united states department of the treasury internal …€¦ · irs hearing page: 6 anderson court...

UNITED STATES DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE

PUBLIC HEARING ON PROPOSED REGULATIONS

"INVESTING IN QUALIFIED OPPORTUNITY FUNDS"

[REG-120186-18]

Lanham, Maryland

Tuesday, July 9, 2019

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Anderson Court Reporting -- 703-519-7180 -- www.andersonreporting.net

1 PARTICIPANTS:

2 For IRS:

3 JULIE HANNON BOLTON Special Counsel

4 Office of the Associate Chief Counsel (Income Tax & Accounting)

5

ROBERT CRNKOVICH 6 Senior Counsel

Office of the Associate Chief Counsel 7 (Passthroughs & Special Industries)

8 RUSSEL JONES Special Counsel

9 Office of the Associate Chief Counsel (Corporate)

10

SONIA KOTHARI 11 Attorney

Office of the Associate Chief Counsel 12 (Passthroughs & Special Industries)

13 SHARENE PFLANZ Senior Technician Reviewer

14 Office of the Associate Chief Counsel (Income Tax & Accounting)

15

For U.S. Department of Treasury: 16

MICHAEL NOVEY 17 Associate Tax Legislative Counsel

Office of Tax Policy 18

BRIAN RIMMKE 19 Attorney Advisory

Office of Tax Policy 20

Speakers: 21

WILLIAM CUNNINGHAM 22 Self

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1 PARTICIPANTS (CONT'D):

2 MARY SCOTT HARDWICK Opportunity Finance Network

3

KEVIN MATZ 4 American College of Trust and Estate Counsel

5 JAMES ROSE Rose Development, LLC

6

FRAN SEEGULL 7 U.S. Impact Investing Alliance

8 STEVE GLICKMAN Develop, LLC

9

DAN CULLEN 10 DARRYL STEINHAUSE

Institute for Portfolio Alternatives 11

BRENT CARNEY 12 Marazit Falcon, LLP

13 JILL HOMAN Javelin 19 Investments, LLC

14

REGINA STAUDACHER 15 Howard & Howard

16 MOSES BOYD Economic Inclusion Task Force

17

SARAH BRUNDAGE 18 Enterprise Community Partners

19 JOHN S. SCIARRETTI Novogradac Opportunity Zones Working Group

20

JOSEPH B. DARBY 21 CHRISTINA RICE

Boston University School of Law 22

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1 PARTICIPANTS (CONT'D):

2 JOHN LETTIERI EIG Opportunity Zones Coalition

3

STEFAN PRYOR 4 State Economic Development Executives

5 CLAYTON WYATT Alliant Asset Management Co., LLC

6

ARGYRIOS SACCOPOULOS 7 State Bar of Texas Tax Section

8 JULIA GORDON National Community Stabilization Trust

9

10

11 * * * * *

12

13

14

15

16

17

18

19

20

21

22

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1 P R O C E E D I N G S

2 (10:04 a.m.)

3 MS. BOLTON: Hello, my name is Julie

4 Hannon Bolton. I am Special Counsel to the

5 Associate Chief Counsel of the Income Tax and

6 Accounting Division of the Office of Chief Counsel

7 of the IRS.

8 Today we are here for the public hearing

9 on the proposed regulation investing in qualified

10 opportunity funds, Reg Number 120186-18. This is

11 the second proposed reg on opportunity zones and

12 it was published in the Federal Register on May 1.

13 We appreciate you all coming, traveling

14 to New Carrolton. This is new for us at the

15 Office of Chief Counsel. Most of our public

16 hearings are held in our building downtown. But

17 we had such an overwhelming group, we had a lot of

18 people come for the first NPRM so we thought that

19 we would have it at a much bigger auditorium and

20 this is what New Carrollton holds for us.

21 So I'm going to start with introductions

22 for the panel. First to my far right we have

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1 Sharene Pflanz, she is a Senior Technician

2 Reviewer from IT&A and she will be our clock

3 keeper today. Then we have Sonia Kothari, a

4 general attorney from Passthroughs and Special

5 Industries.

6 And right to my direct right is Robert

7 Crnkovich, Special Counsel to the Associate Chief

8 Counsel PSI. To my left we have Michael Novey,

9 one of our Treasury representatives on the panel.

10 He is the Associate Legislative Counsel --

11 Associate Tax Legislative Counsel, the Office of

12 Tax Policy with the Department of Treasury.

13 To his left is Brian Rimmke who is the

14 Attorney Advisor and another Treasury

15 representative. He is from the same office as

16 Mike, Office of -- oh, is it the Office of Tax

17 Legislative Counsel, I'm sorry, Brian, I have a

18 different Department of Treasury.

19 MR. NOVEY: We are all --

20 MS. BOLTON: All from the Department of

21 Treasury.

22 MR. NOVEY: All Office of Tax Policy.

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1 MS. BOLTON: And then down at the far

2 left is Russel Jones who is the Special Counsel to

3 the Associate Chief Counsel for corporate.

4 So once again, thank you so much for

5 traveling up here. There is a lot of energy

6 behind this statute. It is a very exciting new

7 area of the tax law and we appreciate all your

8 help to getting the right place for these

9 regulations.

10 We have reviewed and -- all the written

11 comments that have been submitted and we thank you

12 for those comments. Today we have 19 speakers

13 allotted 10 minutes each with possible follow-on

14 questions from our panel. Also, this hearing is

15 being recorded.

16 So the for all the speakers that are

17 here today, the black box on the lectern will be

18 green while you are speaking. A yellow light will

19 turn on when you have two minutes left and then a

20 red light will come on at exactly 10 minutes. We

21 ask that you stay within your time limit so we

22 don't have to bring out the hook.

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1 (Laughter) That will be Sharene's

2 job.

3 (Laugher) But we want to hear form

4 everyone who has asked to speak and

5 if we have time at the end we will

6 open up the lights that are out in

7 the audience for anybody else who

8 has comments.

9 We plan on breaking around noon time for

10 lunch. It depends on where we are at with

11 speakers so but around noon time. You will need

12 -- so the lunch room is actually if you go out the

13 doors to where you came in with the security,

14 there is an escalator that takes you up to the

15 next floor and the lunch room is to the left. And

16 you will need escorts to go into the lunchroom.

17 And we have some in the back, in the lobby back

18 there.

19 Restrooms are out the doors to the

20 auditorium doors to the left. It's a little

21 hallway to the left and the restrooms are down

22 there.

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1 We will call the speakers up in order on

2 our list of speakers but if there, is someone is

3 late or is not in the room we will just put you

4 towards the end so everybody will get to speak if

5 they do come.

6 And then us a reminder, please put all

7 your cellphones on mute and there is no food or

8 drinks in the auditorium but they are allowing

9 water today because they expect us to go for a

10 pretty long time. Okay.

11 So, Mike, did you want to, do you have

12 some comments?

13 MR. NOVEY: Yes. First, thank you for

14 sacrificing your time and convenience to come here

15 to help us. As I was walking in down the aisle

16 way, I overhead a couple of people saying that reg

17 hearings like this one really do much better if

18 there were some musical interlude between the

19 speakers (laughter). And I began wondering well,

20 what would be the most appropriate music? And I

21 think from our perspective, it would be that we

22 could get by only with a little help from our

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1 friends and in this respect, you all are our

2 friends.

3 Because you are here to give us some

4 recommendations, I want to start off with a few

5 recommendations about how you can be most helpful

6 to us since clearly that is why you went to the

7 trouble to get here. And this is particularly

8 important in light of Sharene's anticipated

9 draconian employment of the time.

10 One, we are governed by the language

11 that Congress enacted and the President signed.

12 As a matter of human interest, we understand many

13 people's frustration and disposition with certain

14 aspects of the language that's there. But we are

15 not legislators. And any use of your time to

16 describe how we should do something that really

17 isn't in the statute even if it was consistent

18 with what your perception of the statutes purpose

19 will be interesting but it won't help us to write

20 the regs.

21 Second, your presence here and your

22 interest in our regulations are all the

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1 credentials that you need for us to take your

2 comments seriously. Any more than a one sentence

3 introductory description of yourself and your

4 organization is using up time that would be better

5 spent from our perspective telling us what we

6 ought to do.

7 Many of your written comments in fact

8 provide very impressive backgrounds and personal

9 CB's and institutional descriptions. We have got

10 those and if you could use your precious 10

11 minutes to tell us what we ought to do, that's

12 much better. Your being here is enough for us to

13 take you seriously.

14 And then finally, if you can please try

15 to be concrete. If we should clarify something

16 and I'm sure there are of all the comments that we

17 are getting, I suspect that the largest single

18 comment is please clarify X. Give us an example.

19 Tell us what a clarification would look like.

20 Even if it's not the best one, even if you could

21 come up with something better than that after a

22 while, it is much better than saying please

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1 clarify it and we are left saying well, we knew

2 that. We had but, you know, if we had known how

3 to clarify it we might have done it back in our

4 back room. So if you can be concrete that is one

5 of the most helpful things you can do for us.

6 Thank you for your time and effort. We

7 are all ears.

8 MS. BOLTON: Okay. So let's start with

9 the speakers. And I apologize now if I mess

10 nobody's name up but we are going to start with

11 William Cunningham who is representing himself.

12 MR. CUNNINGHAM: Well, good morning. Is

13 this thing on? Outstanding. So I am Bill

14 Cunningham. I am actually here representing

15 Creative Investment Research which is a company I

16 have run for about 25 years. If you want to

17 follow along with my comments, go to

18 creativeinvest.com/oz.pdf.

19 Creativeinvest.com/oz.pdf is where this

20 presentation is.

21 Now I'm going to talk about -- I

22 testified at the first hearing that you had.

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1 Thank you very much for doing that. By the way, I

2 know this is hard work. I really do. Dealing

3 with the public, I deal with the public all the

4 time. Public is tough to deal with these days,

5 you know. So I appreciate your efforts in this

6 area, especially with a program as important as

7 this.

8 Now as you know, our concerns are that

9 the opportunity zone program seems to allow people

10 with significant capital gains a way to escape

11 their responsibility for paying taxes. And it

12 allows mainly white and wealthy taxpayers to avoid

13 their social responsibility in exchange for

14 investments via qualified opportunity funds in

15 8,700 poor communities. Mainly black and Hispanic

16 communities.

17 So our economic analysis leads us to

18 believe that the program is fundamentally unfair

19 and fiscally unsound. We conducted a survey on

20 the opportunity zone program to ask a couple of

21 questions. One to find out if people thought that

22 the opportunity zone program favored the wealthy,

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1 favored the poor, or was neutral.

2 Based on our survey, 44.74 percent of

3 the people that responded thought that the program

4 favored the wealthy, 5.26 percent concluded that

5 the program favored the poor and 50 percent

6 actually indicated that they thought the program

7 was neutral.

8 Now in terms of the impact, the social

9 impact, what we do is we create impact

10 investments. That's what we have been doing for

11 the past 25 years. And in terms of the impact,

12 projected impact of the opportunity zone on

13 communities, according to our survey, 68.42

14 percent of the people that responded thought that

15 the opportunity zone program would increase

16 gentrification. 10.53 percent thought that it

17 would decrease gentrification and 21.05 percent

18 thought that the program would have no effect on

19 gentrification in those 8700 communities.

20 Now, as we testified last time, part of

21 the issue is that the assumptions concerning the

22 opportunity zone program are very much like the

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1 assumptions that we see being utilized to justify

2 programs that take economic resources out of black

3 and brown communities.

4 We have seen this most recently with the

5 new introduction of a crypto currency called

6 Libra. Facebook is positioning this currency as

7 something that they're going to use to provide

8 banking services to 1.7 -- no, look. It's about

9 shareholder wealth maximization. It's about

10 control. So it is with the opportunity zone

11 program.

12 Marketed as a program that's going to

13 bring economic development to black and brown

14 communities. We know. We know based on the

15 history of other programs like the new market tax

16 credit program, like the CRA programs. We know

17 that these programs have a tendency to reduce

18 economic opportunity for black and brown people

19 that were resident in those geographic areas prior

20 to the introduction of these programs.

21 If you don't believe me, look at 14th

22 Street Northwest, Washington D.C. That's all you

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1 have to do.

2 So we are concerned about the negative

3 externalities that a program like this will impose

4 on black and brown people in the 8,700

5 communities.

6 Now we also know that a program like

7 this diverts needed tax revenue from public

8 programs to private purposes. We know that in

9 places like California there is a massive need for

10 investment in infrastructure to deal with climate

11 change. We know that in Illinois there's a need

12 for police and community development in minority

13 communities.

14 Taking money away from the Federal

15 Treasury will not help these regions provide the

16 service that these communities need. We know that

17 in the state of Texas there is a massive need for

18 integrating new populations into the state. And

19 we know that in New York, there are infrastructure

20 in social needs that are critical especially in

21 light of the reversal of certain private companies

22 from coming into certain parts of the state. I'm

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1 talking about Amazon.

2 Now our suggestions are twofold. The

3 first is and I understand, this may be something

4 that you cannot regulate but our first suggestion

5 would be that you be very clear that there is to

6 be no benefit to the president, to senators to

7 congressmen, to state governors and to others who

8 had a hand in selecting those 8,700 communities.

9 No benefit personally from investments that they

10 hold in those communities.

