IRS Provides Extensions, Tolls Deadlines for Qualified Opportunity Funds and Investors Due to Coronavirus Pandemic

On June 4, 2020, the Internal Revenue Service provided five categories of relief for qualified opportunity funds (“QOFs”) and their investors, on account of the ongoing COVID-19 pandemic. The relief is provided in Notice 2020-39 (the “Notice”) and includes the extension and tolling of several deadlines, as further discussed below.

1. 180-Day Investment Period for Certain Investors in QOFs Extended until December 31, 2020
   Under the opportunity zone regime, a taxpayer with capital gain from a sale or exchange of certain property may elect to exclude from gross income for the taxable year the amount of such gain that is invested by the taxpayer in a QOF during the 180-day period beginning on the date the gain was realized. A prior notice (Notice 2020-23) previously postponed until July 15, 2020 any deadline for this 180-day investment requirement that otherwise would have fallen between April 1 and July 15, 2020. The current Notice now provides that, if an investor’s 180-day period ends on or after April 1 and before December 31, 2020, then the final date by which a taxpayer must make an investment in a QOF will be postponed until December 31, 2020. This relief is automatic, and taxpayers are not required to affirmatively elect this relief. Taxpayers will still need to make valid deferral elections and file all required forms in connection with the deferral.
    
2. 90-Percent Asset Test for Certain QOFs Tolled Until 2021
   A QOF generally is required to hold at least 90 percent of its assets in qualified opportunity zone property, as measured (i) on the last day of the first 6-month period of the QOF’s taxable year, and (ii) on the last day of the QOF’s taxable year. If the average of the percentages of the qualified opportunity zone property held by a QOF on these semi-annual testing dates fails to meet the 90-percent requirement, the QOF generally must pay a penalty for each month that it fails to meet such requirement. Under prior guidance by the Treasury, no such penalty is imposed with respect to a failure that is shown to be due to reasonable cause.
   
   The Notice provides that, for a QOF with a testing date that falls between April 1 and December 31, 2020, any failure to meet the 90-percent investment requirement for such taxable year is deemed to be due to reasonable cause and therefore is disregarded for purposes of determining whether the QOF and any otherwise qualifying investments in such QOF satisfy applicable requirements. Regular application of the 90 percent asset test will resume in 2021.
   
   This relief is automatic, and QOFs are not required to affirmatively elect such relief. However, a QOF must accurately complete all lines on Form 8996 filed for each affected taxable year except that the QOF should place a “0” in Part IV, Line 8 (Penalty).
    
3. Working Capital Safe Harbor for Qualified Opportunity Zone Businesses Extended 24 Months
   The Treasury has previously provided a working capital safe harbor which permits a qualified opportunity zone business (“QOZ Business”) to treat cash (and cash equivalents) as qualified opportunity zone property, subject to certain conditions, for a period of up to 31 months. In order to avail oneself of the safe harbor, applicable Treasury Regulations require that the QOZ Business prepare a written schedule for the expenditure of the working capital within 31 months of the receipt by the business of the assets. In certain circumstances, a QOZ Business may be able to tack on a second 31-month working capital safe harbor, for a total of 62 months during which a working capital safe harbor applies.
   
   The Notice extends a QOZ Business’s initial 31-month working capital safe harbor by up to 24 months, if such QOZ Business is located in a qualified opportunity zone within a federally declared disaster area, as long as the QOZ Business otherwise meets the requirements of the working capital safe harbor. The Notice confirms that, under the rules described above and as a result of the issuance of an emergency declaration by the President in connection with the COVID-19 pandemic, all qualified opportunity zones lie within a Federally declared disaster area, and therefore all QOZ Businesses that held working capital assets intended to be covered by the working capital safe harbor before December 31, 2020 will receive up to an additional 24 months to expend such working capital assets, as long as such QOZ Business otherwise meets the requirements of the working capital safe harbor.
    
4. 30-Month Substantial Improvement Test for Certain QOFs Tolled Until 2021
   In order for tangible property of a QOF to be treated as qualified opportunity zone business property, such property must be used in a trade or business of the QOF and must satisfy several requirements, one of which is that either (i) the original use of the property in the qualified opportunity zone must begin with the QOF, or (ii) the QOF must substantially improve that property. The substantial improvement requirement is met only if, during any 30-month period beginning after the date of acquisition of such tangible property, there are additions to basis with respect to such property held by the QOF that, in the aggregate, exceed the QOF’s adjusted basis of that property as of the beginning of that 30-month period.
   
   The Notice provides that for purposes of the substantial improvement requirement for property held by a QOF or QOZ Business, the period beginning on April 1 and ending on December 31, 2020 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 and ending on December 31, 2020).
    
5. 12-month Reinvestment Period for QOFs Extended An Additional 12 Months
   If a QOF sells or disposes of some or all of its qualified opportunity zone property or if a distribution with respect to qualified opportunity zone stock owned by the QOF is treated as a return of capital, and the QOF reinvests some or all of the proceeds in qualified opportunity zone property by the last day of the 12-month period beginning on the date of such distribution, sale, or disposition, then such reinvested proceeds generally are treated as qualified opportunity zone property for purposes of the 90-percent investment requirement. This treatment generally is available to a QOF only to the extent that, prior to the reinvestment in qualified opportunity zone property, the reinvested proceeds are continuously held in cash, cash equivalents, or debt instruments with a term of 18 months or less.
   
   Under the Notice, if the QOF's plan to reinvest such proceeds in qualified opportunity zone property is delayed due to a federally declared disaster, the QOF may receive up to an additional 12 months to reinvest the proceeds, provided that the QOF invests the proceeds in the manner originally intended before the disaster.
   
   The Notice confirms that any QOF whose 12-month reinvestment period includes January 20, 2020 will receive up to an additional 12 months to reinvest in qualified opportunity zone property some or all of the proceeds received by the QOF from the relevant distribution, sale, or disposition, provided that the QOF otherwise satisfies the requirements of applicable regulations and invests the proceeds in the manner that was originally intended before January 20, 2020.

For more information about the Notice, please contact Seth Lebowitz at 212-573-8152 or Richard Shamos at 212-573-8027, or your usual contact at Sadis & Goldberg LLP.