IRS Issues Guidance on Qualified Opportunity Zones

By:  Amanda Wilson

The 2017 Tax Cut and Jobs Act included significant new tax benefits for investments in qualified opportunity zones. Specifically, taxpayers can defer tax recognition on capital gains when the gains are reinvested in a qualified opportunity fund, which is a partnership or corporation that invests in qualified opportunity zones. In addition, the gains from the investment in the fund can be permanently eliminated if the investment is held for at least 10 years.

Qualified opportunity zones are a new concept, and tax practitioners and investors have been eagerly awaiting guidance on how these new rules will be implemented. The IRS released its first round of guidance on Friday, in the form of proposed regulations and a revenue ruling. This guidance clarified several important issues. For example, qualified opportunity zone property includes tangible property if the qualified opportunity fund substantially improves tangible property located in a qualified opportunity zone. It was unclear what this meant in the context of property such as a building. Revenue Ruling 2018-29 answers this question by providing that substantial improvement occurs when the cost of the improvements is equal to at least the adjusted basis in the building, rather than requiring the improvements to cost at least the adjusted basis in the building and the underlying land. In addition, the qualified opportunity fund is not required to separately substantially improve the land upon which the building is located.

The proposed regulations also clarify that a qualified opportunity fund does not need to be a newly formed entity, and that only capital gains qualify for this new tax regime. The regulations also clarify that 100% gain elimination (for gains occurring from the investment in the fund) is available if the investment is held for at least ten years, even if the designation of an opportunity zone expires prior to the ten year anniversary of the investment. This last piece of clarification addressed a significant concern of many tax practitioners, as the designation of all of the current opportunity zones expires December 31, 2028. The regulations also provide that taxpayers can generally rely on the proposed regulations at this time.

The regulations leave many questions unanswered for now as the regulations reserved several important issues, including what constitutes the active conduct of a trade or business and . Stay tuned for further developments as additional guidance is issued.

Treasury Withdraws Problematic Section 2704 Discount Regulation

By:  Amanda Wilson

As previously discussed (here), the IRS and Treasury identified in July eight Obama era tax regulations that are burdensome on taxpayers.  In early October, Treasury announced that it proposed to repeal or revise these regulations.  It has now taken its first concrete step in doing so, by withdrawing the Section 2704 proposed regulations released last year.  These proposed regulations limited the availability of the lack of liquidity discount when valuing interests in family controlled corporations and partnerships for estate, gift, and generation skipping tax purposes.  This proposed regulation was very unpopular among tax practitioners and its withdrawal is viewed as a positive change.

Treasury To Repeal/Revise 8 Burdensome Regs

By:  Amanda Wilson

As previously discussed (see prior post here), the IRS and Treasury identified in July eight Obama era tax regulations that are burdensome on taxpayers.  The next step for Treasury was to determine what to do with these regulations, and today we got Treasury’s answer.

Treasury proposes to withdraw entirely:

  • Proposed regulations under Section 2704 limiting lack of marketability discounts of an interest for estate, gift and GST taxes.
  • Proposed regulations under Section 103 defining a “political subdivision” of a State that is eligible to issue tax-exempt bonds.

Treasury proposes to revoke in part:

  • Final regulations under Section 7602 on the participation of certain persons by the IRS in a summons interview.  Treasury proposes to revise the regulations so outside lawyers would no longer be allowed to participate in examination, but allow outside subject-matters experts to participate.
  • Temporary and proposed regulations under Section 752 dealing with allocation of liabilities for disguised sale purposes and treatment of bottom-dollar guarantees.  Treasury proposes to revoke the rules governing how liabilities are allocated for purposes of disguised sale rules and reinstating the prior regulations.  However, Treasury proposes to retain the regulations as it relates to bottom-dollar guarantees.
  • Final and Temporary regulations under Section 385 dealing with characterization of related-party debt as debt or equity for tax purposes.  Treasury proposes to revoke the documentation regulations, but retain the distribution regulations pending enactment of tax reform.

Treasury proposes substantially revising:

  • Temporary regulations under Section 337(d) dealing with transfers of property by C corporations to REITs and RICs, including rules designed to prohibit/limit tax-free spinoffs of REITS and RICs.
  • Final regulations under Section 987 dealing with currency gains or losses with respect to a qualified business unit.
  • Final regulations under Section 367 dealing with the treatment of certain transfers of property to foreign corporations.

The full report can be found here.




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