11 The second recommendation that we made

12 was that you use something called Ethereum. The

13 Ethereum block chain. Block chain technology is

14 basically a distributed public database that is

15 hard to manipulate. That you basically use this

16 new technology to report on opportunity zone

17 investment social impact.

18 And we have outlined an impact

19 measurement strategy that would basically allow

20 you to collect and analyze impact data, to

21 evaluate the data and then to possibly and again

22 this is beyond your capability but what we would

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1 like to see is we would like to see the social

2 impact data used to calibrate the tax credit.

3 You want to put a liquor store in

4 Anacostia using the opportunity zone tax credit.

5 The rules say that these types of sin businesses

6 are not allowed. But we know that the second

7 tranche of the regulations actually provide a safe

8 harbor where there are going to be companies that

9 utilize, that are able to put in sin businesses in

10 opportunity zone communities.

11 If you don't believe me, there was an

12 opportunity zone podcast that I'm happy to send

13 you that outlined exactly how that would work.

14 So what we would like to see is we would

15 like to see the opportunity one tax credit

16 calibrated to the social impact of the business.

17 So that if you put affordable housing in

18 Anacostia, you should get the entire tax credit.

19 No question about it.

20 You put a liquor store in Anacostia, you

21 should get five percent of the tax credit. Some

22 type of calibration that measures social impact

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1 and reduces or increases the tax benefit

2 accordingly.

3 Now again, complicated, hard to do but

4 we know that there are certain entities, Beeck

5 Center, Georgetown University. In the interest of

6 full disclosure, I'm a member of the faculty of

7 Georgetown. I had nothing to do with the Beeck

8 Center's social impact methodology as it relates

9 to Opportunity Zones, but I'm simply pointing out

10 that there is one, and it could be utilized to do

11 exactly what I've just suggested in the interest

12 of specificity, I guess.

13 So, those would be our main

14 recommendations. If you look at the presentation,

15 again, CreativeInvest.com/oz.pdf, at the end of

16 the presentation, you will see a social cost

17 calculation mockup -- oh, this thing is moving, I

18 don't to want to fall off the stage here -- but

19 you'll see social cost mockup that is basically

20 our idea as to how you would take the social

21 impact data from that theory and blockchain that

22 we suggested and put it into a dashboard, that

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1 anybody could utilize to see what the social

2 impact of Opportunity Zones investments are.

3 Now, this is something, again, I don't

4 know how you would regulate that. I really don't,

5 you know, but I know that it's doable. I know

6 that the technology that has been developed now

7 allows you to do things which you could not do 20

8 years ago. And I'm suggesting you use it for this

9 purpose. So, I think that about covers my

10 comments. Any questions -- No, I'm just kidding.

11 Thank you very much. I appreciate your time.

12 MS. BOLTON: Thank you, Mr. Cunningham.

13 Our next speaker is Mary Scott Hardwick, from

14 Opportunity Finance Network.

15 MS. SCOTT-HARDWICK: Good morning. My

16 name is Mary Scott Hardwick. I work with

17 Opportunity Finance Network, which is a National

18 Trade Association of Community Development Finance

19 Institutions. We have 270 members, and we are

20 CDFI, ourselves as well.

21 Collectively, our members provided over

22 65 billion in responsible lending to disinvested

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1 communities throughout the country. So, we are

2 excited about the chance for additional capital to

3 flow into these communities but are concerned

4 about whether proper regulations have been written

5 to ensure that the benefits flow through to the

6 communities and to the residents of those

7 communities.

8 In order to do that, we have three areas

9 that I'm going to cover today, first reporting

10 requirements, anti-fraud and anti-abuse

11 provisions, and then finally ensuring investment

12 in operating businesses.

13 So first, on the reporting requirements,

14 OFN is supportive of the Opportunity Zones'

15 framework that was developed by the Beeck Center

16 and the U.S. Impact Investing Alliance, and we

17 support transaction level reporting requirements

18 with impact measurements, and making that data

19 publicly available at least once a year.

20 This will allow communities to see

21 what's going on, what sort of investments are

22 being made, evaluations to be made of the program

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1 to ensure that it is worth the tax benefit, or the

2 tax loss that is occurring, and it will allow

3 people to compare zones to see if rural areas are

4 seeing more investments or urban areas, or how the

5 program is working, and where it maybe need to be

6 tweaked in the future.

7 We also believe that reporting

8 requirements are one of the best ways to deter

9 fraud and abuse. If people know that they're

10 going to have to submit, you know, transaction-

11 level data, they need to be doing what they're

12 supposed to be doing.

13 In addition, on the anti-abuse

14 provisions, we have a couple of places that do

15 need to be clarified. The first is the

16 improvements for vacant land when it is acquired.

17 Currently the regulations state that it doesn't

18 need to be substantially improved, but in a

19 different area it talks about how it needs to be

20 more than insubstantially improved, so that's

21 pretty confusing for someone trying to figure that

22 out.

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1 So, for example, we would want to make

2 sure that if somebody acquires 50 acres of land,

3 that they're not putting some small minimally

4 impactful commercial development on a quarter acre

5 and saying that they've improved the land enough.

6 If you're acquiring large pieces of

7 property, there needs to be a threshold for how

8 much you need to improve it, and having that

9 clarity will help investors move forward.

10 The conference report that passed with

11 H.R. 1 indicates that certification for funds

12 should be similar to the New Markets Tax Credit

13 Program, and we support that, including adding

14 things that are required in the New Markets Tax

15 Credit Program, such as having fund managers

16 certify that they haven't been convicted of

17 certain financial crimes within the past three

18 years.

19 We think that's a commonsense check

20 that's already in other Treasury regulations for

21 similar programs, and we would support adding

22 that.

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1 We also suggest extending the ban on SIN

2 businesses, not just for opportunity funds, but to

3 qualified Opportunity Zone businesses.

4 Currently a fund can't invest in the CIN

5 business, but the qualified Opportunity Zones

6 business does not have the same restriction on it,

7 so that creates a loophole for somebody being able

8 to pass through funding there, so we would

9 encourage you to clarify that and make it uniform

10 across the board.

11 Finally, we are looking for some

12 additional clarity around the reasonable cause for

13 a fund to fail a 90 percent ASSET Test. I think

14 there's concern that, you know, it could be too

15 broad and people would be not making those

16 investments, or if it's too narrow, you would have

17 people who are unwilling to maybe make a riskier

18 investment in a low-income community because

19 they're scared they may fail a 90 percent ASSET

20 Test, if a business plan falls apart, or something

21 like that.

22 So, it would be very helpful to have

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1 clear definitions of reasonable cause is and how a

2 fund would meet that 90 percent requirement.

3 Finally, we would like to thank Treasury

4 and the IRS for this set of regulations for

5 providing a lot more information about investing

6 and operating businesses. We believe that job

7 creation is the only way that this is going to

8 provide true economic benefit, so we are

9 encouraged that those pieces are in there.

10 We remember at the Economic Innovations

11 Group Opportunity Zones Working Group, which,

12 they're going to be testifying later, and we

13 support the recommendations in their letter, and

14 we are co-signatory of their letter with

15 recommendations on how to improve it for operating

16 businesses. So, thank you for the opportunity to

17 talk today.

18 MS. BOLTON: Do we have any questions?

19 And I apologize because I didn't ask the Panel for

20 questions for Mr. Cunningham. So, Mr.

21 Cunningham, we'll wait till the end, and if

22 anybody has a question for him we can ask then.

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1 Does anybody have any questions? I have one.

2 MS. SCOTT-HARDWICK: Okay.

3 MS. BOLTON: So, your vacant land rule?

4 MS. SCOTT-HARDWICK: Yes.

5 MS. BOLTON: Do you have another in your

6 head for commercial?

7 MS. SCOTT-HARDWICK: I don't have a

8 number in my head, but I believe it does need to

9 be more clearly defined.

10 MR. NOVEY: Excuse me.

11 MS. SCOTT-HARDWICK: Yes.

12 MR. NOVEY: If we could come up with it,

13 we would put it in the closet, so -- (laughter).

14 The proposal that you mentioned from the -- or

15 under certain occasions and there are -- for a

16 variety of arcane procedural aspects of certain

17 process of the statute as it change between that

18 time and the time it's enacted.

19 But how much time between the submission

20 for certification and receipt certifications that

21 you anticipate would be a horrible delay for all

22 of the Opportunity Zones? And if there were as

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1 few as one per zone, we're talking about staffing

2 over 8,700 hands-on certifications. Is that

3 really consistent with the speed and flexibility

4 that comes if the (inaudible)?

5 MS. SCOTT-HARDWICK: We believe, and

6 from reading the conference report and talking to

7 members on The Hill, that they do support having

8 certification in there. I don't have an exact

9 number for exactly --

10 MR. NOVEY: And so, how many FTEs

11 personally can get hit?

12 MS. SCOTT-HARDWICK: I would not know

13 that. I don't.

14 MR. NOVEY: What I'm saying is, that we

15 also bring that legislative history, and had been

16 said you must send something into an office, and

17 went to CDFI, and you need to wait until a certain

18 issue comes back. And that would have been

19 consistent with the legislative history, it would

20 have been highly problematic with respect to the

21 structure of the statue with its stress on

22 flexibility and (inaudible)?

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1 MS. SCOTT-HARDWICK: I agree that it

2 would take additional resources in order to that,

3 the position of our organization is that it's

4 worth that investment and time.

5 MR. NOVEY: And so, but with our current

6 resources should we simply slow things down, or it

7 has to be (inaudible)?

8 MS. SCOTT-HARDWICK: I believe that that

9 the Treasury has found a way to do it with several

10 other programs, and I would encourage you to do as

11 much as you can.

12 MR. NOVEY: Thanks.

13 MS. SCOTT-HARDWICK: Mm-hmm. Thank you.

14 MS. BOLTON: Thank you. Our next

15 speaker is Kevin Matz from the American College of

16 Trust and Estate Counsel.

17 MR. MATZ: Good morning. And thank you

18 for the opportunity to speak today. I'm Kevin

19 Matz. I'm a Tax Trust Estates Lawyer, and also a

20 CPA. I'm a partner at the Stroock law firm in New

21 York City, and I'm speaking on behalf of the

22 American College of Trust and State Counsel, on

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1 trust and estate specific issues under the

2 proposed regulations.

3 In our comment letter, we've identified

4 five. Just to move things along I'm going to

5 start with the second one. But just very briefly

6 by way of background, again, we are talking about

7 a trio of benefits, three different benefits to

8 investors by investing in this program.

9 Number one they get a chance to defer

10 capital gains, until the earlier two occur

11 according the statute of sale or exchange of the

12 interest in the Qualified Opportunity Fund, again,

13 they have to invest in the Qualified Opportunity

14 Fund within 180 days of that, or deemed 180 days.

15 Or, the outside date which, December 31, 2026, so

16 sale or exchange, or December 31, 2026, whichever

17 comes first according to the statute, that's the

18 trigger point for an inclusion event.

19 The second benefit to be derived, so you

20 have tax deferral, you could possibly, through

21 basis adjustments, eliminate up to 15 percent of

22 the capital gain, if you hold the interest in the

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1 Qualified Opportunity Fund for five years, you get

2 a 10 percent basis step up, if you hold it for

3 seven years, you get 5 percent on top of that, so

4 that's 15 percent in total that could be

5 eliminated.

6 And then thirdly, the (inaudible)

7 benefits. If you happen to have the investment of

8 the Qualified Opportunity Fund including tacking

9 by virtue of someone dying, and the like, and you

10 get to 10 years, and their subsequent appreciation

11 value the interest goes up in value, then that

12 appropriation is completely tax free.

13 So what are some of the issues that are

14 presented in the trust and estate field? I am

15 going t point, because I think that now -- I think

16 in terms of trust and estates means people die and

17 they pay taxes, but they also can make gifts, you

18 could lifetime transfers.

19 So what happens if you have a gift and

20 interest in Qualified Opportunity Fund? My

21 thought, when I was reading the statute was, what

22 the statute talks about what's a triggering event,

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1 sale or exchange, or December 31, 2026, is a gift

2 to sale exchange? The answer, at least according

3 to the plain and unambiguous language of the

4 statute, I would submit should be null.

5 It says sale or exchange, and that's

6 what it says under Section 102: a gift or bequest

7 is not a sale or exchange. So, under the Internal

8 Revenue Code plain and unambiguous language, it

9 should not be treated, I would respectfully

10 submit, as a taxable event.

11 However, under the second tranche

12 proposed regulations that came out on May 1st, it

13 is treated as an inclusion event, unless you

14 happen to have a gift, or actually "a

15 contribution" to a special type of trust that is

16 called a grantor trust which is treated as one and

17 the person as the person who makes the

18 contribution for income tax purposes.

19 Now, I looked at that, I compare it to

20 the statute, it does -- very respectfully -- it

21 does not squire with the statute, and that was

22 noted in the preamble to the proposed regulations,

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1 with the proposed regulations, the preambles then

2 said, they went back to the legislative history,

3 the conference report, and in the conference

4 report, it talks about a disposition, and it goes

5 off of the sale and exchange concept.

6 You'll see that in the comment letter,

7 and this begins the part two, beginning on page 6,

8 we go very meticulously through the conference

9 report, it doesn't evidence an attempt to state,

10 to basically change a very clear precept of the

11 Internal Revenue Code.

12 Again, I respectfully submit that if

13 Congress wanted to change -- wanted to have gifts

14 deemed as sales or exchanges so as to trigger

15 this, they could have done it very easily. They

16 did not. And again, there is nothing that if we

17 look at the entire legislative history and the

18 conference report. Again, I've quoted language

19 verbatim that would suggest that there's some

20 loose language, but then if you viewed in context,

21 it does not show an attempt for expansive reading

22 to override what's in the plain and unambiguous

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1 language of the statute. So, that is one point

2 that we would request revision on.

