On-Demand: New Qualified Opportunity Zone Guidance Released

So fast forward to April 17th, 2019, when the treasury department and Internal Revenue Service issued the second round of proposed regulations that we were waiting for. So as we know, all 50 states, the five US territories in Puerto Rico, designated qualified opportunity zones. And taxpayers who invest in these zones through qualified opportunity funds and qualified opportunity businesses, have the potential to receive significant benefits provided certain provisions are met. These benefits include a deferral of current capital gains through the tax year ending December 31st, 2026, assuming the investment in new qualified funds or business is not disposed of prior to that date, or reduction in the deferred capital gain of 10% or 15% depending upon holding periods and complete step up the basis a removal of capital gain treatment on the appreciation of the qualified opportunity investments if held for more than 10 years.

So one more item to mention with regards to the history of this incentive is that the intention was for this to be used in conjunction with other tax incentives already in use such as R&D credit, new markets credit and the low income housing credit. So we finally have answers. So for the past six months, I can easily say that the phrase that's been heard more often than not when speaking about opportunity funds or opportunity businesses is, I don't know, we're still waiting on further guidance or I don't know, we're still waiting on further clarity. And well, we now have those answers that are providing us with the additional guidance and some clarity.

It's only been a short time since the release of the second proposed regulations. However, I know I've had, and I would imagine others have as well, I have had conversations with taxpayers and clients who are now rethinking this initiative in some of the benefits. So we have clients who before this release, stated that there was way too much uncertainty, not only regarding the potential investment in an opportunity fund or an opportunity business, but also the type of investment. Meaning multi-asset versus single asset fund, which we'll speak to later, but it's a very interesting time now that the second proposed regulations have been released and I can only expect that we're all going to see an increase in activity. So before we get into the details of what was actually included in the April proposed regulations, one item to note is that the recently released proposed regs, are not a replacement for what was issued in October, it's actually an enhancement. You can't read one without the other.

So substantially all. The term substantially all was used throughout the first round of regulations in multiple contexts, including application to a single tier qualified opportunity fund, a qualified opportunity business, and ultimately a multi-tiered qualified opportunity fund, all which require further explanation. We know that substantially all of the qualifying assets or investments are required to be in a qualified opportunity zone, but what does that actually mean? So the recently released proposed regulations clarify for this. In order for qualified opportunity zone business to meet the definition, there are various tests required. The 70% test, the income and assets test, and the qualifying business test. The qualifying business test is simply whether or not the business is the same business. Is it a massage parlor, a country club, a golf course, et cetera? Or is it an acceptable business within the qualified opportunity zone?

The 70% test states that substantially all or 70% of the use of the business property must be in a qualified opportunity zone. Substantially all is also defined as outlined in the October proposed regulations as 70% of the tangible property that is owned or leased by the qualified opportunity business is used in the qualified opportunity zone. And then applying substantially all to the holding period requirements, 90% is the required threshold. So before mentioning the last part of the definition, let's take a look at what the above actually means, because unless you read it multiple times, it can be rather confusing. So the original definition being during substantially all of the qualified opportunity funds holding period, for such business property, substantially all of the use of such property is to be held in a qualified opportunity zone. Now let's apply the above. And the statement then becomes, during 90% of the qualified opportunity funds holding period for such business property, 70% of the use of such property is to be held or used in a qualified opportunity zone.

So a little bit more clarity there. Now granted the question becomes, how do you determine what 70% is? But that information is coming. And then lastly in addressing the substantially all as it relates to the income and assets test, 40% of the intangible property must be used in the active conduct of a trade or business within the opportunities zone. Now failing to meet the testing requirements and qualify as a qualified opportunity fund or a qualified opportunity business, will not result in disqualification of either and cause an inclusion event, however, it will result in a penalty. So the question is how the penalty application be administered. Neither October nor the April proposed regulations address this issue specifically and we do expect further guidance over the next couple of months.

So working capital safe harbor. So treatment of undeployed cash and cash equivalence was another unknown and was highly discussed prior to the release of the October proposed regulations, the concern being if undeployed cash and cash equivalents were specifically set aside with the intent of deployment into qualified opportunity property, would be considered a bad asset or working capital and then therefore treated as a qualifying asset? The October proposed regulations address this, benefiting the opportunity funds and including the working capital safe harbor for investments and tangible business property. This work in capital safe harbor allows qualified opportunity zone businesses to maintain a reasonable amount of working capital and cash, cash equivalence, or short term debt instruments to be held up to 31 months, provided that the following requirements are met.

