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What does the “anti-abuse rule” mean in practice?

The "anti-abuse rule” seems to give regulators the power to effectively cancel or suspend OZ benefits for transactions they don’t like. Is that right, and do we have any idea how or in what situations this rule might actually be applied? Have there been any instances of the anti-abuse rule actually being used?

  • John Wegmann
    August 10, 2019

    A broad anti-abuse rule allows the IRS to recast any transaction intended to achieve a tax result inconsistent with the purpose of the statute. In this case, the purpose of the statute is to encourage economic growth and investment in designated distressed communities. The regulations specifically address the desire to prevent “land banking” (hoarding land). I would argue that investors pursuing this practice might want to hoard for the purpose of selling to a QOF and not even hold the land long enough to qualify for benefits. The QOZ program was designed to foster new investment; thus, any machinations directed at obtaining QOF designation for pre-existing investments may be frowned upon and subject to challenge. Given the arbitrariness of provisions within the statue, abuse may be difficult to prove. I am not aware of any anti-abuse enforcement actions thus far in this new area of the tax law.

  • Darryl Steinhause
    August 09, 2019

    There are anti-abuse rules throughout the code. These rules are primarily intended to stop investments that could arguably be included but clearly do not meet the intent of the provision.

  • Maria De Los Angeles Rivera
    August 07, 2019

    It is expected IRS will address the anti-abuse issues on a third set of regulations. It is to early to have any practical experience on the application of this by authorities.

  • Scott McIntosh
    August 06, 2019

    More clarity on the anti-abuse rules is expected in the next round of regulations. I'm not aware of any instances where the IRS has used its anti-abuse authority to date.

  • Blake Christian
    August 05, 2019

    Many commentators during the OZ regulation public hearings asked Treasury to add some guidance so taxpayers know what constitutes situations that would trigger their anti-abuse jurisdiction. Since the purpose of the OZ statute is pretty broad and flexible, many commentators believe the anti-abuse threat may be hard to apply in cases where the primary purpose was to complete a project or start a business in an OZ. Still, care should be exercised and the taxpayer/fund's purpose for the investment and structuring should be fully documented. This placeholder was put in to give the IRS latitude to attack all or part of a transaction that was designed to circumvent the intent of the law. I expect we will get more guidance soon.