3 I talked about gifts being and

4 exception, but there's an exception as to the

5 Internal Revenue Code, we love our exceptions to

6 exceptions, and there is a case of -- instead of

7 having an outright gift, say, to an individual, I

8 gave it to my son, made a gift to my son, having

9 an interest in Qualified Opportunity Fund which

10 would be a trigger. Again, under the proposed

11 regulations, I would submit should not be the

12 position of the statute.

13 But if instead I made a gift to a

14 grantor trust, which is a trust that usually I

15 would create, that for tax purposes has certain

16 triggers in it, that cause it to be one and the

17 same as me for income tax purposes, then the

18 proposed regulations, correctly, state that that

19 is disregarded, and that will not be an inclusion

20 event.

21 If there's a further distribution from

22 the trust, and it's not by reason of death, that

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1 could an inclusion event down the road, but the

2 actual contribution of an interest in the

3 Qualified Opportunity Fund to a grantor trust

4 would not be -- would not be bad. I'm following

5 along; this is the third point that begins over on

6 page 10 of the ACTEC Report.

7 So, what are some of the issues that are

8 raised there? Well, a couple things we need to

9 bear in mind about grantor trust, the number one,

10 the grantor -- so being the example, I set up a

11 trust, I retain certain powers, including maybe

12 the power of substitute assets of equivalent

13 value, as a grantor trust triggers Section

14 675(4(c) of the Code.

15 That allows to be a grantor trust, and

16 the income that's derived from the assets

17 including the Qualified Opportunity Fund, they are

18 all taxed to me, during my lifetime as a grantor.

19 So that's one benefit. Basically it all flows

20 through.

21 There's another important provision that

22 needs to be considered, and that is Revenue Ruling

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1 85-13, Revenue Ruling 85-13. And that says that

2 if I have a transaction with the grantor trust,

3 let's say I were to sell assets to the grantor

4 trust, it could be one with some interest in the

5 Qualified Opportunity Fund, and I get back cash,

6 or a promissory note, or other property in kind,

7 it's so long, dealing right pocket, left pocket,

8 all of myself, it's a tax nothing for income tax

9 purposes.

10 Revenue Ruling 85-13 says basically:

11 Across the board it's a tax nothing. I

12 respectfully submit that the proposed regulations

13 should similarly have -- or rather, the regulation

14 as finalized, should similarly also state that, so

15 that not only a contribution of an interest in the

16 Qualified Opportunity Fund, and the proposed

17 regulations talk a contribution interest in the

18 preamble talks about a gift, presumably that's one

19 of the same that could be clarified, that would be

20 very helpful.

21 But if I were to have other transactions

22 that were within the purview of 85-13, basically

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1 anything during my lifetime, while it's a grantor

2 trust, it could be a sale, it could be a swap of

3 assets, it could be a distribution, including in

4 kind, that should not be an inclusion event, and

5 it seems to be consistent with the intent here,

6 but that needs to be clarified.

7 Importantly, because a grantor trust

8 also is treated as one and the same as me, it

9 should not matter if the source of funds that are

10 used to go to the Qualified Opportunity Funds,

11 come from the grantor trust, or come from me

12 directly. Again, Revenue Rule 85-13, the grantor

13 trust provision 671 through 679 of the code,

14 treated as one and the same, and therefore that

15 should be respected all the way across the board

16 here.

17 Now what are some of the other issues?

18 I'm going to point four, which is page 11. Here

19 are some items to consider. There were, in the

20 proposed regulations that came out, actually the

21 first tranche that came out last year, very

22 helpful relief provisions to the 180 date rule,

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1 that's basically the rule that says: if you have a

2 capital gain, you have 180 days to invest in the

3 Qualified Opportunity Fund, if you don't, you lose

4 the opportunity to defer and have possible basis

5 adjustments, and then after 10 years, if there's

6 appreciation, be able to avoid tax on that, on the

7 gain.

8 That's very helpful. Where this could

9 be problematic, let's say, and he worst of relief

10 provisions, so one relief provision is that if I

11 have to be a partner in a partnership, instead of

12 looking at the partnership, unless an election is

13 made to the contrary, it could be the partner who

14 then has the ability to defer the gain, because a

15 partner gets on it anyway based on by receiving a

16 K-1, and then unless an election is made

17 otherwise, it's the end of the tax year that's

18 used for 180-day period to start. So that would

19 be in most cases -- in many cases December 31.

20 So I could have had -- the partnership

21 could have had the sale occur February last year,

22 well over a year ago, but because it was a

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1 partnership, and because an election was made

2 otherwise, December 31, 2018, could have been the

3 trigger date to start the hundred day clock and as

4 long as the investment was made by June 29th of

5 this year, it would qualify. What are some of the

6 issues that arise partnerships, S corporations and

7 also apply to trusts and estates? This is

8 dependent on effective communication between

9 effectively the fiduciary, the manager and the

10 beneficiary or partner or S corporation

11 shareholder. And the communication device is the

12 K1. And that works wonderfully if the tax returns

13 are filed properly, the K1's are issued properly

14 and then all that gets shared.

15 But that's not how the real world often

16 works. Quite often, especially with any measure

17 of complexity, quite often with partnerships, S

18 corporations and also trust and estates, returns

19 go on extension. And if returns on extension,

20 you're talking about due dates in September,

21 October for the K1 to even have to issue. And by

22 the time the partner or S corporation shareholder

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1 or beneficiary of the trust or estate gets the K1,

2 low and behold and you'll see as described in the

3 example that provide in the materials, it could

4 well be September. And at that point, they're

5 completely out of luck because they're more than

6 180 days out from the window.

7 So, our proposal here is that just as

8 there was relief provided for the 180 day

9 situation in the case of partnerships that in

10 order to achieve the objectives here of

11 substantial economic investment, in economically

12 stressed communities, i.e. opportunity zones, the

13 capital gains and the funding mechanism. There

14 should be an allowance here that says the 180

15 period runs from the later of the 180 day period

16 under the proposed regulations. Or if later, 180

17 days from the filing of the time they filed,

18 including extensions for the tax return that

19 issued the K1.

20 My time is very short, just a couple of

21 brief points. Basis adjustments, what happens

22 upon death. Under section 691 which is

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1 incorporated by reference here, there is no step

2 up in basis. However, you'll see and this is.5,

3 if however, there is appreciation value through

4 date of death, that is not an amount that is

5 recognized under the section pursuant to the

6 language of the statute. Therefore, that amount

7 should not be tied to 691 which basically carries

8 over the deferred gain to the person who happens

9 to be holding onto the investment at the time of

10 recognition event such as December 31, 2026. And

11 that amount through date of death should be

12 subject to step up and basis.

13 And then just the last point, 15 seconds

14 and I see that I'm out of time. What happens to

15 an inheritance where someone inherits an interest

16 and Qualified Opportunity Fund and low and behold,

17 they have nothing to pay the tax on come December

18 31, 2026, request relief. Thank you for your time

19 and attention.

20 MS. BOLTON: Thank you, Mr. Matz.

21 Panel, do we have any comments or questions?

22 MR. NOVEY: Do you see in the code any

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1 mechanisms or --

2 MR. MATZ: I'm sorry I didn't catch

3 that.

4 MR. NOVEY: You suggested that gift

5 should not count as an inclusion event.

6 MR. MATZ: Yes.

7 MR. NOVEY: Are you suggesting that the

8 sale or exchange by the donee would trigger a tax

9 liability for the donor if the donor happens to

10 know of it? Or are you suggesting that the sale

11 or exchange by the donee triggers liability for

12 the donors to start capital gains?

13 MR. MATZ: Well, I think the better

14 reason result here should be that the donee upon

15 receiving it, unless we have a grant or trust.

16 So, a grant or trust would be completely

17 different. Let's say I'm making a gift to my son.

18 MR. NOVEY: Yeah. I'm talking about not

19 a grant or trust.

20 MR. MATZ: Okay. In that case, the sale

21 or exchange by the donee should trigger a tax to

22 the donee. That, I think, is a better reason.

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1 MR. NOVEY: And if the donee sells and

2 let's say hypothetically that, you know, the donee

3 may have some gain because of the basis

4 (inaudible). But you were saying that the donee

5 then picks up the start gain by the donor.

6 MR. MATZ: Right. And that would be

7 consistent with how ordinary principles work.

8 MR. NOVEY: In my opinion, that might be

9 very reasonable -- but do you think that a donee

10 who says I don't see any obligation on my part. I

11 don't get it. I don't owe anything for gains that

12 my kind uncle may have diverged before I was born.

13 MR. MATZ: Well, in that case, the donee

14 has an obligation enforceable by the Internal

15 Revenue Service.

16 Well, if the donee has property and it

17 has zero basis perhaps or maybe an adjustment

18 basis over the course of time but putting that

19 aside. So, the zero basis and it sells it, it has

20 a gain. It has a capital gain, presumably that

21 then will trigger tax costs closest to the donee

22 and the donee fails to pay it, that is tax

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1 evasion.

2 MR. NOVEY: And if the donee has loses,

3 then so be it, the donor (inaudible)?

4 MR. MATZ: Well, that is a situation

5 that applies right now. So, it could be that

6 donor has a capital gain, doesn't make a transfer

7 or an individual's capital gain does not make a

8 gift to a donee. And then in a year prior to 2026

9 has losses, sells the interest to the qualified

10 opportunity fund then and then is basically to

11 have zero tax. So, that is no change from the

12 current situation that exists.

13 MR. NOVEY: In terms of clarifying that

14 the tax nothing attribute of the grant or trust

15 that are reflected, is there anything in the

16 current proposed regulations where you see an

17 implication that we would fail to reflect

18 (inaudible).

19 MR. MATZ: Again, that's an excellent

20 point. I don't see anything that necessarily cuts

21 away at it but it isn't addressed and therefore it

22 would be very helpful to clarify it because --

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1 MR. NOVEY: There are lots of obvious

2 consequences of current law that we don't address.

3 MR. MATZ: That is true. But it could

4 be that maybe simply an example to say that if

5 there's a sale, take back the promissory note,

6 that is governed by revenue rule 85-13 and

7 therefore it affectively is the same as though it

8 were a gift because it's a tax.

9 MR. NOVEY: Finally, you raised the

10 point in your comments that the IRD rate put the

11 beneficiary in the posture of having tax liability

12 for which it has no tax (inaudible). Are you

13 suggesting something more like a as an automatic

14 with underpayment interest extension of the

15 liability pay? So, that the liability can be

16 measured at an appropriate time but there would be

17 recognition of the fact of the persons liable for

18 the IRD ought to get some temporal relief that

19 would effectively be made whole.

20 MR. MATZ: That is an excellent

21 suggestion. If some relief is needed because any

22 time you plan right now basically you almost have

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1 to plan with life insurance. You know, you have

2 to talk about that which means then you have to

3 have this additional set up and reputable life

4 insurance trust to make it tax efficient. And

5 then you have to match the trustee and the

6 beneficiaries to whoever has the interest and

7 Qualified Opportunity Fund.

8 There's a lot to take in account. Some

9 sort of relief is needed and I do completely

10 understand your point that well the statute says

11 that and how far can you go beyond the statute.

12 But if there's some sort of relief provided,

13 installment payment plan and that could be

14 administratively built and that would go a long

15 way to addressing this concern. Thank you.

16 MS. BOLTON: Thank you. All right, our

17 next speaker is James Rose from the Rose

18 Development, LLC.

19 MR. ROSE: Hello and thank you, it's

20 great to be here. I was here at the first hearing

21 back in February that was going to be in January

22 and I was here with my wife. And the reason why

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1 we were here back then was that we are, I'm not a

2 -- I am a developer, I'm not an attorney, I'm not

3 an accountant and I'm also partners with the State

4 of Utah in some of my developments.

5 And one day, I'm having one of my

6 partnership meetings and the director walks in

7 with this letter from the Governor nominating 47

8 census tracts and says can you look this up and

9 tell me what is this, you know. And it was the

10 first time I'd ever heard of anything like that.

11 It was in about April or about June 1st and boy

12 this has really changed things for us.

13 Because at first, I was like well what

14 the heck, where's the map that shows me where

15 these census tracts are. So, I can understand

16 what properties that we have with the State of

17 Utah that we're developing and giving a large

18 portion of the money to the students, you know,

19 whether or not these developments are inside an

20 opportunity zone.

21 And so, it really sent us down a certain

22 path. Then we decided well, we better, once we

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1 figured out that it had to go through a fund and

2 then it had to go to, you know, go through all the

3 regulations and the processes we decided we better

4 do a fund. Well, then it was like well we need to

5 find an attorney that knows this and can help us

6 do this the right way. So, we drafted a set of

7 documents and we found out that there were going

8 to be these regulations, these guidance comments

9 and what not.

10 So, here is the first and second regs

11 right here, right? First one came out in October.