The intended use of the working capital are designated in writing, there's reasonable written schedule, and then the working capital is to be used in a manner substantially consistent with the designated uses and the written schedule. So the October regulations were written cash and cash equivalence held directly by the qualified opportunity funds versus the qualified opportunity business would not qualify for the working capital safe harbor and then these assets would not lend to the 90% asset test. Now the April proposed regulations added a few changes, further defining the 31 month working capital safe harbor. First, the written designation for planned use of the working capital now includes the development of a trader business in the qualified opportunity zone, as well as acquisition, construction, and or substantial improvement of tangible property.

Second, if a qualified opportunity zone business exceeds the 31 months prep or period due to delays attributable to waiting for government response on an application that was actually completed and submitted by the qualified opportunity zone business during that 31 months period, then the QOZ business will not be in violation of the safe harbor. The regulations also clarify that a business may utilize multiple rolling or sequential working capital safe harbor applications, provided that each application independently satisfies all requirements. So the way to think about this is that each tranche of capital that's raised by the qualified opportunity zone business, is actually subject to its own 31 month working capital safe harbor. So at this point I will turn it over to Jordan, who will provide answers to a few more of those other open questions.
Jordan Amin: Thank you, Stephanie. Excuse me. One of the requirements for property to qualify as qualified opportunity zone property, is that the original use of such property in the opportunity zone must begin with the opportunity fund or the opportunity zone business. If not, then the opportunity fund or the opportunity zone business, must substantially improve the property. This new round of regulations have provided additional clarity on the term original use, so we can actually put that into practice now. Original use begins on the date the property is placed in service within the qualified opportunity zone for purposes of depreciation. So think about it as a place in service date where you begin depreciation within that zone. The exceptions are that use property would qualify if the property has not yet been placed in service within an opportunity zone. So if the property had previously been placed in service in another area, then that's fine. If it had previously been placed in service with any opportunity zone, then the fund or the business must substantially improve that property in order to meet the original use test.

Another exception has to do with unused or vacant property. So if it was unused or vacant property, and that's defined as being unused or vacant for an uninterrupted period of five years prior to being placed in service within the opportunity zone, then it's considered to satisfy the original use requirement. So if we think back to opportunity zones, and we think about what the intention is, is to get capital into these areas and to help build up these areas, then it makes sense to think that something vacant that they want to spend money on to improve, would qualify as original use.

The regulations also clarify that the original use and substantial improvement requirements are not applicable to land. Land can only be treated as QOZ property if it is used in a trade or business, and a little bit later we're going to define what a trade or business is, but the regulations specifically mentioned that holding or "banking" land for investment does not constitute a trade or business, and therefore that land would not qualify as QOZ property. So one of the areas that the regulations address is around leased property. In the initial proposed regulations which came out in October, the regulations indicated that a qualified opportunity fund must purchase property, but a qualified opportunity zone business could purchase or lease property. The new regulations clarify that both the qualified opportunity funds and a qualified opportunity zone business, may lease property and satisfy the respective 90% and 70% test that Stephanie spoke about a few minutes ago.

In order for lease property to qualify, the lease must be entered into after December 31st, 2017, which again is consistent with all the rules, and it must be at an arm's length or a market rate. There was no... it's important to note that there is no original use or substantial improvement requirement for leased property. The rules also provide that improvements made by a lessee to lease property will have to satisfy both the original use and the acquired by purchase requirements of the opportunity zone rules.

Now when we talk about leased property, the regulations go in detail about leasing property from related parties. So if leased property is between a related party, party related to the fund or the opportunity zone business, there's additional criteria that must be met in order for it to qualify. First, there can't be prepayments on a lease, relating to a period of use that exceeds 12 months. The lessee must acquire other tangible property that constitutes qualified opportunity zone business property, and such property must have a value that is not less than the value of the leased property. So after reading that about 13 or 14 times, what you figure out that means is that in addition to the leased property, other property must be acquired that has a value at least that of the property being leased so that you're actually putting additional investment into these opportunity zone areas.

