

Other points include:
  • Opportunity Zone "Funds will get additional leeway to invest capital on a more flexible timeline"
  • Opportunity Zone "Funds will have a 1 year grace period to sell assets and reinvest the proceeds, thus avoiding penalties intended to prevent funds from sitting on the cash."
  • Opportunity Zone "Funds will have more flexibility to include more than one investment in a fund. Investors will get special tax treatment if they’ve held their stake in the fund for at least 10 years, even if the fund didn’t own the asset for a full decade."
  • The requirement that OZ businesses generate at least half their gross income within their opportunity zone has been dropped. Now, "Treasury will allow businesses to qualify if at least 50 percent of the hours the employees work are within the zone, as long as it performs at least half of the its services within the area, or if there are significant management and operational functions present."
  • There is "no penalty if an investor dies and passes an interest in an OZ Fund to their heirs." Working capital "can be used for development of an operating business, not just a real estate project."
  • OZ Funds don't "have to take assets into account for purposes of the requirement unless the assets have been in the fund for at least six months. They also provide that if a fund sells an asset, it has up to 12 months to reinvest in a new appropriate investment."
In a nod to criticisms we and others leveled at the program on February 14th, Treasury requested "comments about how to best measure the economic impact taking place in the opportunity zones." During my testimony, I proposed two OZ program improvements: 1) I recommended regulations that would prohibit the President, senators, congressmen, and state governors from personally benefiting from the program; and 2) I suggested using the Ethereum blockchain to track and report Opportunity Zone investment social impact.

Looks like one of those suggestions got thru.

Note: there will be a hearing on these regs on July 9, 2019 at the New Carrollton Federal Building at 5000 Ellin Road in Lanham, Maryland 20706.

We'll be sure to raise these issues.

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