12 It was about 73 pages and it set us back because

13 we thought well there are really so many issues

14 not being an attorney, not being an accountant

15 that I didn't even know were possible issues in

16 the first place. I mean, we're developers. I'm a

17 licensed general contractor. I was a licensed

18 general contractor, builder, in the State of Utah

19 when I got my license. I'm also a principle

20 broker in Utah and in Nevada. So, I know a lot

21 about transactions as it comes to real estate,

22 building and doing things like that.

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1 So, this process that we've bee going

2 through has kind of led us to the point where

3 we're thinking, all right how do we take something

4 so complicated and make it simple for us to really

5 be able to use. And for us to be able to explain

6 to our friends and for my wife and I to do our

7 family planning with for the next, until 2047.

8 And so, one of the funny things that

9 happened to us is that on December 7, 2017, my

10 wife and I closed on about 20 assets in an

11 opportunity zone for the purpose of improving

12 these assets, you know, for the community and

13 doing exactly what the law really helps developers

14 do. But we did it about 20 days too soon, right?

15 So, we understand how important it is to know all

16 the little nuances of this law.

17 So, what we want to do is make it as

18 simple as possible in the big ways for when people

19 can -- so that normal people can understand and

20 verify what fund managers, now we're fund

21 managers, right, we're not just developers and

22 builders. Now all of the sudden, we have to

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1 manage a fund, we're fund manager for our own

2 projects. So, that when we talk to other people

3 as fund managers that they can get the information

4 without having to hire a bunch of accountants and

5 attorneys for just the big concepts.

6 And that's why I wrote all my comments

7 about the IRS website, www.irs.gov. And it's a

8 wonderful resource and tool. I think it could be

9 updated a little bit. You know, we have these

10 regs that have been coming out and there's some

11 really great things that haven't kind of

12 transferred over onto the website that I think

13 could happen. And there could be more of the kind

14 of, you know, opportunity zones for dummies kind

15 of sections, right? And it kind of gets into --

16 SPEAKER: Maybe opportunity zones for

17 real people, right?

18 MR. ROSE: Yeah. Yeah because sometimes

19 we feel like dummies when we're kind of going

20 through this. You know, I like to print things

21 off and I've been printing off everything that

22 you've been, you know, submitting and writing to

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1 us and cross reference it and, you know, trying to

2 figure it all out. And some of the things, you

3 know, we should be able to rely on as normal

4 people. And some of the things yeah, we might

5 need to, you know, get our attorneys to give us an

6 opinion letter on. But there should be parts that

7 we don't have to do that for.

8 And so, one of the things that I noticed

9 on the website recently because I went back to

10 check before all of this came. Was that in the

11 frequently asked questions page on opportunity

12 zones, there should be more detail and

13 clarification given as to what is a Qualified

14 Opportunity Fund. Currently, the FAQ page answers

15 the question, what is a Qualified Opportunity

16 Fund. With an answer indicating that it is a

17 vehicle for investing in eligible property located

18 in a qualified opportunity zone.

19 For someone unfamiliar with the act, the

20 stated answer could be interpreted as only

21 including real property located within an

22 opportunity zone. This interpretation would miss

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1 an additional major benefit of the act which is

2 the investment in qualified opportunity zone

3 businesses. And given the potential for growth

4 and positive impact that QOZB's can bring to

5 opportunity zones is benefit of the act should be

6 more clearly stated in the answer.

7 So, as somebody from my local community

8 of Utah where we have 47 zones and my current

9 office was located by some luck inside of an

10 opportunity zone, I look at this and I start

11 speaking to people about it. And all of the

12 sudden they start looking at me in my local

13 community like I'm some kind of an expert. And

14 so, I keep saying, listen, I am not an expert in

15 this but I am the guy that just recently held the

16 first stakeholders meeting in my community with

17 the mayors of my communities and the city council

18 members and so on and so forth. And not one of

19 them knew hardly anything about this and the

20 misconceptions were just unbelievable.

21 So, articles have come out and people

22 have started calling me and I'm sitting here

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1 thinking how can we make this the most reliable

2 for everyone. And that is pointing back to the

3 IRS website. We could have these, you know,

4 little bit better pieces of clarification that

5 people can go and fact check what others are

6 telling them. Whether it's their attorney's or

7 whoever it might be.

8 And then I reluctantly bring this last

9 part up which is just about the act itself. I

10 know that you don't want to really hear that but

11 as we have gone through different revisions of

12 PPM's or, you know, private placement memorandums

13 if there's anybody else out there like me that may

14 have never been to these things before. We have

15 had revision after revision based off of the

16 guidelines.

17 But when we look at raising additional

18 funds from people, you know, we can only right now

19 bring in tax advantage or deferred capital gains

20 money. And I know that you have to change the act

21 and we're not here to do that, okay, the law. But

22 wherein you have latitude to kind of make

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1 exceptions or create possibilities where some of

2 the people that call me that want to move their

3 businesses into these zones that want to do kind

4 of like ten year planning.

5 If it's something that you can do where,

6 you know, the part where if they leave their money

7 in there for ten years, you know, and there's

8 capital gains. It shouldn't really matter, that's

9 my big point, whether that money came from capital

10 gains. If they're willing to go through all the

11 rules, yeah, they're not going to get an increase

12 in basis, none of that applies to them. But they

13 should be able to get some of those benefits and I

14 don't know all the ways in which you could make

15 that possible where there could be. Hey, they're

16 leaving their money in those funds in the fund for

17 ten years and the fund then is investing in QOZB's

18 or QOZBP's properties, project.

19 And if you're not able to in some way

20 make that happen so that that money can be tax

21 advantaged, then perhaps as we are selling or

22 making money capital gains in our QOZB's and then

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1 we're sending that money back up to our QOF's,

2 right, our Qualified Opportunity funds. Then

3 maybe there's something that we can do that

4 clarifies the ability to take those capital --

5 some of that money somehow. I mean, I don't know

6 where the latitude is here but it would be

7 extremely helpful.

8 But either way, the simpler we can make

9 this and one other point about the IRS website.

10 If you could even have a little section that said,

11 if you were a QOZB, a business and you want to do

12 a QOZB, here are the one, two, threes. Or like a

13 checklist of ten things that you need to start off

14 with, that would be incredibly helpful. That's

15 it, that's all I had to say.

16 MS. BOLTON: Any questions for Mr.

17 Rose?

18 MR. NOVEY: Just one in terms of sharing

19 your predilection for printing stuff out and then

20 coming across something that is in need of

21 clarification. When I printed your hearing

22 outline, I came across 1K3-9LAY-BB67 and then

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1 something else as well with a similar (inaudible).

2 It's comments that you say you had submitted

3 before but I wasn't smart enough to figure out

4 what timeframe.

5 SPEAKER: PRN1.

6 MR. ROSE: You know and --

7 MR. NOVEY: We would love to see them.

8 MR. ROSE: I apologize for that. And

9 there again, this is my first time ever getting

10 involved in something like this or the hearing,

11 but thank you.

12 MR. NOVEY: But, you know, I saw the

13 summary of what you said.

14 MR. ROSE: Yes.

15 MR. NOVEY: And some of it was, as you

16 recognize, in addition to --

17 MR. ROSE: Outside.

18 MR. NOVEY: -- alerting us to your

19 frustrations, which we also have some

20 frustrations. You may want to communicate that to

21 the people who actually can change the law. But

22 in addition, since you made those comments and

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1 want us to prevent it (inaudible).

2 MR. ROSE: Absolutely. There was a

3 clerical error there. I thought that was --

4 MR. NOVEY: No problem.

5 MR. ROSE: Thank you for bringing that

6 to my attention.

7 MR. NOVEY: Do you know how many

8 clerical errors I make?

9 MR. ROSE: Thank you.

10 MS. BOLTON: Thank you very much. Our

11 next speaker is Fran Seegull, U.S. Impact

12 Investing Alliance.

13 MS. SEEGULL: Good morning, folks.

14 Great to see many of you again. I'm Fran Seegull,

15 Executive Director of the U.S. Impact Investing

16 Alliance.

17 So, the U.S. Impact Investing Alliance

18 and our members represent collectively about a

19 thousand private investors and financial

20 intermediaries who are actively engaged in

21 deploying private capital to advance the public

22 good. We believe in leveraging the power of

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1 markets to create measurable social, economic, and

2 environmental benefits and that investors can play

3 an important role in achieving desirable policy

4 outcomes. Many of our members and our

5 stakeholders have particularly deep knowledge of

6 and track record in investing for community

7 economic development. They include institutional

8 investors, foundations, pension funds, university

9 endowments, high net worth individuals, banks, and

10 community development finance institutions that

11 understand the importance of place, local

12 contacts, and authentic community engagement when

13 investing in low-income communities. For this

14 reason, we have taken a keen interest in

15 opportunity funds, opportunity zones, and the

16 development of pertinent regulations, but it's

17 based on consultation with these members that I

18 offer the testimony to you today.

19 In previous comments before you and on

20 several iterations of written comments, we have

21 underscored the critical importance of timely,

22 accurate, and consistent data collection and

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1 reporting. We believe that of the remaining

2 issues to be addressed by Treasury in its

3 rulemaking, this is perhaps the most important.

4 It's certainly the most important to us and the

5 members that we represent.

6 We are heartened to see that Treasury

7 released a request for information on data

8 collection and tracking and opportunity zones and

9 we're likewise glad to see that this issue has

10 been taken up by the White House Opportunity and

11 Revitalization Council. We are grateful to those

12 of you here today and your colleagues throughout

13 the Administration for their efforts to elevate

14 this topic of impact accountability and community

15 engagement. Before I address data and reporting

16 requirements, I'd like to first quickly address

17 the issue of rules to prevent abuse.

18 It was encouraging that the Notice of

19 Proposed Rulemaking included broad authority to

20 recharacterize abuse of transactions as

21 non-qualifying. In final regulations we recommend

22 that Treasury should seek to provide greater

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1 clarity about the circumstances in which this

2 authority may be exercised. Qualified opportunity

3 funds are given great flexibility in deploying

4 capital in opportunity zones.

5 The authors of the statute were clear in

6 their goal to see a broad range of operating

7 businesses and other investments supported to meet

8 the needs of qualified opportunity zones.

9 Treasury in particular with the latest proposed

10 regulation has approached the rulemaking process

11 in a manner consistent with this intent, but this

12 flexibility also creates significant room for

13 abuse. It would be impractical to enumerate every

14 type of potential abuse. In our written comments,

15 we articulate a three-part approach to this topic.

16 First, in final rules, the IRS

17 Commissioner should maintain the broad authority

18 to recharacterize abuse of investments as such.

19 Second, Treasury should define some clear

20 potential abuse of action such as land banking to

21 immediately prevent such predictable negative

22 outcomes. And third, Treasury should consider the

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1 adoption of a safe harbor such as independent

2 certification of the community benefit practices

3 of opportunity funds to provide investors with an

4 additional degree of certainty that their

5 investments are being well managed and do not

6 violate these abuse rules.

7 We provide greater detail on all points

8 of this approach in our written comments, but on

9 this last point, I would like to underscore that

10 the private sector tools needed to implement

11 independent certification are already under

12 development. Several speakers already mentioned

13 this opportunity zone's reporting framework is a

14 private sector standard for reporting that was

15 developed by our organization, the U.S. Impact

16 Investing Alliance, in partnership with the New

17 York Federal Reserve Bank and the Beeck Center at

18 Georgetown.

19 So, a broad range of groups including us

20 have worked to develop these frameworks, tools,

21 and methodologies that could be used as a basis

22 for an independent certification program. With a

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1 safe harbor tied to independent certification, we

2 believe that significant numbers of opportunity

3 fund managers would be incentivized to voluntarily

4 take part. We believe that with sufficient

5 participation, these market-led efforts would

6 become financially viable, these certification

7 efforts. Standards would need to be instituted

8 for which certifications qualify for safe harbor

9 protection, and these certifications would need to

10 be continuously monitored over the course of the

11 program. We believe that the CDFI Fund would be

12 naturally suited to handling this task, given

13 their experience managing other effective

14 community development programs.

15 As discussed in my introduction, I want

16 to spend the balance of my time on the vital

17 importance of tracking and publicly reporting on

18 fund and transaction level data about opportunity

19 zone investments. The opportunity zones market

20 cannot function efficiently without access to

21 basic transaction data about qualified opportunity

22 funds and their investments. For this reason, we

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1 recommend the Treasury collect and report publicly

2 on basic fund and transaction level data about

3 qualified opportunity fund activities in a

4 consistent and timely manner. Doing so would

5 achieve the goal of tracking the effectiveness of

6 the policy and create multiple benefits directly

7 increasing that effectiveness. While we applaud

8 Treasury for its thoughtful RFI on this topic, the

9 time lag in aggregated data envisioned in that

10 document would be entirely insufficient to assess

11 the efficacy of the policy.

12 Fund and transaction level reporting

13 should be collected in a manner other than through

14 a tax form, likely through a web portal, and the

15 information should be made available to the public

16 in a disaggregated, anonymized, and timely

17 fashion. Such reporting would not create a

18 meaningful burden on qualified opportunity fund

19 managers. And the public benefit of such

20 reporting was articulated in a wide range of

21 public comments submitted to Treasury to its RFI

22 on the topic.

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1 The statutory language creating

2 opportunity zones gives Treasury the necessary

3 authority to collect and report basic fund and

4 transaction data. Collection of this data will

5 enable qualified opportunity fund managers to

6 track and certify their compliance with the

7 statute. The Secretary is given the specific

8 authority to promulgate regulations to facility

9 the certification of qualified opportunity funds.