So what that leads us to is the question of how do we value the leased property? And the regulations provide two methods for valuing the leased property. The first is the financial statement valuation method, and that's a value used in an applicable financial statement. And this financial statement, in order to qualify, it must be prepared under GAAP, Generally Accepted Accounting Principles, that requires recognition of the lease. They provide an alternative valuation method for those that do not have an applicable financial statement, and that method provides for the present value of the lease payment, determined on the date the lease is entered into. So you're determining it on that period of time, and you're locked into that for the period of the lease.

Now there's also a concept of there must be a substantial overlap of zones. Which means that the tangible property you're acquiring and the leased property, they must be substantially in the same zone. And again, if you think about the intention of the regulation to make sense, they're trying to provide that you are investing in property and using it inside of his zone rather than trying to crowbar leased property from related party into qualified opportunity zone property. One of the other requirements is that there can't be the expectation or intent for the property to be purchased by the qualified opportunity fund for an amount other than the fair market value. So, again, they want this to be a real lease, they want it to be at fair market value. So these anti-abuse rules are there to disqualify any leased property, as we said, where there is an intent for the property, or an expectation intent that the property is going to be transferred for a value other than the fair market value.

So earlier I mentioned that a qualified opportunity zone trade or business. So what is the definition of that? The April... the regulations require a qualified opportunity funds and a qualified opportunity zone business to conduct a trader business within the meaning of Internal Revenue Code Section 162. The regulations do however provide, in addition to that, that the ownership and operation of leasing of real property is considered an active trader business for purposes of the opportunity zone rules. So that's a little bit of a difference between that in Section 162 is that they're allowing you to take real property and consider that to be an active conduct of trader business when under other circumstances within the code that may not be. However, they specifically state that merely entering into a triple net lease will not be considered the active conduct of a trader business under these rules.

So as you're structuring your leases and you're structuring these arrangements, we need to be certain that we're not structuring it as a triple net lease and that it will fall under the active conduct of a trader business. The first set of proposed regulations provided that in order for a business to qualify as a qualified opportunity zone business, 50% or more of its gross income must be earned from a qualified opportunity zone. So this left tremendous uncertainty after the first set of regulations as to how that would actually be determined. There was a lot of talk in the industry about different ways to do that. Is it based on where you're located, where your customers are located, where your employees are located? And thankfully, treasury has issued some safe harbor rules to consider when determining if the business is going to qualify.

So there's three annual safe harbors that the newly issued regulations provide. The first is if at least 50% of the services performed for the business based on the hours work, and this includes both employees and independent contractors, if at least 50% of those services, again, based on hours are performed within the opportunity zone, then it would qualify. So if 100% of the customers are outside of the zone but all the employees are located within the zone, it would still satisfy. There's a second safe harbor test that says, if at least 50% of the compensation paid for the services before and within the opportunity zone, again, both employees and independent contractors, so if 50% of the comp is for services performed within the opportunity zone, then again, they would meet that safe harbor test. And you only need to meet one of the three.

And the third is, if the tangible property located in the opportunity zone and then the management and operational functions performed in the opportunity zone are each necessary for the generation of at least 50% of the business's gross income, then you would satisfy that as well. So again, they're providing a few different ways which you can qualify under the safe harbor, and then the treasury provides for the facts and circumstance test which, if you're not able to meet any of the safe harbor tests, that doesn't mean you can't qualify as a trade or business. It just means that you'll need to do so under your facts and circumstances. And the provisions that they're providing give you some insight into how the IRS will be looking at this to see if it qualifies.

So what happens if the qualified opportunity fund sells qualified opportunity zone property prior to meeting the 10 year holding period? This was one of the big questions that was out there because in 10 years is a long time. So a lot of investors and a lot of funds have different horizons for investment, so what happens if you sell something? What does that mean for the deferred gain? What happens? So treasury addressed that and it says that the opportunity fund will have 12 months to reinvest the proceeds from the sale of opportunity zone property, without the fund having failed the 90% asset test. So in order to qualify under that, the proceeds from the disposed assets must be held continuously in cash or cash equivalents or debt instruments, with a term of 18 months or less.

