The IRS issued Notice 2021-10 on Jan. 19, 2021, providing yet another round of “extension relief” specifically targeted at Qualified Opportunity Funds (QOFs) and investors affected by the ongoing COVID-19 pandemic.Basically, the IRS took an eraser to its earlier Notice 2020-39 and replaced the date “December 31, 2020” with respect to extensions on five key deadlines or timing requirements and provided new deadlines that push the relief out to either March 31, 2021, in the case of (1) the 180-day investment period for investors and (2) the 30-month “substantial improvement” period for QOFs and QOZBs; or to June 30, 2021 in the case of (3) penalty relief for the 90% Investment Standard, (4) the date by which funds invested in a QOZB get an “extra” 24 months to expend working capital assets, thereby pushing the maximum period to 55 months and up to 86 months in the aggregate, and (5) the date that if included in a 12-month reinvestment period, the QOF received up to an additional 12 months, to a maximum of 24 months, within which to satisfy the reinvestment requirements.

1.This COVID extension relief gives investors yet another reprieve from having to pull the trigger on OZ investment decisions, but, from the perspective of people with a strong interest in seeing the OZ Act succeed, there is a concern that viable transactions are being delayed for too long. The original OZ deadlines were very demanding and were intended to push this forward in a relatively aggressive fashion, and there might be concern that the repeated tolling of deadlines could eventually take a toll on the program.

2.Regarding the 180-day investment requirement: A gain recognized by a partnership on Jan. 1, 2019 can be pushed by the partnership rules into a deadline that is past April 1, 2020, and therefore can now be satisfied by investing on March 31, 2021. The investment period can be stretched out for as long as 821 days – and that is just to get gain invested into the QOF! Add on the periods for stretching the investment by the QOF into a QOZB, and then two back-to-back 31-month working capital safe harbors, and it is a long period to time.

3.That said, there are a lot of investors who put money into a QOF in 2018 and 2019 with a good-faith intention to find a suitable investment – and COVID has really knocked many initial OZ projects sideways. Who is eager to invest money into a new restaurant project right now? Or into an expensive new city center office space after COVID has trained the entire US work force how to work from the dining room table? Maybe these projects could still be or become good investments, but the natural instinct of an investor is to wait and see.

4.Hopefully, all these good projects in needy Opportunity Zones will one day get built.

5.These are hard tradeoffs to be sure, so cross your fingers, toes and maybe even eyes and hope that COVID gets knocked out by the vaccines and that these extensions can become mercifully unnecessary.

What does Notice 2021-10 mean for investors and funds:

•Extends the time period for investors to invest into Qualified Opportunity Funds: If the last day of the 180-day investment period within which a taxpayer must make an investment in a QOF in order to satisfy the 180-day investment requirement falls on or after April 1, 2020, and before March 31, 2021, the last day of that 180-day investment period is postponed to March 31, 2021.

•Extends the 30-month substantial improvement timeline: For purposes of the substantial improvement requirement with respect to property held by a QOF or qualified opportunity zone business, the period beginning on April 1, 2020, and ending on March 31, 2021, is disregarded in determining any 30-month substantial improvement period (that is, the 30-month substantial improvement period is tolled during the period beginning on April 1, 2020, and ending on March 31, 2021).

•Extends the time period to comply with the 90% Investment Standard for QOFs: In the case of a QOF whose (i) last day of the first 6-month period of a taxable year or (ii) last day of a taxable year falls within the period beginning on April 1, 2020, and ending on June 30, 2021, any failure by that QOF to satisfy the 90% investment standard for that taxable year of the QOF is due to reasonable cause. Thus, any failure by that QOF to satisfy the 90% investment standard for that taxable year is not taken into account for purposes of determining whether the QOF or any otherwise qualifying investments in that QOF satisfy the OZ requirements.

•Extends the time period afforded under the working capital safe harbor provision: As a result of the Emergency Declaration, all qualified opportunity zone businesses holding working capital assets intended to be covered by the working capital safe harbor before June 30, 2021, receive not more than an additional 24 months for a maximum safe harbor period of 55 months total (not more than 86 months total for start-up businesses), to expend the working capital assets of the qualified opportunity zone business.

•Extends the 12-month reinvestment period: If any QOF’s 12-month reinvestment period includes June 30, 2020, that QOF receives an additional 12 months for a maximum reinvestment period of not more than 24 months total, to reinvest in qualified opportunity zone property some or all of the proceeds received by the QOF from the return of capital or the sale or disposition of some or all of the QOF’s qualified opportunity zone property.

One of the key skillsets for operating in the OZ space from the very outset was figuring out how to “kick the can down the road,” and buy additional time for investors. The IRS was relatively accommodating, adopting various complicated (and mostly favorable) ways to count the 180-day investment period; adopting a rule that the first six-month period that funds were invested in a QOF was a grace period and the 90% Investment Standard only began to apply to the next six-month period; and, of course, the 31-month working capital safe harbor that was eventually doubled to 62 months in final regulations.

Now, with the series of IRS COVID extensions added on, you can pretty much kick your particular can the entire length of Interstate 95. This might cause that some taxpayers could abuse these extensions by pushing investment decisions off for literally years, and then choose to liquidate rather than go forward – and possibly use the OZ Act as a subterfuge to defer gain recognition for years without ever investing a penny. To be sure, pushing gain forward may be less of a bargain given the tax policies by the Biden Administration, but the fact is that the IRS has always been hypersensitive to the potential for abuse under the OZ Act, and even those of us who strongly support the OZ incentives acknowledge that it calls for a significant amount of integrity in order for the program to work successfully and achieve its very worthy social and economic goals.

 Again, the best solution is to make COVID go away – thank you Operation Warp Speed for getting the vaccines to market in record time! – and then put everyone back to work.

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