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Investors Unearth Worrying Concerns in Opportunity Zone Tax Treatment

By Miriam Rozen February 19, 2019

About 200 people — advisory firm owners and consultants, fund managers, and advocates for impoverished communities nationwide — packed into an Internal Revenue Service auditorium in Washington, D.C., Thursday. Concerned about fire hazards, IRS officials said they had to turn others away at the door.

The big crowd’s objective: to implore IRS officials to refine, modify and, in some instances, bolster regulations governing the new Opportunity Zone tax-sheltering program aimed at spurring investment in 8,700 neighborhoods nationwide which the federal government has designated as economically distressed.

Scott Dinwiddie, associate chief counsel for the IRS, began the hearing by conceding that the proposed regulations “are not particularly specific” so far and “leave a great deal of questions.”

At the hearing, most of the advisory and fund management industry representatives — as well as some of the designated communities’ advocates — sought to have IRS officials tweak the rules so investors have more options and also make significant additions when the agency releases a second tranche of proposed regulations later this year.

“The rule should provide sufficient flexibility for opportunity funds to reinvest interim gains without incurring a penalty or triggering a taxable event,” Stefan Pryor, Rhode Island’s Secretary of Commerce, who represents a coalition of State Economic Development Executives, told the IRS officials.

“Flexibility” was the watchword for many of the 23 speakers who followed Pryor.

The financial advisory firm representatives and fund managers at the IRS podium argued repeatedly that more flexibility in the rules would trigger more Opportunity Zone investments — not just in real estate, but also in operating businesses.

We see this program possibly having negative social returns; it’s based on greed and the facilitation of greed.
William Michael Cunningham
Creative Investment Research

The Opportunity Zone program, established when President Donald Trump signed his 2017 Tax Cuts and Jobs Act two years ago, provides a potentially lucrative tax incentive for investors in the designated communities. With the program, investors may be able to defer capital gains taxes — and even avoid some entirely — if they buy stakes for the long haul in the designated communities. To achieve the maximum tax benefits, the investors are required to make a 10-year commitment and to receive maximum tax sheltering benefits, investors must purchase their stakes by a December 2019 deadline.

The majority of Opportunity Zone investing so far has been in real estate, even though Congress intended the law to trigger investment in operating businesses, as many of the speakers stressed.

John Lettieri was among those to make that point. He is president and co-founder of the Economic Innovation Group, a nonprofit started by Napster entrepreneur and ex-Facebook president Sean Parker. The EIG lobbied congress for the Opportunity Zone program and helped ensure its passage as part of the 2017 Tax and Jobs Act signed by Trump in December two years ago.

During his turn at the IRS auditorium podium, Lettieri singled out the proposed regulatory requirement that 50% of the revenues of a business, staked by a Qualified Opportunity Zone fund, come from local sales in the designated neighborhood. That location-specific rule for sales has deterred investors who otherwise would consider Opportunity Zone-located business development, Lettieri told the IRS officials.

We have to focus on this as investors to make this work.
Paul Saint-Pierre
PSP Advisors

“We have to focus on this as investors to make this work,” Paul Saint-Pierre, a principal advisor for PSP Advisors, which provides alternative investment due diligence research and other fund advisory services, told the IRS officials.

For retail investors in multi-asset Qualified Opportunity Funds ,“the tax compliance question is beyond their control,” Saint-Pierre said. Therefore, IRS officials need to create a strong culture of compliance by making the rules straightforward.

Saint-Pierre, and others, also argued that the IRS needs to craft rules that provide investors who are at the end of their 10-year period required for the capital gains tax exemption with an avenue for realizing those gains without having to sell their Opportunity Zone assets all at once. Without such an allowance, Opportunity Zone fund investors become likely victims of “predatory buyers” and may take steep discounts when they unload. Saint-Pierre envisions rules that allow Qualified Opportunity Zone fund managers, at the end of the 10-year period, to sell off assets and offer fund investors tax-free dividends. He wants the IRS to protect the “taxpayer/investor’s long-term pursuit of forgiveness of taxation on capital gains until their ultimate disposition of investments in Qualified Opportunity Funds,” Saint-Pierre told IRS officials.


At the IRS hearing, Opportunity Zone communities’ advocates had additional objectives. They asked for more rules requiring diversity on Qualified Opportunity Zone funds’ boards and among those funds’ asset classes. They also sought more rules aimed at protecting targeted neighborhoods from gentrification’s downsides — in particular, rising prices pushing out current residents.

“We see this program possibly having negative social returns; it’s based on greed and the facilitation of greed,” warned William Michael Cunningham, the founder of Creative Investment Research, an organization that helps foster investment opportunities in markets populated by minorities and women.

Stockton Williams, the executive director of the National Council of State Housing Agencies, cautioned that the Opportunity Zone program could lead to affordable housing losses. To combat that likelihood, he recommended IRS officials in their second tranche of proposed regulations add a requirement that Opportunity Zone investors replace any affordable housing lost as a result of their investments.

Notably, several speakers — both the designated communities’ advocates and the investment world’s representatives — welcomed the notion of IRS officials adding a jobs requirement as an alternative to the geographic location of a business’ sales requirement in the existing proposed rules. No jobs requirement currently exists in the proposed regulations, so such an addition would command attention.