So the sale of those assets by the qualified opportunity fund will not trigger the inclusion of the deferred gain of the investors. However, the gain on the sale of the property will be fully taxable to the QOF. So if the fund is a flow-through entity, then that gain will be allocated to its partners or shareholders. Additionally, for purposes of applying the 90% asset tests, if the fund receives new capital invested into the fund, for purposes of the 90% test, the new capital received in the six months prior to the testing period will not be included in the test. And that capital must be held under the same test as the proceeds from a sale of opportunity zone property. It must be held in cash, cash equivalent or a short term debt instruments. And I'm going to kick this back over to Stephanie to talk about some of the other items that were addressed in the regs.
Stephanie Hines:Thanks, Jordan. So we'll stay on the topic of gains for a bit. Some of the questions really surrounding the October proposed regulations in the release is, what is considered a deemed triggering event? When should gain on your deferred gain be included in income? So with the inclusion of the incentive in the Tax Cuts and Jobs Act, current realized gains invested into a qualified opportunity fund will be recognized on the earlier of the date on which the qualified investment is sold or exchanged. The proposed regulations issued in October, again, didn't expand upon the definition of sale or exchange and what transactions outside of an outright sale of the qualified opportunity fund interest, would actually trigger recognition of a previously deferred gain. Well, thankfully, the proposed regulations recently released established an understanding that deferred gain must be recognized anytime a taxpayer reduces or terminates their direct investment in the QOS or if it's due to a distribution, it's going to be deemed as a "cash out."

The April proposed regulation provided a non-exclusive list of various events that would cause all or part of a deferred gain to be taxable. Outlined in this non-exclusive list were 11 types of inclusion events. Now a few are obvious, and we were just saying this, but a few are obvious as to why that deferred gain would be realized at the time, while others are less obvious. Let's start with the sale of a direct interest in a qualified opportunity fund. Clearly a triggering event. However, the proposed regulations take it a step further and they created an inclusion, even if there's an indirect sale of a partnership interest. Meaning an individual sells an interest in a partnership that holds an interest in a qualified opportunity fund, so for example, if I hold a 25% interest in a partnership that owns an interest in a qualified opportunity fund and I sell my interest, then I would trigger a realization of a portion of my deferred gain.

Now, that's for partnerships. S corps have a similar rule that's a bit more taxpayer friendly, to the extent that there's a change in ownership of an S corporation, if it's not an aggregate greater than 25%, then a triggering event will not occur. Adversely, if the aggregate change of ownership in the S corporation is greater than 25%, then 100%, so all of the gain deferred is going to be required to be recognized. Another more obvious event is the termination of a qualifying fund. Again, this is clearly a triggering event. Some of the less obvious are if there's a liquidation of a corporate owner of a qualified opportunity fund, to the extent that the fund investment is deemed to have been sold in the liquidation, then that would be an inclusion event. The next one is something that I've had a number of conversations surrounding and it's whether a transfer of a qualified opportunity fund investment by gift, and if that actually would be deemed a triggering event.

And it is. The proposed regulations recently released clearly stated this, except for if it's a gift to a grant or a trust where the donor is the grantor or the owner of the trust. At that point in time there would be no triggering event, again, as the taxpayers are the same, call it individual. So additionally, distributions in excess of basis and redemption of a qualified opportunity funds C corp, unless the shareholder was the sole shareholder, those would also be inclusion events. And we'll get to the distributions in excess of basis in a bit. Well, let's go back to the transfer of the investment by gift. So it's important to clarify that generally speaking, a transfer of a qualified opportunity fund investment at death is not going to be deemed an inclusion event.

So the last set, lets let's talk a little bit about step-up basis and debt finance distributions. The last set of proposed regulations left us really wondering about basis, when it would be increased, and then if those respective increases would actually shelter distributions and then similarly, if debt financing would provide basis and allow for distributions without triggering an inclusion event. Luckily the answer is yes. All investments have a deferred gain into an opportunity fund, have a basis of zero on day one. As each investment meets the respective five and seven year mark, basis is increased accordingly. 10% of the year, five investment date, and then another 5% at the 70 year anniversary. These increases provide basis for all purposes. So including the release of suspended losses and distributions to the extent of what the stepped-up basis has been allowed. The new proposed regulations also provide guidance permitting the taxpayer to increase their basis in a qualified opportunity fund by the amount of deferred gain recognized when an inclusion event is triggered.

So a very, very favorable treatment for this inclusion event in basis step-up, is that the deferred capital gain is realized and the step up in basis is deemed to be treated after the inclusion of the gain, but prior to the inclusion of other tax considerations, which this is actually huge because that means that the basis increase is taken into consideration before determining any income tax consequences, and therefore is a prevention of essentially a double recognition or a potential double recognition of capital gains. April regulations also provide that a partner's basis and an opportunity fund includes it's share of partnership liabilities. Therefore, this also allows a partner to receive a tax-free distribution up to the partners basis, including their share of allocable debt. However, and this next comment could be under inclusion items, but a transfer to a partnership, now the timing of this is important.