10 Furthermore, while we primarily see this

11 data collection effort as a means to promote the

12 efficient formation and deployment of capital, an

13 ancillary benefit would be to inform Treasury in

14 promulgating and enforcing rules to prevent abuse,

15 another point on which the Secretary has specific

16 authority to institute reporting requirements.

17 Finally, Treasury has repeatedly and

18 clearly articulated that the purpose of the

19 statute is to promote economic activity in

20 opportunity zones. This intent is further

21 supported by the statutory language and

22 legislative history of Regulation 1400(c). In

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1 previous written comments, we have discussed at

2 length the benefits that basic and transparent

3 reporting will have for market participation.

4 To quickly summarize this point,

5 reporting will increase investor confidence,

6 enable more efficient capital matching, and

7 promote effective partnership with state and local

8 governments. Again, the Secretary is given broad

9 authority to promulgate rules that advance this

10 legislative purpose and could under that authority

11 institute reporting requirements. Such a

12 reporting process would require a minimum level of

13 staffing within Treasury to implement reporting,

14 ensure completeness and accuracy of data, and

15 prepare reports.

16 The CDFI Fund provides a model through

17 its role in implementing and overseeing the new

18 markets tax credits program, and we suggest that

19 the Secretary consider leveraging this existing

20 resource to support implementation of opportunity

21 zones' reporting requirements.

22 Thank you once more for the opportunity

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1 to testify. We've remained deeply optimistic that

2 once these remaining points are clarified, this

3 policy can be used to improve the lives of the 32

4 million residents living in opportunity zones

5 today. The taxpayers of this country have made

6 and will make a tremendous investment in the

7 economic potential of opportunity zones. I urge

8 you here today to give us the tools we need to

9 measure and affirm the impact of those

10 investments. Thank you.

11 MS. BOLTON: Thank you. Does anybody on

12 the panel have a question?

13 MR. NOVEY: It would help even if was

14 not an exhaustive list to give some examples of

15 abuses you think we ought to write into the regs

16 and, in particular, what the consequences of those

17 abuses ought to be for either the fund or the

18 ultimate (inaudible) the business, the fund, or

19 the investors.

20 MS. SEEGULL: So specific examples of --

21 MR. NOVEY: The IRS and Treasury are not

22 bashful about being concerned about abuse, but

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1 (inaudible). You referred to the importance of

2 providing for independent certification,

3 essentially of consistency with the legislative

4 history as articulation of the purpose. There's a

5 variety of questions related in part to who would

6 do this. Would such certification be conclusory?

7 In other words, you've got private actors. You've

8 got a lot of money involved. It would not be

9 unheard of for an otherwise magnificent

10 independent force to get captured by the

11 transactional process, a fascinating podcast by

12 Michael Lewis (phonetic) (inaudible).

13 So, would a positive response be

14 absolutely exclusory that IRS could not get behind

15 it to say we don't think that this was a fair

16 (inaudible)? What consequence of failure there

17 ought to be done? And are you imagining ab appeal

18 process for someone who says I should have gotten

19 my certification and you didn't give it to me?

20 And it may have been negligence. It may have been

21 a difference in judgment. It may have been

22 corrupt. But it would be unusual and possibly

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1 inappropriate for some private actor, absent

2 statutory delegation and responsibility, to get

3 this kind of control over whether or not a

4 taxpayer gets the benefits that the taxpayer

5 thinks it is entitled to.

6 In terms of the transaction and the

7 transaction tracking, you said that, well, this

8 isn't going to be collected by the IRS and

9 implicitly seemed to suggest that, therefore, it

10 would not be subject to the privacy assurances in

11 Section 6103 (inaudible) numbers instead of

12 concepts. And I'm not sure that this would get

13 the kind of granular analysis that you're

14 suggesting be made public, so you're looking to

15 whether or not that kind of granular information

16 would be collected for government evaluation of

17 what's going on. But making that kind of granular

18 analysis public, even if, as you put it,

19 anonymized, but is aggregated, if there is a

20 transaction that is described and it was in a

21 census track (inaudible), and there is only one

22 fund operating a census track there, being

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1 anonymized doesn't do much good. And so I think

2 the privacy issues are important.

3 Then finally, lacking explicit statutory

4 mandate, you said it was written for authority,

5 but not the statute, suppose somebody says I don't

6 feel like filing this information, what are the

7 consequences? Should the IRS enforce filing by

8 denying the tax benefits? Should the filing be

9 done (inaudible) under penalty of perjury? I

10 think the general desirability of taking a tax

11 incentive, which is as inviting, sort of you all

12 come, as this one is, with no aggregate limit on

13 the amount of(inaudible) that would be possible,

14 some people can take up (inaudible), the risk that

15 all of the problems that Mr. Cunningham identified

16 that might come true are there, but take concrete

17 steps to ensure that what Congress says it wanted,

18 it gets, are not simple or automatic.

19 MS. SEEGULL: Okay. I'll do my best to

20 answer those. I wish I had taken my pen up here.

21 I'll do my best and happy to take some of this

22 offline.

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1 MR. NOVEY: (inaudible).

2 MS. BOLTON: Yeah, I second the examples

3 for abusive transactions.

4 MS. SEEGULL: Okay. So, just as kind of

5 a high level thought, we believe and we're also

6 part of the EIG coalition and Novogradac coalition

7 and our members feel that in exchange for the tax

8 advantage capital that opportunity zones

9 represents, that the disclosure so that we can

10 ascertain the efficacy of the policy is a very

11 reasonable trade.

12 MS. BOLTON: Well, to that, you need to

13 go somewhere else because that's not in the

14 statute at this point.

15 MS. SEEGULL: Understood. Understood.

16 And someone else mentioned that reporting was

17 stripped out of the statutory language for

18 parliamentary reasons, and we're aware of that.

19 I'm not able to speak about live legislation

20 because I'm not allowed to lobby, so I won't opine

21 on that topic here, nor is it appropriate in this

22 forum, but I'm just saying what our members

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1 believe.

2 So, what we are communicating in a

3 testimony is two pieces around data. One is fund

4 and transaction level data disclosed to a central

5 data repository and then available to state,

6 local, federal governments, policymakers,

7 academics, as a way for us to ascertain whether

8 the opportunity zone benefit has been efficacious,

9 and again, our belief is community economic

10 development is a desired result.

11 And so, what we envision there, and I'll

12 get to this piece about certification and rules to

13 prevent abuse in a moment, but what we asked for

14 actually in our first public comment letter, and I

15 testified on this on Valentine's Day earlier this

16 year, we're asking for capital raised into an

17 opportunity fund, property acquired, amount

18 invested in each deal and deed, location by census

19 track, NAICS code sharing the business type, so

20 that we can start understanding -- and we actually

21 asked for additional information, including jobs

22 creation, percentage of units affordable where

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1 appropriate, new business starts, business

2 ownership type with a special focus on women and

3 minority entrepreneurs, and poverty reduction,

4 which many folks believe that that is an outcome

5 that should not be -- that would be burdensome on

6 the fund manager, and so we threw that in there,

7 but I think that it's really important throughout

8 all of these discussions around data to understand

9 what is appropriate use and request of fund

10 managers and what is best analyzed by policymakers

11 and academics and think tanks.

12 And so there, what we're envisioning is

13 discloser through a web portal similar to the one

14 that is used by the CDFI Fund to administer new

15 markets tax credits. I take your point about

16 privacy and if, you know, there is, indeed, one

17 investment and one opportunity zone that is

18 problematic, but we still believe that -- what was

19 suggested in the RFI from Treasury was single

20 numbers, complete, kind of programmatic

21 aggregation issued, you know, every handful of

22 years and we feel like that is insufficient. So

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1 that's kind of one topic and I'll try to wrap it

2 up. I see we have a time constraint.

3 On the issues of rules to prevent abuse

4 there what we're asking for is a certification

5 safe harbor saying that if you use a third party

6 certifier, indeed, a private sector certifier

7 those certifiers which would be certified by, say,

8 the CDFI Fund and some kind of interagency

9 agreement in the same way that there was an

10 interagency agreement between the IRS and the CDFI

11 Fund and certifying the 8,700 opportunity zones.

12 And so, you know, asked the

13 representative from Opportunity Finance Network

14 about this issue of certification. What we're

15 asking here around the rules to prevent abuse, the

16 safe harbor, a certification program where, say, a

17 CDFI Fund would certify the certifiers, so there

18 wouldn't be -- need to be a certifier and, you

19 know, just your point, your question to OFN

20 earlier today. So that's sort of what we imagine.

21 I'm happy to disclose in writing answers

22 to some of your other questions if you feel that I

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1 don't have time to answer them at this time. I

2 see you're wanting to move on. Okay. Well, thank

3 you --

4 MS. BOLTON: We would like to hear from

5 you, but we have a lot of speakers.

6 MR. NOVEY: One thing to add and that is

7 when you do a lot of people have criticized the

8 selection by governors. In some cases, census

9 tracts that were gentrified, and by the time -- in

10 fact, gentrified by the time the governors made

11 the designations. And are you suggesting that

12 there will be some impairment of investors that

13 don't always go into those tracts because there

14 really is little social benefit derived

15 particularly from the loss of tax revenue?

16 MS. SEEGULL: The Urban Institute did a

17 report, as you probably saw, that showed 3 to 4

18 percent of census tracts that were selected or

19 have experience gentrification so it's still a

20 relatively small percentage, but we know it's a

21 concern. So I'll look forward to following up

22 with greater details and examples in a written

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1 format.

2 MR. NOVEY: It may be more than 3 to 4

3 percent --

4 MS. SEEGULL: Yeah.

5 MR. NOVEY: -- of the total investment.

6 MS. SEEGULL: Pardon?

7 MR. NOVEY: It may be more than 3 to 4

8 percent of the total investment.

9 MS. SEEGULL: Yes, yes. Understood.

10 Well, thank you. Thank you very much.

11 MS. BOLTON: Well, thank you very much.

12 We appreciate it. Okay. Our next speaker is

13 Steve Glitman. He is from the Develop LLC.

14 MR. GLICKMAN: Thank you, the panel for

15 having me back to testify. I was here in February

16 testifying on the first round of regulations. I

17 will be complementary on the second round, but I

18 will also have a number of issues in line with the

19 first round of regulations which just take as

20 constructive criticism and nothing more, nothing

21 less.

22 My name is Steve Glickman. I'm the

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1 founder and CEO of Develop LLC, between 2013 -

2 2018 I was the founder and CEO of the Economic

3 Innovation Group, co-founder along with Sean

4 Parker and John Lateri which was deeply involved

5 with the architecture behind the opportunity zone

6 program. Over the past year I've spent most of my

7 time in and around the country talking, working

8 with opportunity' zone fund managers, with wealth

9 managers, with community leaders, with opportunity

10 zone businesses and developers and others trying

11 to education various parts of the country and

12 various industries about the program and how it

13 works. And working with individual client as they

14 attempt to utilize the program.

15 And so a lot of these comments are built

16 along in the spirt of how is the market

17 practically responding to some aspects of this and

18 where do I think there may be some easy areas for

19 the IRS in finalizing these rules to make this

20 more workable along the intent of the program

21 which is, one, to raise a transformative amount of

22 capital for opportunity zone communities, and

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1 being able to do that through various types of

2 fund structures. And also to ensure that the

3 deployment of the funds go both to operating

4 businesses, as well as real estate of all types,

5 and I'll get to how a few of those pieces, I

6 think, are playing out.

7 I'm a member of the EIG opportunity zone

8 coalition and the Novagratic working group and I

9 think both they, along with the ABA, have put

10 together very thorough and excellent jobs at

11 providing a very detailed look at the regulations

12 with the recommendations that are broadly, I

13 think, consistent with each other and overlapping

14 which I think is a good sign that the market's

15 coalescing around where it needs.

16 I think there are two big categories I

17 want to point out. One relates to the formation

18 of multi-asset funds, and one relates to the

19 utilization of opportunity zones for operating

20 businesses. And there's a few issues within there

21 that I think the IRS needs to be more on before

22 finalizing.

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1 The most important, I think, aspect for

2 multi-asset funds is actually a very easy one. I

3 think the IRS did a good job in the regulations in

4 April of outlining an exit strategy for single

5 assets, single asset exits out of multi-assets

6 funds. And there's, I know, some commentary

7 around different ways to structure it, but the far

8 more important, I think, issue right now is that

9 it's the only part of the regs, really, that the

10 IRS left open to speculation from the investor

11 community in saying that's the only part of the

12 regulations that investors and fund managers can't

13 rely on.

14 And the impact of that, I think, is

15 quite substantial. While there are multi-asset

16 funds in the market it's not unreasonable as a

17 multi-asset fund manager when having to address

18 questions from investors to be concerned with the

19 fact that they don't have a good answer as to why

20 that part of the statute hasn't been allowed to or

21 why investors haven't been instructed they can

22 rely on that part of the statute.

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1 My sense is that IRS assumed that this

2 would be an issue that fund managers wouldn't have

3 to address until much later on in their life cycle

4 because many of these funds were structured to

5 exit ten years or beyond. The reality is the

6 structure decisions are being made right now. And

7 without the clarity that you can exit single

8 assets without a tax event, investors are much

9 more hesitant to invest in those funds and I think

10 you're seeing that in the fund raising. I think

11 multi-asset funds, while some are having success,

12 many are facing a slower fundraising cycle then

13 they expected, in part because of this feature of

14 the regulations.

