United States: Qualified Opportunity Fund Update: Likely Biden Administration Changes & New Rules For Non-US Investors & Working Capital Safe-Harbor

Sir Richard Branson famously said, "It's only by being bold that you get anywhere." This spirit certainly applies to the qualified opportunity fund ("QOF") rules enacted as part of the Tax Cut & Jobs Act of 2017.¹The QOF regime is a daring legislative venture that marries tax benefits to long-term investments in low-income communities.² And like all ventures into uncharted territory, there are likely to be unanticipated detours and adjustments along the way, especially following a change in leadership, such as the one that the United States just experienced. In this Legal Update, we'll explore changes to the rules likely to be pursued by the Biden administration and explain regulations proposed by the Internal Revenue Service (the "IRS") on April 14, 2021 (the "Proposed Regulations") that address how non-US investors can take advantage of the QOF rules and explain how a 24-month expansion of the working capital safe-harbor for federally declared disasters may be tweaked to work better.³

I. Likely Biden Administration Changes to the QOF Rules

During the 2020 presidential campaign, then-candidate Biden made three proposals to improve the operation of the QOF rules: (1) encourage partnerships between QOFs and non-profits or other community-oriented organizations, (2) direct the IRS to review tax benefits and ensure that benefits are directed to projects with clear community benefits and (3) enhance reporting requirements by QOFs to disclose the impact that the projects are having on local communities.⁴ These three themes are likely to form the basis of amendments to the QOF rules to be proposed by the Biden administration.

A. Encouraging Joint Ventures

At this time, we do not have any transparency as to how the Biden administration would propose to encourage joint ventures between local communities and QOFs. The Biden administration's "Build Back Better Agenda," which is the administration's economic recovery plan, provides that one goal for qualified opportunity zone ("QOZ") program reform would be to incentivize QOFs to partner with non-profit or community-oriented organizations, and jointly produce a "community benefit plan" for each QOF investment, with a focus on generating jobs for low-income residents and otherwise improving the finances of households within QOZs.⁵ It is not clear what kind of incentives could be offered to QOFs to partner with local community organizations. Given the overall tenor of the Biden proposals, however, we would not be surprised to see employment tax credits (or other credits) offered for employment of individuals who are resident in QOZs and meet certain income or other types of wealth caps. QOF investments do not offer any current income incentives; QOF benefits only apply to deferral of gains on the funds used to invest in the QOF and from dispositions of the QOF investment itself. There is significant room to amend the rules to provide employment tax incentives during the life of the venture.

B. Enhanced Reporting

The original version of the QOF legislation contained enhanced reporting requirements.⁶ However, these provisions were not included in the final version of the legislation. In November 2019, shortly following revelations that then-Treasury Secretary Steven Mnuchin allegedly manipulated the creation of a particular QOZ for personal benefit, Congressional interest in enhanced reporting resurfaced.⁷ Senator Ron Wyden, now the Chairman of the Senate Finance Committee, and Congressman Richard Neal, the Chairman of the House Ways and Means Committee, proposed identical bills to require enhanced reporting of QOF investments (together, the "Wyden-Neal Bills").⁸ These bills were ultimately not enacted. It is likely, however, given the positions of the sponsors as the heads of the two tax writing committees, that the Wyden-Neal Bills will serve as the model for any enhanced reporting legislation. We note the Economic Innovation Group, a coalition of QOF investment groups, has recently written Treasury to support enhanced reporting.⁹

It's also worth noting that the Wyden-Neal bills would have made substantive changes to the QOF rules. The announcements from the Biden administration, however, do not indicate support for these substantive changes (but nor do they reject them).

Under the Wyden-Neal Bills, QOFs would be subject to annual information reporting containing the names of their investors, the value of the property that they hold, their number of employees, and detailed information regarding real property held and improved by such QOF. QOFs would also be required to publish these reports on internet websites. In addition, persons who invest in QOFs would also be subject to significant reporting responsibilities. The failure to file either report would result in a $10,000 penalty.

Months before the introduction of the Wyden-Neal Bills, House Ways and Means Committee Members Ron Kind and Mike Kelly introduced HR 2593.¹⁰ HR 2593 likewise would have required increased reporting by QOFs. HR 2593 would have asked QOFs to provide essentially the same information as would have been required in the Wyden-Neal Bills and the basic reporting requirements follows those bills. This legislation also would have required disclosure of the business conducted by the QOF and certifications as to compliance with the QOF rules. HR 2593 proposed penalties of $500 per day for each day late that the reports were filed, subject to a $200,000 cap. HR 2593 did not contain provisions for investor reporting.

Thirdly, Senator Corey Booker proposed a bill (S. 1344) that would have required the Treasury Department to provide enhanced reporting to Congress on QOFs beginning five years after passage of the bill.¹¹ In contrast to the Wyden-Neal Bills and HR 2593, S. 1344 did not place explicit reporting requirements on QOFs. Instead, it more closely hewed to the provisions of the original QOF legislation that were deleted. Under S. 1344, the IRS would have been authorized to specify information that it would collect from QOFs to enable the IRS to make its required reports.

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*  Mark Leeds (mleeds@mayerbrown.com; (212) 506-2499) and Stephanie Wood (swood@mayerbrown.com; (212) 506-2504) are tax lawyers in the New York office of Mayer Brown LLP. Mark and Stephanie regularly assist clients on structured qualified opportunity fund investments.

Footnotes

1 P.L. 115-97, § 13823.

2 For our prior coverage of the QOF rules, please see https://www.mayerbrown.com/en/perspectivesevents/publications/2020/04/irs-updates-qualifiedopportunity-fund-regulations-on-april-1-2020, https://www.mayerbrown.com/en/perspectivesevents/publications/2019/12/irs-issues-final-qualifiedopportunity-fund-regulations, https://www.mayerbrown.com/en/perspectivesevents/publications/2019/12/irs-issues-final-qualifiedopportunity-fund-regulations, https://www.mayerbrown.com/en/perspectivesevents/publications/2019/04/mayer-brown-analyzessecond-set-of-qualified-opportunity-fund-regulations, and https://www.mayerbrown.com/en/perspectivesevents/publications/2018/08/gain-deferral-using-qualifiedopportunity-zone-inv.

3 REG-121095-19.

4 Curry, Biden Targets O-Zones for Reforms in Racial Economic Equity Plan (Tax Notes doc 2020-28905) (July 29, 2020).

5 The Biden administration's "Build Back Better Agenda" can be found at https://joebiden.com/racial-economic-equity/ .

6 See Joint Explanatory Statement of the Committee of Conference (HR 1), p. 400 (2017).

7 Cumings, Wyden and Dems Launch Multi-Prong Crackdown on O-Zones (Tax Notes doc 2019-42291) (November 7, 2019).

8 Copies of the Wyden-Neal Bills are available at Tax Notes Document Services (2019-42254).

9 See comment letter from the Economic Innovation Group to Mark Mazur, deputy assistant secretary policy, Department of Treasury, re: Recommendations for Legislative Regulatory Modifications to Opportunity Zone Incentive (March 11, 2021).

10 H.R. 2593 - 116th Congress: To require the secretary of the Treasury to collect data and issue a report on the opportunity zone tax incentives enacted by the 2017 tax reform legislation, and for other purposes. A copy of HR 2593 is available at Tax Notes Document Services (2019- 42268).

11 S. 1344 - 116th Congress: A bill to require the secretary of the Treasury to collect data and issue a report on the opportunity zone tax incentives enacted by the 2017 tax reform legislation, and for other purposes.

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