So a transfer to a partnership will not be treated as an eligible investment if the partnership makes a distribution to the partner and both the transfer into the entity and the distribution to the partner could be recharacterized as a disguise sale. From what we can tell at this point, if distributions made by an opportunity fund to its partners are more than two years after an initial investment and the distributions are not in excess of the partner's basis, then generally speaking, a gain would not be triggered. So the timing of investments in distributions really have to be paid attention to. The last thing that you would want is to have an inclusion event if there wasn't the intent.

So this next slide is actually one that we had used in our webinar back in early November just outlining the timing of when each percentage reduction would occur and by how much. It's now been updated to just reflect each respective step-up in basis. You can see that in year five there would be a 10% step-up basis and then at year seven, there'd be another 5% step-up in basis. It's just a different visual and way of looking at it. So there are a few other partnership in escort provision to touch base on and this slide is meant to highlight just a few of the items worth mentioning as they relate to qualifying investments. However, the first point I'm going to mention isn't actually on the slide. The original proposed regulations left us with an understanding that the only way to defer an eligible capital gain was to contribute cash into a qualified opportunity fund.

Well, the April proposed regulations released on the 19th, clarified this and permits taxpayers to contribute property to the opportunity fund in exchange for an interest. So really the easiest way to describe how this would be achieved is to walk through an example. So if Jordan sells a building for a million and a half and realizes a $500,000 gain, instead of contributing the cash of 500,000, he can actually contribute another building worth the equivalent amount, so the $500,000, to the opportunity fund and still defer his current realized capital gains. And then additionally, just another added benefit is he'd be pocketing the full 1.5 of cash and he wouldn't have to roll over the $500,000 in cash. One thing to note in this transaction is because the opportunity fund did not purchase the building from Jordan, the building would not qualify as an opportunity zone business property by the opportunity fund.

Alternatively, if the fund has purchased the property and the transfer was a taxable transaction, then the building would qualify as qualified opportunity zone business property, again, assuming that the original use or the substantial improvement test are met. Also noteworthy in a transaction such as this is the holding period, and it's important to note this. So typically in a tax-free event, the holding period tax onto the interest received, that's an exchange for the property. In this case, the building was contributed. However, it's not the same as it relates to opportunity funds. The taxpayer's holding period begins on the date that the property is contributed into the qualified opportunity fund. And really this is another anti-abuse provision where it's to ensure that the five, seven, and 10 year holding periods are not accelerated. So it seems to be that they're pretty cognizant of not having these entity be abusive.

Even though property can now be contributed and defer current capital gains, services provided still are not qualifying contributions, so meaning carried interests and promote structures do not qualify for the opportunity fund in opportunity zone beneficial tax treatment, and would be treated as a mixed fund investment. So we know that mixed funds are treated as two separate investments, one that's entitled to preferential benefits and one that's not. The April proposed regulations came forth and clarified that all partnership items, so income loss, expenses, debt, distributions, are required to be allocated proportionately between the beneficial interest and the non beneficial interest for lack of a better term. Earlier, just going down the slide, earlier it was mentioned that an aggregate change in ownership by 25% or more in an S corporation would trigger an inclusion event. However, when a corporation makes an S election, so when a C corporation makes an election to become an S corporation or when an S corporation converts to a C corp, this conversion is not going to be deemed an inclusion event.

So other items to note, just a few other items that we felt important to mention and then I'll turn it back over to Jordan to wrap up the rest of the topics, he had mentioned... Jordan had mentioned that land is not required to be substantially improved as part of meeting the substantial improvement test, which we now know, and then the recently released regulations clarified that even if it's used as part of the active trader business, it's not required to be substantially improved in order to be that qualifying asset. What do you do when, and this is a kind of a larger question, is what do you do when real property straddles in opportunity zone and a non opportunity zone? How do you determine the location of services, the tangible property or the business use? It's got to happen.