15 So I think even before the full

16 finalization of the regulations for Treasury to

17 put out an additional amendment or an additional

18 piece of regulation to make clear that the

19 existing rules can be relied up, and, of course,

20 IRS can change its mind or clarify further in

21 finalizing the structure. It would do a part into

22 getting more capital into the market.

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1 One piece though of the multi-asset fund

2 structure that I think has created some questions

3 in the marked relates to depreciation recapture.

4 Right now it's fairly clear that exiting out a

5 single asset or multi-asset real estate funds and

6 a single asset basis you would avoid depreciation

7 recapture because it would be treated as the

8 capital gains and the regs made clear that single

9 asset exits would not be subject to capital gains.

10 But if you're exiting out of, let's say, a

11 renewable energy vehicle where you're selling

12 assets that would be treated as the sale of

13 personal property and that's ordinary income out

14 of a multi-asset fund it reads right now as if the

15 tax treatment would be different, and you would be

16 subject to a tax event unless you organize those

17 assets into single asset funds.

18 And, of course, that's possible to do,

19 but quite cumbersome if the goal is to get --

20 aggregate a lot of capital for, in this case, a

21 renewable energy asset class or other, sort of,

22 business assets classes within these zones.

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1 There's no policy reason why would should be

2 treating real estate, let's say, different from

3 renewable energy, and no reason you should have to

4 enter into an exotic structure if you're

5 structuring non-real estate multi-asset funds in

6 order to get the same benefit which is to avoid

7 depreciation recapture at this sale of individual

8 assets after ten years.

9 The third piece I'd say is a little more

10 controversial, but I think important, and after

11 the October regulations the Treasury and IRS made

12 clear that there were three eligible classes of

13 investments that opportunity zone funds could

14 make. They could make equity investments, they

15 could have preferred equity interest, preferred

16 equity interest and special allocations. Special

17 allocations, I think, was read as much of the

18 market is allowing for carried interest to receive

19 the opportunity zone fund treatment. And in the

20 April regulations the IRS made clear that for any

21 interests that are not a purchase from an

22 investment in the fund as opposed to treated to by

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1 sweat out equity in the allocation that those type

2 of interests would be treated differently.

3 And I understand the rationale for it,

4 but I think it carries some unintended

5 consequences. One of which is I think you limit

6 the number of professional fund managers who are

7 going to engage in the marketplace. As a fund

8 manager the primary benefit of this program is

9 creating ease of capital raising, and for a lot of

10 fund managers that's important for professional

11 and other institutional fund managers I think it's

12 much less important. And not being able to tap

13 into the opportunity zone benefit I think will

14 limit the amount of those type of fund managers we

15 have in the market which I would argue is

16 important given, as we've all seen, the

17 complications of or the complexity of the program

18 and the rules involved, and the shared desire we

19 all have to ensure these funds meet their intended

20 purposes.

21 But maybe the far more important issue

22 is that it's starting to create, as I'm observing,

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1 a fundamental misalignment between fund managers

2 and LPs. And that especially occurs in the case

3 of opportunity style real estate funds where much

4 of the value is derived in the first years of the

5 construction or rehabilitation, and once you have

6 stabilization you start to have a diminishing

7 return in those funds. That creates an enormous

8 amount of pressure for fund managers to sell well

9 before the ten year mark. They may feel they have

10 a fiduciary responsibility cause they can meet the

11 -- they can receive at the highest price, you

12 know, five or six or seven years into the

13 marketplace when investors, you know, have a tax

14 reason to stay in and ensure they can stay

15 invested in that asset for ten years or more.

16 And there's no reason to have that

17 misalignment. I'd argue with the carried interest

18 treatment that was original envisioned in the

19 October regulations it would create a natural

20 alignment to ensure we have a long term ten year

21 plus investments in these funds where you don't

22 then have this artificial misalignment between the

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1 length of time in LP which is to say invested in

2 the fund, and like the time at GP is incentivized

3 to manage that capital.

4 On the operating business side I think

5 there's some much more fundamental questions. The

6 most important relates to how we treat the

7 substantial improvement test and whether we are

8 looking at it asset by asset or as an aggregate

9 basis. It's fundamentally not practical to invest

10 in an existing opportunity zone business and

11 expect to improve each individual asset which may

12 be a chair or a computer or a desk and, frankly,

13 doesn't achieve, you know, much of the economic

14 benefit that we were looking to achieve in this

15 program.

16 Much more important, I think take an

17 aggregate look at the value of its tangible assets

18 and ensure that opportunity zone business is at

19 least investing as much, just as you would in an

20 analogous real estate example. And, of course, in

21 the real estate context there is, I think, some

22 practical applicability here as well. Practically

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1 speaking there are purchases all the time of a

2 building and let's say an adjacent or adjoining

3 parking lot of which the building is going to

4 receive a tremendous amount of improvement, but

5 the parking lot won't and there will be not

6 economic case or business case to doubling the

7 value of that parking lot, but you're still

8 achieving the economic impact to that same area.

9 So I think there's real reasons to think

10 through the aggregate improvement test. I think

11 the ABA laid out a very good way to do it in its

12 comments which I won't go into in detail because

13 they did, but I think that will be important to

14 ensure there's investing in existing operating

15 business in the opportunity zones, as well as

16 practical investment in certain types of real

17 estate projects.

18 The second issue I think that's

19 important I think will just need a minor

20 clarification is the treatment of the gross income

21 test. So I think the IRS substantially, won't use

22 that term, I think the U.S. greatly improved its

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1 treatment of the gross income test between the

2 October and April regs. One small note though, it

3 used language that the gross income test applied

4 to activity in the zone of the business which

5 implies to some in the marketplace that they can't

6 have opportunity zone businesses that stretch

7 across multiple zones.

8 Of course, that would be the goal to

9 have large growth businesses that can grow across

10 multiple opportunity zones, and businesses that

11 meet the -- otherwise, the other criteria should

12 be able to meet the gross income test across these

13 assets, across multiple zones. I know my time is

14 expiring. I'll just make one other quick comment

15 and that is I think there's a question about

16 whether qualified opportunity zone businesses can

17 hold subsidiaries in their normal course of

18 business and not be excluded from investment

19 because of the non-qualified financial property

20 test.

21 The way that reads is it would prevent

22 partnership interest in subsidiaries. Of course,

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1 this would be a normal way of doing business as a

2 qualified opportunity zone business or an investor

3 in those businesses and there should be a rule in

4 place. I think EIG and others have laid out a

5 practical scenario of evaluating if you're wholly

6 owned that subsidiary or invest at least 50

7 percent of it that it would not be treated against

8 your non-qualified financial property test.

9 Without allowing for subsidiaries to be invested

10 in I think you're going to limit the size and type

11 of businesses that can be practically invested in

12 throughout this program. Thank you.

13 MS. BOLTON: Thank you, Mr. Glickman.

14 Any comments from the panel? Otherwise, I'll turn

15 it over to Mike.

16 MR. GLICKMAN: I'd be offended if Mr.

17 Novey did not ask me any questions.

18 MS. BOLTON: I know, right. You have a

19 time limit.

20 MR. NOVEY: I assume you're suggesting

21 that there's a workable nexus rule for aggregation

22 in the (inaudible)?

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1 MR. GLICKMAN: Yeah, of course there is.

2 It relates to assets in tracts or adjoining

3 tracts, contiguous tracts.

4 MR. CRNKOVICH: Mike, are you done?

5 MR. NOVEY: Yes.

6 MR. CRNKOVICH: Just one question. You

7 talked about exotic structures and you mentioned

8 1245 recapture. What if you just elaborate on

9 that? Are you thinking of a situation whereby if

10 you sold the partnership interest the 1245

11 recapture would escape tax, where if it's a sale

12 of assets, you know, down one or two tiers the

13 1245 would not escape tax? And then by virtue of

14 that difference in rules, if I understand where

15 you're going, there might be an exotic structure

16 whereby you have a single asset fund such as the

17 partnership interest could be sold in. Am I

18 following you correctly?

19 MR. GLICKMAN: Yes. So it basically is

20 just a different of the language of 1250 and 1245

21 and how the regulations refer to the sale of

22 single asset. So they talk to the capital gains

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1 that then the investors would not be on the hook

2 for anymore. And in other parts of the statute

3 they talk about a full step up in basis in the

4 interest. Of course, capital gains works fine as

5 a 1250 asset because it's considered capital

6 gains. So you could add language that said you

7 escape ordinary income or capital gains which I

8 think Novagretic has recommended.

9 Right now a work around is to allow for

10 interest at the feeder fund level to these

11 individual QOFs that may hold individual, let's

12 call it renewable energy assets and those -- it

13 could function in a similar way, but it's much

14 more burdensome because then you have to collect

15 investment for each individual asset and then

16 transfer those interests back up to the feeder

17 fund, and there's really no reason it should work

18 different from the real estate context. My sense

19 is it's an inadvertent wording difference that

20 could be corrected with an update in that wording.

21 MR. CRNKOVICH: Could a work around also

22 operate to eliminate all ordinary income, income

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1 other than 1245 recapture such as sale of

2 inventory?

3 MR. GLICKMAN: Yeah. Well, so I think

4 in this case you just -- the focus will be in the

5 sale of the asset itself. So you're talking about

6 selling what will most likely be an individual LLC

7 containing the asset and a full -- equivalent

8 treatment to the full step up in basis of the

9 value of that asset upon sale so that there is no

10 outstanding tax event on a non-real estate asset.

11 So I think the goal is to get to that same result

12 so that you don't have different results depending

13 on the different types of assets that you're

14 qualified opportunity zone fund may own in a

15 multi-asset vehicle.

16 MR. CRNKOVICH: But just to be clear, if

17 I start a widget making business in a qualified

18 opportunity zone are you suggesting that the

19 income from the sale of the inventory if we sold

20 it --

21 MR. GLICKMAN: Oh, no. No, no, no.

22 MR. CRNKOVICH: Okay. You're focusing

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1 your comments on the real estate aspects, the 1250

2 un-recapture, 1250 gain, and the 1245 gain. I'm

3 just trying to figure out where you would draw the

4 line as what would be permissible to be eligible

5 for the step up in basis.

6 MR. GLICKMAN: Yeah, I think it's,

7 again, to treat them in the same way as a sale on

8 the real estate components of those assets because

9 it's the, you know, again, it's the core of this

10 is the tangible property in the zone in the sale

11 of those assets at the end of the ten year holding

12 period.

13 MR. CRNKOVICH: I'm just trying to

14 understand whether the sale of a tangible could be

15 extended to deal with a sale involved in a

16 business that has a significant amount of other

17 ordinary income assets such as an inventory. And

18 you're not proposing that?

19 MR. GLICKMAN: I'm not.

20 MR. CRNKOVICH: Okay. Thank you. Thank

21 you.

22 MR. GLICKMAN: Sure.

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1 MS. BOLTON: So I just want to confirm

2 that your first comment is you believe that people

3 are sitting on the sidelines because of our

4 applicability rule where we didn't give the lines?

5 MR. GLICKMAN: Yes. I think that's why

6 some investors are sitting in the sidelines in the

7 multi-asset fund context which is I think will be

8 the majority of the source of investment over time

9 in this program because it creates the structure

10 that's most scalable. And I've talked to many

11 investors and many fund managers that are having

12 trouble confirming to the investors that they can

13 make sales, individual assets sales which is how

14 most of these multi-asset funds are structured at

15 the end of ten years and provide them some kind of

16 assurance that they're going to receive the tax

17 treatment that they're expecting because of that

18 language. And, in part, because that language is

19 different than the language of the rest of the

20 regulation -- of the rest of the regulations that

21 were released in April.

22 MR. NOVEY: And you're suggesting that

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1 what's necessary is reliance -- that a structure

2 which is created today would be able look back to

3 the proposed regulations in 2046 and apply the

4 terms of those regulations even if the final

5 regulations are different.

6 MR. GLICKMAN: Well, correct. Just like

7 --

8 MR. NOVEY: Again, I want to make sure

9 that we're communicating effectively.

10 MR. GLICKMAN: Yeah, no correct. Just

11 as you can anywhere else that's laid out in the

12 April regulations. They may also have long-term

13 consequences and the reality is there are now a

14 not insubstantial amount of multi-asset funds in

15 the marketplace that are having to essentially

16 sell on their faith and a prayer that their

17 analysis of where the regs are likely to end up,

18 that these exits are going to avoid a tax event

19 are, in fact, true. So, everyone in the market is

20 taking on some amount of liability in interacting

21 with their investors and others that this

22 structure and the tax treatment that they're

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1 committing to their investors will be there. I'm

2 confident that's where the IRS plans to go, but

3 that's not enough for many investors to feel like

4 they can deploy capital now into the marketplace.

5 MS. BOLTON: Okay, anybody else? No.

6 All right.

7 MR. NOVEY: Thank you.

8 MS. BOLTON: Thank you, Steve. All

9 right, our next speaker, Dan Cullen and Darryl

10 Steinhause from the Institute for Portfolio

11 Alternatives.

12 MR. STEINHAUSE: Good morning. My name

13 is Darryl Steinhause. I'm with DLA Piper. Dan

14 Cullen and I are here representing the Institute

15 for Portfolio Alternatives and I want to go over a

16 couple of issues today that I think we could

17 improve the regulations and provide some

18 additional guidance.

