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Call to Increase Transparency Of Opportunity Zone Program
From the date of its inception, the Opportunity Zone Program has been criticized for its lack of transparency and reporting requirements. The original version of the law included reporting requirements, but some of those requirement–specifically the public reporting requirement–were stripped out during budget reconciliation. This lack of transparency has raised concerns that the Opportunity Zone Program allows wealthy investors the ability to avoid significant taxes without accomplishing the program’s objective – spurring 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 the tax on those gains until December 31, 2026. It also allows any appreciation of investments held in the QO Funds for more than 10 years to be excluded from tax.
In October, the U.S. Government Accountability Office (“GAO”) released a report finding that more than 6,000 QO Funds invested about $29 billion in qualified opportunity zone property through 2019 and that approximately 18,000 taxpayers made investments in QO Funds in 2019 alone. The GAO report also notes that certain projects would have proceeded even without the tax incentives provided by the Opportunity Zone Program.
This GAO report caught the attention of Senate Finance Committee Chair Ron Wyden, D-Ore. As a result, he launched an investigation into the operation and effects of QO Funds by asking 7 investment firms, including SkyBridge Capital and Baker Tilly, to provide extensive details about their QO Fund investments. Senator Wyden was concerned that the Opportunity Zone Program’s lack of transparency allowed wealthy investors to use the program to subsidize luxury real estate projects. One project specifically called out by Senator Wyden was the “superyacht marina” in Palm Beach, which reportedly included the construction of two luxury waterfront apartment towers with 399 units, featuring a resort-size, heated pool overlooking the intercoastal waterway, private pools for the penthouse floors, and a 120-foot day dock with twelve 20-foot boat slips.
Senator Wyden has also introduced legislation to reform the Opportunity Zone Program, including provisions requiring annual public information reporting from QO Funds, and annual statements to the IRS from fund investors. This legislation would also prohibit QO Funds from investing in casinos, luxury apartments, and stadiums, and would tighten existing rules to ensure the tax incentives are available only for new investments in distressed communities and not for projects that are already underway.
Under current law, an investor is already required to annually report to the IRS on Form 8997 any investments in and dispositions 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 terminates the qualifying investment in a QO Fund, which could cause any deferred gain to be taxed. In addition, under current law, an entity that elects to be a QO Fund must annually report to the IRS on Form 8996 that the QO Fund meets the required investments standard. Senator Wyden’s legislation would impose not only additional IRS reporting requirements and but also public reporting requirements.
The GAO investigation has highlighted the lack of transparency and reporting requirements of QO Funds as an issue of concern for some lawmakers. Whether this call for more transparency will result in changes to the law remains to be seen. For now, taxpayers looking to invest in QO Funds which are planning large “luxury” projects should be aware of Senator Wyden’s ongoing investigation and the risk that such projects could be publicly called out.
The information contained in this publication should not be construed as legal advice, is not a substitute for legal counsel, and should not be relied on as such. For legal advice or answers to specific questions, please contact one of our attorneys.