The April proposed regulations provide two tests in order to determine if real property qualifies as qualified opportunity zone property when it's not located 100% in the qualified opportunity zone. So of these two tests, one test considers square footage and then the other considers unadjusted costs of the real property. When utilizing and based on the test that's based on square footage, if the amount of real property that's located within the opportunity zone is substantial, and this, really from a high conceptual view, it makes sense. So when the amount of the real property located within the zone is substantial compared to the amount of real property square footage outside of the zone, then all of the property would be deemed located in the qualified opportunity zone. The recent guidance also states that the real property located in the opportunity zone should be considered substantial, as the adjusted cost of the real property inside is greater than the unadjusted costs of the real property outside of the zone.

Now, something to note is that both tests relate to contiguous real property and it doesn't apply if you have a building in an a building out dispositioned, it's called real property that straddles the borders. So the next point, and I won't spend too much time on this, but the next point is possibly going to require further guidance relating to asset aggregation. However, as of April 19th, substantial improvement of assets is going to be addressed or it's addressed on an asset by asset basis. Again, we expect that there's going to be further guidance released on this in order to address the opportunity for aggregation.

So regarding basis step-up, we addressed this first item just a bit earlier. However, it's important as the question of how depreciation would be treated upon disposition after the 10 year holding period was met, and the basis basis step-up will apply to all assets, meaning that unrecaptured depreciation will not be taxed upon meeting the 10 year holding period. So it'll be beneficial and there won't be an additional capital gain realized or an additional gain realized. As we've seen, a significant number of the April proposed regulations addressed qualified opportunity businesses, which was expected. Now as we all know, there are certain businesses that will not provide all services within a qualified opportunity zone. So the question arose as to what do you do with inventory if it's in transit, either from a vendor or to a customer during the required testing periods?

So yet another favorable provision for the tax payers is that inventory, including raw materials, qualifies as property located at the qualified opportunity zone business even while in transit. And so this is quite beneficial for anybody who has customers outside of the zone, or distribution centers, et cetera, that are going to be in transit during these testing periods. Now, October's proposed regulations clarified that section 1231 gains were eligible gains for opportunity zone purposes. However, 1231 gains and 1231 losses are required to be netted together and then that net result would then be the eligible gain deferral. So April's proposed regulations address the timing of the net gains, and how to determine what this eligibility date is. The proposed regulations treat any net 1231 gain as if it occurred on the last day of the taxable year rather than throughout the year on the actual date of occurrence.

Now this is important for two reasons, and there are two items to take away from this. First, it's the possibility of losing out on unrealized appreciation, and then the second item relates to the ability to actually maximize the gain deferral benefits, so your 15%. An example of the first is if there's a 1231 gain that I realized on February 1st, but because the gain is required to be netted with any 1231 losses, this gain is not deemed eligible to be invested into an opportunity fund at that time. Now if later on in the year there's an equal offsetting loss, then there was no, call it real loss on any deferral, and let's assume at that point in time an investment in opportunity fund would not be made. So no harm, no foul. But what if the 1231 losses have not incurred for the remainder of the year and I'm left with a 1231 gain?

I then would have lost out on any appreciation between February 1st and essentially year end, but then even further show quite possibly up to 180 days after that year end depending upon what an investment in an opportunity funds is made. The second and then more possibly of an issue, is due to clarification that the net 1231 gains are deemed to have occurred on the last day of the tax year, meaning that anyone with the 1231 gain this year is essentially not going to be able to benefit from that additional 5% reduction on the deferred gain because they can't make an investment until after the close of the tax year, which is January 1st, 2020, taking you out of the seven year mark before 2026. So with that being said, congress is going to propose a bill to extend the date from 2019 to 2020 in order to preserve the seven year holding period benefit. Yeah, so that's how the timing issue always comes in for these things, and now back to Jordan.
Jordan Amin: Thank you, Stephanie. Just a couple of other odds and ends that were in the regs before we close out and see if we can address this, some of the questions that have started to come in, a couple of things that were included in the regs were that qualified opportunity fund leads have the ability to designate special capital gain dividends on sales of qualified opportunities on property, as long as that it doesn't exceed the longterm capital gains of the QOF breed. Another provision that was in the relates to consolidated return groups. So in order for the rules on opportunities does not to interfere with the intercompany transaction wills on the consolidate return groups, there's a couple of provisions in there that say, first is that a consolidated return group cannot treat capital gains of one member as gains from another member. Kind of makes sense, they have to stay within the company that realized the gain.