19 The first is somewhat, what Steve talked

20 about before, which is aligning exit strategies.

21 When we look at these transactions today, there's

22 three ways you can get out of these deals. The

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1 investors can sell their units; you can have the

2 qualified opportunity zone property sold, which

3 are typically partnership interests; or, you can

4 sell the underlying business/projects. In most of

5 the deals done today, we have a fund on top; we

6 have a partnership below; and the partnership

7 below owns right now, typically a piece of real

8 estate. And the problem is depending on where you

9 are and how you're exiting your transaction, these

10 don't give you the same result. So, I'm going to

11 take the typical structure, which is the fund in a

12 sub-partnership.

13 First, if you go to sell the property,

14 you cannot sell the property and get the tax

15 advantages. Second, if you want to sell the

16 partnership interests, you can do that, but you

17 have to exclude -- you can only exclude the

18 capital gain; and, third, if you sell the units as

19 an investor, you get to exclude all of your gain.

20 So, you have three different components of the

21 same transaction exiting the same deal and you get

22 different tax results.

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1 So, what's the issues and problems with

2 that? Well, first, in the real world, if you have

3 to sell a partnership interest instead of selling

4 the underlying project, you get a lower price.

5 Buyers do not want to buy partnerships that have

6 ongoing liabilities, uncertainties, reps and

7 warranties, they want to buy the real estate. If

8 you want to maximize the value to these investors,

9 you have to let them sell the real estate.

10 Second, if you are trying to gather all

11 the units held by the fund, it's difficult. You

12 might have 100, 200, 300 investors and you have to

13 gather those units and all sell them at one time.

14 And if you're going to let your investors go to

15 the marketplace, most of these deals are private

16 transactions. How you go to the private

17 marketplace without taking a significant haircut

18 on you price? So, the only way to effectively

19 make this work is selling the underlying project.

20 The third thing is, multiple asset funds are at a

21 complete disadvantage because they can't sell

22 their projects. They can only sell their

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1 partnership interests, which will be at discounts,

2 or they have to find one buyer to buy all of their

3 deals at one time.

4 This is a relatively easy fix. You

5 could just say, no matter which way you exited

6 your transaction, there's no gain that would be

7 triggered as you have with the underlying units of

8 the funds today.

9 The second issue that I'd like to talk

10 about is what happens when you have substantial

11 improvements from projects for businesses?

12 Currently, under the proposed rules, you have this

13 being done on an asset-by-asset basis. That

14 generally works okay for real estate. That,

15 however, does not work for businesses or

16 quasi-businesses. When we look at these

17 transactions and you have a business or a

18 quasi-business such as a hotel, sometimes you have

19 new assets. You can't improve a new asset. Other

20 times, you have assets that can't be improved. I

21 mean, literally, how do you improve the towel at

22 the hotel? What do you do? These things have to

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1 be done on an aggregate basis.

2 In addition, when you're looking at this

3 from an aggregate basis, the most important thing

4 is when these fields are done from a practical

5 standpoint, the business or the project, they

6 don't actually in business settings improve the

7 property. And many times, they buy new property.

8 When you're the hotel, you buy new towels; you buy

9 new linens. That has to be allowed in this

10 process, so it's got to be the purchase that

11 allows you to improve -- make the improvements, as

12 opposed to specific improvements to the individual

13 assets.

14 MR. CULLEN: Thank you Darryl. Hi, my

15 name is Dan Cullen. I'm a partner at Baker

16 McKenzie and like my friend, Darryl, I'm here on

17 behalf of the IPA. Thank you for allowing me

18 back. I had the privilege of presenting testimony

19 on the first run of regulations.

20 I would like to specifically dive into

21 two key points. The interest section of debt

22 finance distributions. In your decision to

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1 incorporate a modified disguise saleable. Second,

2 the interest section of inclusion events and

3 tax-free transactions. I raised both of these

4 issues on behalf of the IPA the last time around

5 and I want to applaud you for the manner in which

6 you've addressed them so far. I believe your

7 proposed regulations, however, in one instance,

8 took a step too far. I would ask for you to

9 reconsider your approach.

10 And in the second instance, I believe

11 the proposed regulations were drafted too

12 narrowly. So, specifically, I'd like for

13 clarification, or if I dare, modification with

14 respect for debt finance distributions. When I

15 read the regulations that came out, I was

16 extremely pleased to see that you followed the

17 inherent wisdom of Subchapter K and allow full

18 outside basis for debt financing and no impact

19 against accrued benefits to the extent there was

20 distributions to the extent of that outside basis.

21 I must say I was surprised and in part,

22 disappointed in the decision to incorporate a

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1 modified disguise saleable. When I hear testimony

2 from others who are not tax counsel or

3 accountants, and they are worried about traps for

4 the uninformed, adopting a modified disguise sale

5 rule in a manner in which you did, I believe

6 creates a trap just like they're worried about.

7 Specifically, you modified the disguise

8 sale rule so that it would apply, not just the

9 profit contributions, but to all cash

10 contributions, effectively turning into a governor

11 as to how the capital needs to stay within these

12 funds. That step, I think, is prudent. Where I

13 thought you may have made a mistake, is when you

14 turned off one of the exceptions to that normal

15 rule. Predominantly, the pro-rata distribution of

16 debt financing proceeds. I would ask that you

17 reinstate that exception and remove the trap from

18 the unaware here. I believe that there is no

19 hindrance to the policy we're looking to achieve.

20 The members of the IPA are actively gathering and

21 aggregating capital to be deployed in these

22 neighborhoods.

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1 In the furtherance of our objective

2 here, if after a period of time, they appropriate

3 substitute their capital, for the capital of a

4 bank and there's a pro-rata distribution, the

5 policy has been achieved. We have allowed this

6 for decades under Subchapter K in every other real

7 estate or other transactions. I do not feel it is

8 appropriate to narrowly limit that exception here

9 for QRZ funds. I think it's contrary to the

10 policy objectives trying to be achieved and I

11 would ask that you consider (a), either not

12 incorporating a reference to a modified to scale

13 -- disguise sale rule. I think you may have taken

14 a step too far. Or if you choose to do so, and

15 you leave that in, that you allow the exceptions

16 to be modified as well.

17 In the alternative, if you will not

18 reinstate the pro-rata debt financing distribution

19 exception, then please provide further guidance as

20 to when distributions would be accepted. The

21 reason why I ask this is I think you're stuck with

22 a bit draconian. If you violate the disguise sale

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1 rule here, you have a failure of your eligibility

2 of your investment from the beginning and you've

3 received none of the benefits. From a policy

4 perspective, I think that was a bit harsh.

5 The second thing I asked the last time I

6 was in front of you was that the intersection

7 between inclusion events and tax-free transactions

8 should be symbiotic. The reason why I asked for

9 that was rather simple. I've been practicing for

10 just shy of 20 years now, and over those two

11 decades, we experienced some interesting problems

12 for our clients between 2008 and 2012. I believe

13 that the friction filled world that we live in

14 will continue to be just that, and in spite of

15 terrific policy and the best efforts of people

16 trying to help these communities, some funds are

17 going to struggle, and perhaps fail, and some

18 funds are going to be successful. It is in

19 furtherance of our policy objective to allow a

20 more broad assistance amongst funds in those

21 circumstances empowering counsel, such as myself,

22 to allow some funds to affirmatively assist other

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1 funds that are struggling. It's going to be

2 appropriate and it's something you should

3 facilitate.

4 And I asked you to do that the last time

5 I was in front of you. I believe you did so in

6 part, but you only took a partial step. If you

7 look at your list of inclusion events, you

8 excluded a Section 721 contribution into a

9 partnership. And I thank you for doing that. I

10 do think that you will see certain UPI

11 transactions, or UPC transactions that will allow

12 combinations to take place when they're

13 appropriate, and where the QOZ requirements are

14 still being met. But I cannot contemplate why you

15 only took that half step.

16 Continue walking forward. I think you

17 should also include Section 351 transactions. I

18 think you should also include tax reorganization

19 transactions. It's in furtherance of the policy,

20 and there shouldn't be a difference between

21 whether or not a fund enters into an UPI

22 transaction, or if they do a Tax B reorganization

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1 between two weeks. Please continue to include a

2 more expansive list so that when one fund is

3 struggling and it needs the help of another fund,

4 they have all the options in the Code available to

5 themselves. Thank you for your time. I

6 appreciate your consideration of the IPA's

7 requests.

8 MS. BOLTON: Thank you. And you have a

9 comment letter for us?

10 MR. NOVEY: Yes, we have a comment

11 letter that outlines 19 suggestions. I know

12 you'll take all of them into consideration.

13 MS. BOLTON: Yes, every single one of

14 them.

15 MR. CRNKOVICH: All right, Dan, Darrell,

16 thank you. Dan, let me approach you first on the

17 disguised share rule. It's not a disguised share

18 rule, obviously. It is a rule that is designed to

19 police extractions of cash shortly after the

20 investment. So, the question I would ask you is

21 how you would police the situation I'm going to

22 lay out. Suppose Dan and Darrell, each put $100

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1 into a QOF, a Qualified Opportunity Fund taxed

2 partnership. And let's assume varying effects.

3 Don't even worry about. You each put $100 in.

4 The next day, you go to the bank. You borrow $150

5 because the bank will loan, let's say 75 percent

6 below the value and distributes it out 75 to each

7 of you. The question is, should your investment

8 -- should your qualifying investment that permits

9 a rollover gain for lack of a better term be the

10 full 100, or should that distribution, which

11 occurs say the next week, the next month, be taken

12 into account to reduce the amount that's being

13 invested?

14 MR. CULLEN: I'll answer that

15 three-fold.

16 MR. CRNKOVICH: Great.

17 MR. CULLEN: First and foremost, as Mike

18 noted earlier, both taxpayers and yourselves are

19 wedded to the legislation. In Section 1400Z-2,

20 does not modify at all, Subchapter K. So, the

21 results you're describing would be permitted under

22 Subchapter K and should technically be allowed.

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1 What you're concerned about, rightfully so, is

2 from a policy perspective. Whether or not it's

3 appropriate for private capital to get a tax

4 benefit unless their money is sticky. You want it

5 to stay in the neighborhood. You want them to be

6 invested long-term. I think that's appropriate.

7 However, the ability to put that capital in; do

8 something with respect to that project in a manner

9 that's going to allow third-party financing to

10 give you that $150 in your example so that Darrell

11 and I get to take $75 off the table is a step in

12 furtherance of the policy. And to not allow me to

13 substitute my capital with bank capital is an

14 undue restriction on capital you're trying to

15 aggregate. And I recommend that you don't apply

16 that restriction.

17 MR. CRNKOVICH: So, just to follow that.

18 If, in lieu of doing that, you each put in 25, and

19 you borrowed 150, and invested the full 200 in a

20 qualifying business, would you suggest that the

21 appropriate policy call would be to permit a full

22 rollover 100 gain for each of you? Because

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1 economically, those two transactions are virtually

2 identical.

3 MR. CULLEN: They're virtually the same

4 and the disparate treatment should not be allowed.

5 I think that in each case, if we have done

6 something for the property where a third party

7 bank is comfortable taking on that risk and

8 allowing us to take the capital off the table,

9 then we've met the objectives of the policy and

10 complied with both Section 1400-2, and Subchapter

11 K.

12 MR. CRNKOVICH: So, just to be clear,

13 you said there should be identical results with

14 those two transactions. So, is that suggesting

15 that if you each put in 25 and borrowed 150, and

16 kept the cash in the partnership, that you two

17 could each be treated as rolling over 100 in gain,

18 as opposed to limiting your rollover amount to the

19 actual cash you invested.

20 MR. CULLEN: I apologize. I

21 misunderstood your original question. I think,

22 unfortunately, the statute says that you have to

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1 invest cash into the QOF to get benefit from the

2 troika of tax benefits allowed under Section

3 1400Z-2. Getting debt finance benefits is not

4 cash that you have put in, it's the bank's cash.

5 MR. CRNKOVICH: So, the only question

6 I'm asking is, if you could enter into an

7 economically, virtually identical transaction and

8 get a much bigger result, is that something the

9 government should be concerned with and write a

10 rule to prevent? Or should the rules be drafted

11 where you each put in 100 and you borrow 150 in a

12 prearranged plan, say the very next day and

13 extract the 75 each?

14 MR. CULLEN: You are correct that in a

15 perfect world without friction that that result

16 could occur. And I think inherent in your example

17 and your question is, why would one be concerned

18 about being able to have the partnership borrow

19 the money and distribute out the funds when one

20 could put in less -- put in more and then just

21 leverage your outside position from a bank

22 directly? The world in which we live in doesn't

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1 have that inherent flexibility in all

2 circumstances. The bank may not be as willing to

3 lend to somebody individually as they would to the

4 partnership that has the collateral and the

5 assets. So, I would respectfully propose that

6 your two analogies when actually occurring in the

7 real world are not analogous.

8 MR. CRNKOVICH: And if putting aside the

9 outside borrow, and putting aside plantation

10 patterns and issues, again, you would be

11 comfortable -- or you think we should write a rule

12 that would permit the partnership, that client

13 base case to borrow shortly after the infusion of

14 cash -- extract the cash, have the partners take

15 it as a distribution, and yet not count that

16 distribution as reducing or against the

17 investment. That's the rule you would prefer.

