Call to Increase Opportunity Zone Program Transparency | Obermayer Rebmann Maxwell & Hippel LLP

Since its inception, the Opportunity Zones program has been criticized for its lack of transparency and reporting requirements. The original version of the law provided for reporting requirements, but some of these requirements, in particular the public reporting requirement, were removed during the budget reconciliation. This lack of transparency has raised concerns that the Opportunity Zone program allows wealthy investors to avoid significant taxes without achieving the program’s goal – to spur economic development and job creation in economically distressed communities. .

The Opportunity Zone program allows investors to invest capital gains in qualified opportunity funds (“QO funds”) within 180 days, and to defer tax on such gains until December 31, 2026. It also allows any appreciation of investments held in the QO Funds for more than 10 years to be exempt from tax.

In October, the United States Government Accountability Office (“WAG”) released a report indicating that more than 6,000 QO funds have invested approximately $29 billion in qualified Opportunity Zone properties through 2019 and that approximately 18,000 taxpayers have invested in QO funds alone. in 2019. The GAO report also notes that some projects would have been completed even without the tax incentives provided by the Opportunity Zone program.

This GAO report caught the attention of Senate Finance Committee Chairman Ron Wyden, D-Ore. Accordingly, it launched an investigation into the operation and effects of QO Funds by asking 7 investment firms, including SkyBridge Capital and Baker Tilly, to provide detailed details of their investments in QO Fund. Senator Wyden was concerned that the Opportunity Zone program’s lack of transparency could allow wealthy investors to use the program to subsidize luxury real estate projects. One project specifically named by Senator Wyden was the “superyacht marina” in Palm Beach, which would have included the construction of two towers of luxury waterfront apartments with 399 units, including a heated swimming pool the size of a complex overlooking the intercoastal waterway, private pools for the penthouse floors and a 120-foot day dock with twelve 20-foot boat ramps.

Senator Wyden also introduced legislation to reform the Opportunity Zone program, including provisions requiring annual public information reports from QO funds and annual IRS filings from fund investors. This legislation would also prohibit QO funds from investing in casinos, luxury apartments and stadiums, and tighten existing rules to ensure that tax incentives are only available for new investments in struggling communities and not for projects already underway.

Under current law, an investor is already required to report annually to the IRS on Form 8997 any investment and disposition of QO funds, as well as any deferred capital gains. According to a recent IRS alert, a taxpayer’s failure to file Form 8997 will result in a “rebuttable presumption of an inclusion event” that will terminate qualifying investment in a QO fund, which could result in taxation of any deferred gain. In addition, under current law, an entity that elects to be a QO fund must report annually to the IRS on Form 8996 that the QO fund meets the required investment standard. Senator Wyden’s legislation would not only impose additional reporting requirements on the IRS, but also public reporting requirements.

The GAO investigation highlighted the lack of transparency and reporting requirements of QO funds as an area of ​​concern for some lawmakers. It remains to be seen whether this call for more transparency will lead to changes in the law. For now, taxpayers looking to invest in QO funds that are planning large “luxury” projects should be aware of Senator Wyden’s ongoing investigation and the risk of such projects being exposed publicly.

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