And then a qualified opportunity fund can be a consolidated group parents, but it cannot be a subsidiary of a consolidated group. And again, that has to do with the intercompany transaction rules. Another item that was specifically mentioned within the regulations is that a seller cannot roll gain from sales to a qualified opportunity funds, into a qualified opportunity fund. So essentially you can't double dip on that. And then the April proposed regulations also provide for general anti-abuse rule for any transactions that are designed to achieve a tax result, which is inconsistent with the purposes of the rules, are going to fall into these anti-abuse rules and it's going to kick you out of the opportunity zone benefits.

Again, as with old tax transactions, it's very important to understand the state rules. Qualified opportunity zone rules are federal legislation, and how is that handled in the states? As we know, there are some... some states begin with your federal adjusted gross income, some States conform automatically to federal rules, some do not conform, some specifically conform to certain provisions and decouple from others, so it's important to understand the state rules. And for pass-through entities, it's both the state where you're making your investment and potentially the state of the investors of the fund if it's a pass-through entity. So both of those are important things to consider as you're investing in a business or property. We mentioned here that New York allows the QOZ benefits and in New Jersey, which is where I am based, has also adopted the federal treatment for both it's corporation business tax and the gross income tax regimes.

So again, if the States are competing with each other for lack of a better term, for these qualified opportunity zone investments, it seems to make sense that they would align themselves to put themselves on the best footing to receive these dollars into the low income areas in their state, but as we all know, taxation in the states not always follow a logic what we think would make sense. And then finally, what's next? So now that these regs came out after six months of waiting for the second set, treasury is receiving comments on the new leadership proposed regulations. It must receive comments by mid June, and there's a public hearing scheduled for July 9th. The IRS and treasury has indicated that they expect to address some administrative rules for qualified opportunity funds that fail to satisfy the 90% investment standards, from an administrative operational perspective what happens there, as well as some information reporting requirements to help the government measure the economic impact of the QOZ investments.

So we'll be looking for more guidance from them on what exactly they'll be looking for from us. It's also expected that the qualified opportunity fund form 8996 which was issued for 2018, will revise for 2019 and forward, to capture additional information such as the EIN of the qualified opportunity zone business that's owned by the fund, and also maybe the amounts invested by the fund and the business is located in these opportunity zones, again as a way to measure the deferral and also measure the economic investment in these areas. So with that, as we begin to wrap up, I want to point out to, visit our website at eisneramper.com. We have a website... a landing page on qualified opportunity funds with access to various amount of resources that we've been putting together for you, including our white paper on opportunity zones. So please feel free to visit our website, and now I think we have one or two minutes left. We can try to address a couple of questions that have come in. Stephanie.
Stephanie Hines:Sure. One of the questions is if an investor sells a marketable security that's appreciated significantly over their lifetime, can they invest in an opportunity fund to defer the capital gain? Yes, absolutely. As long as the gain is a capital gain and it's been realized, then that game can be deferred through a qualifying investment into an opportunity fund. Another question is, or surrounding just clarification on using the $500,000 cash to contribute to an opportunity zone.

The question is if the individual defers the gain in case of the building, how would it not qualify as an opportunity zone property. So really in that instance, in that example, it's two things that you have to look at. One is in Jordan's case, his $500,000 gain that he had incurred, that's what he's looking to defer. And he contributes the building, so therefore has satisfied the property contribution into an opportunity fund and then can therefore defer his capital gain. The second side of it is from the fund or the business, and how they qualify as an opportunity fund or an opportunity zone business. So there are two ways of looking at it. It has nothing to do hand in hand for Jordan in it not being opportunity zone property.

And then I think we have time for one more. Is there ever a reason when you would want to trigger a gain inclusion event? Really the only way to think about that is we can't really advise on that, but what we do say, and we have these conversations all the time with our clients is, does the investment make sense? You can't, a term that I use way too often is you can't let the tax tail wag the dog, but if it's a good investment, you have to take all things into consideration.
Jordan Amin: I agree with Stephanie. And there could be an opportunity where you have an investment that is not performing as you would want it to and there may be capital losses from other things and opportunities where you would want to trigger that game prematurely. So, and I think that that just about takes us out of time, so we thank everyone for joining us today.
Moderator: We hope you enjoyed today's webinar. Please look out for a follow up email with a link to the presentation and survey. Thank you for joining our webinar today.

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