18 MR. CULLEN: Correct.

19 MR. CRNKOVICH: Okay, I just wanted to

20 understand that. And then, I have a question for

21 Darrell, just on your buyer and seller piece,

22 again, I appreciate all your comments, so, we know

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1 that if an investor sells its interests, then --

2 under the 2C 10-Year Rule, there's that 743 type

3 rule that would eliminate all the ordinary and

4 capital gain. Right?

5 MR. CULLEN: Mm-hmm.

6 MR. CRNKOVICH: If you, in lieu of the

7 having to sell the partnership for sole property,

8 would your rule limit the benefit under 2C to just

9 capital gain? Under capture 1250 gain? Would it

10 include 1245 recapture, and would it include any

11 other ordinary invites?

12 MR. CULLEN: I think that there

13 shouldn't be a difference how you exit. I think

14 that if you sell any of the three, when you get

15 done, you have money in your pocket and you don't

16 have an investment. And to tell the investor that

17 you get different tax treatment if we sell the

18 underlying project, the underlying partnership

19 interest, or that your unit seems a little unjust.

20 MR. CRNKOVICH: Would your approach

21 require that in the event of a sale by the

22 partnership to create equilibrium or parallel

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1 structures that -- would your rule require that

2 the QOF, and ignore lower tier partnerships, would

3 the QOF take the distribution or take the proceeds

4 of the sale and distribute it out to the investor

5 so that you're in an identical position?

6 MR. CULLEN: I would think that would be

7 a fair rule because you're trying to put everybody

8 into the same economic position.

9 MR. CRNKOVICH: Okay. So, if they

10 didn't distribute it under your rule, they would

11 not be eligible to avoid any of the gain? Would

12 it be limited to the capital gain under Chapter

13 1250?

14 MR. CULLEN: If they don't distribute

15 it, maybe then you put them back in the penalty

16 box of just the capital gain. But if they

17 distribute the money, everybody is on equal

18 footing and equal treatment.

19 MR. CRNKOVICH: Fair enough. Thank you.

20 MR. NOVEY: Just a confirmation of what

21 you said. You were saying why is it that you

22 can't -- there would be an addition, or a problem

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1 with having to improve properties such as towels,

2 I think -- I just want to make -- I understood you

3 as having said that the acquisition of new

4 qualified opportunities on business property,

5 which is what those towels would be should qualify

6 as a form of substantial improvement, or some

7 other asset in need of substantial improvement

8 with which there is an asset acquisition. Is that

9 what you were saying, or am I misunderstanding?

10 MR. CULLEN: What I'm saying is if you

11 have towels, you're going to throw them out and

12 you're going to buy new ones.

13 MR. CRNKOVICH: New ones, I would think

14 would be qualified opportunities on business

15 property. Since they're new they don't need --

16 since they're new to the zone they don't need any

17 substantial improvement. So, what is the problem

18 you're trying to address?

19 MR. CULLEN: You still have to improve.

20 You have your old property that you have to

21 improve. So, you have to still make the test.

22 So, I believe you're looking at the distinction

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1 between original use and substantial improvement.

2 When you come in and you buy an operating

3 business, the FF&E, furniture, fixtures, and

4 equipment, that's your first purchase. A new

5 purchase would qualify. And so you're focused on

6 the next towel. I think we're focusing on

7 partnering clarification that the first towel

8 existing when you purchase doesn't need to be

9 improved.

10 MR. CRNKOVICH: Since you throw it out,

11 in what way is that going to impair you at the end

12 of the quarter? Or at the end of periodic test.

13 MR. CULLEN: So, there is likely going

14 to be a period of time between your initial

15 purchase and the date in which you throw out that

16 first towel. And I like that we're focusing on a

17 single example of towels, but it is a much larger

18 example. If you look at operating businesses and

19 you purchase price allocation to FF&E, we're

20 talking about a significant dollar amount. And so

21 the delta of time between your initial purchase

22 and when you ultimately would throw it out and

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1 make a qualifying purchase, we're just looking for

2 clarification of what otherwise, I think is

3 obvious, is that one cannot and shouldn't be

4 required to substantially improve those FF&Es for

5 the first initial purchase.

6 MR. CRNKOVICH: As long as you throw

7 them out and replace them.

8 MR. CULLEN: If I want to keep the towel

9 forever, I think my customers would be

10 unsatisfied, but I don't think you need to force

11 me to throw out the towel. I think you simply

12 need to clarify that I don't need to improve the

13 towel. That that initial purchase, although the

14 overall transaction is a transaction that falls

15 within the bucket of substantial improvement.

16 That some sub assets cannot be and should not be

17 required to be substantially improved.

18 MR. CRNKOVICH: Okay, so you're saying

19 then that they are never going to qualifying

20 opportunities for the property and you want to

21 keep them out of the denominator as well, or you

22 want to put it in the numerator because they can't

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1 be improved?

2 MR. CULLEN: It's a fair question. I'm

3 not sure what the best approach would be to

4 exclude them and still make it appropriate to

5 apply the 90 percent test. We'd be happy to

6 collaborate with you to figure out how one would

7 exclude them out and still meet the objectives of

8 the 90 percent test.

9 One idea, although I think it would be

10 hard to police and I think you would have to have

11 self-enforcement would be to allow a bifurcated

12 approach as a (inaudible) part. Treat them as

13 original purchases even though they've been used

14 before, and the remainder would be substantial

15 improvement. When you look at how people have

16 been saying that you should be able to buy used

17 assets that are brought into the zone here for

18 some of that FF&E, allowing it to be treated as

19 original use where it is physically impossible

20 within the world as I know it to really improve

21 certain towels, or when you look at how people

22 have been saying that you should be able to buy

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1 used assets that are brought into the zone here

2 for some of that FF&E, allowing it to be treated

3 as original use where it is physically impossible

4 within the world as I know it to really improve

5 certain towels or pillows or mattresses or

6 whatever else that you're going to have, I think

7 excluding (inaudible) the approach.

8 MR. CRNKOVICH: The stuff that's brought

9 in from outside is original use.

10 MR. CULLEN: Correct.

11 MR. CRNKOVICH: Even if (inaudible).

12 MR. CULLEN: Correct. And so what I'm

13 asking from a practical purpose is don't force the

14 taxpayers to bring in something from the outside

15 to allow them to buy the towels and (inaudible)

16 there.

17 MS. BOLTON: So I guess I'm a little

18 confused because when we talk about activation,

19 and it's had this question before, you know, I'm

20 thinking you buy a hotel and you have furniture

21 and towels and all of that. So it's all in the

22 purchase price. So let's say you buy $100 and

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1 that includes the real estate, I thought you

2 wanted to just double the 100, but not have to put

3 it into those -- the towels and stuff.

4 MR. CULLEN: Yes.

5 MS. BOLTON: You want to be able to put

6 it into the total building.

7 MR. CULLEN: Total cost. You buy the

8 building, you buy the towels, you buy everything,

9 $100, you got spend another $100. That's what

10 we're looking for.

11 MS. BOLTON: Okay. All right. Any

12 follow-up questions? Okay.

13 So thank you very much. We appreciate

14 your comments.

15 So right now it is about noon and we're

16 going to take a very needed break. So as I said

17 to you before, we have a lunch room that is up the

18 escalator to the left. And we have escorts

19 outside in the lobby that will show you where to

20 go. Let's be back here at about 12:45 and we can

21 start with Brent Carney at 12:45. Thank you.

22

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1 (Recess)

2 MS. BOLTON: Okay. Welcome back. I

3 hope you all had a nice lunch. Well, we took a

4 little bit longer than we expected. But, all

5 right. So we're just going to start up again, and

6 we've had a little change to the schedule because

7 one of our speakers has a flight to catch.

8 So, the next speaker will be Argyrios

9 Saccopoulos. Did I get it right?

10 MR. SACCOPOULOS: Anybody else has got

11 comparable problems with (inaudible).

12 MS. BOLTON: Yeah. Let us know if you

13 have comparable problems. I don't know how much

14 they can change that. But Argy is from the State

15 Bar of Texas, Tax Section.

16 So, one thing for speakers, if you could

17 make sure that you are speaking into the mic,

18 because sometimes when you're talking to the

19 Panel, the people in the back are not hearing.

20 So, we are requesting people to come down further,

21 if possible.

22 MR. SACCOPOULOS: Hi. Thank you very

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1 much for the opportunity to testify. My name is

2 Argyrios Saccopoulos. I represent the State Bar

3 of Texas, and I'm also in private practice at

4 Jackson Walker where I do fund formations. And a

5 lot of my clients are trying to set up Qualified

6 Opportunity Funds, and then advising them there

7 are a few ambiguities, and frankly potential

8 issues that I was hoping to bring to the Panel's

9 attention, respectfully.

10 And I guess before I get into the two

11 main topics I want to discuss, I just want to

12 briefly touch on the inside gain issues that a

13 couple other panelists addressed. That's

14 something that we've been wrestling with as well.

15 I've actually been advising clients to set up

16 parallel cross structures, where there's still

17 ambiguity in the rules regarding how inside gain

18 will be treated, especially where there could be

19 1245 recapture.

20 Even for real estate investments, if you

21 have, you know, cost seg and some of the purchase

22 prices allocated to depreciable assets, you would

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1 return to the same issue even with the real

2 property investment.

3 So, I would respectfully suggest that

4 given that the statute operates by excluding all

5 the gain from the investment held for 10 years by

6 increasing the basis to fair market value, 1245

7 recaptures an element of that fair market value.

8 And so in all I think the final reg

9 should address that. And in the context of

10 operating businesses I respectfully suggest that

11 if the assets of the trade or business in the

12 Section 1060 (inaudible) sold, it would

13 appropriate to have a full exclusion for that, for

14 the decision of that investment.

15 The two main topics I wanted to discuss,

16 one of which was touched on a little earlier by, I

17 think it was Mr. Glickman, regarding carried

18 interest. I have a slightly different take on

19 that, the position of the State Bar, and my

20 personal position is I think it's completely

21 appropriate for carried interest not to qualify

22 for the fair market value basis election and for a

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1 tax-free exclusion after 10 years, because that

2 amount does not represent an investment of capital

3 gain.

4 However, I think there is an issue in

5 the proposed regs regarding how a partner's units

6 or a capital account is apportioned as between a

7 section that might represent a valid capital gain

8 rollover versus a section -- a portion of the

9 capital account that represents the carried

10 interest.

11 And the example that I bring to your

12 attention which is exceptional economy in the

13 market, I think -- I would say most of the deals,

14 or Qualified Opportunity Fund offerings I work on

15 have some kind of economic deal that's similar to

16 this.

17 You have a waterfall with multiple

18 tiers, and in tier one of the waterfall -- well,

19 let me just back up. Suppose the facts are that a

20 sponsor co-invests with outside investors, the

21 sponsor puts up -- let me just look at my example

22 -- 10 percent of the capital, and the investors

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1 put up 90 percent, and the deal is that everyone

2 gets an 8 percent return on their money, and only

3 above that 8 percent IRR, does the sponsor earn an

4 incentive allocation, or carried interest.

5 And the way that works is the sponsor

6 always gets his percent of the profits, and the

7 investors get their 90 percent of the profits up

8 to a 28 percent IRR, and then any profits above

9 that go 80/20 in a typical deal.

10 But the problem that we're encountering

11 is that you have two, at least two basic ways that

12 a fund might be set up. You might have a general

13 partner that makes that capital gain investment

14 which might be a perfectly good capital gain

15 rollover just for the LPs, and then that general

16 partner also gets and inventive allocation.

17 Or you might have a separate management

18 company that gets the incentive allocation which

19 make perfectly good sense for sound business

20 reasons, because you're giving some incentive

21 allocations to different parties that rolled-over

22 capital gain, or there's Texas margin tax reasons,

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1 being a Texas lawyer, that's probably all

2 esoteric.

3 But the point is that these two

4 structures don't seem to be treated the same. In

5 particularly there is this concept of an

6 allocation percentage in the regs, which you've

7 defined as the highest share of residual profits,

8 the next fund's partner receive with respect to

9 the carry.

10 And I'm not sure if this is intended,

11 but at least the way we're all interpreting this

12 as practitioners, is that's a fixed number and

13 it's like the worst number for he carried interest

14 person. And in the example I gave just now, and

15 the facts I laid, I believe -- and correct me if

16 my math is wrong -- that that number is 64

17 percent.

18 Because above the 8 percent hurdle,

19 that's where the highest -- that's the only tier

20 in the waterfall on which that carry is earned,

21 and in that tier, you know, for every hundred

22 dollars that's earned, 10 bucks goes to the

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1 sponsor for his capital interest, and 18 bucks

2 goes to the sponsor as 20 percent of the other 90.

3 And so out of the 28, 18 out of the 28,

4 or 64 percent, is carried interest. And because

5 the regs don't distinguish between profits that

6 are earned above and below the hurdle, this

7 appears, the way a lot of us are reading it, to

8 effectively convert part of the sponsor's 8

9 percent return on its capital, the same as the

10 money partners are getting, into a deemed carry

11 that effectively causes the carry -- I apologize

12 for the metaphor -- to almost be like a cancer in

13 your capital account.

14 It causes -- it metastasizes and takes

15 over parts of the capital account it really

16 shouldn't, and as a result if a single capital

17 account represents both capital and carry, that's

18 a bad structure, and that's a bad way for a

19 sponsor to invest.

20 And so we've been advising clients to go

21 the route of having a separate carry vehicle with

22 a separate capital account, which makes the rule

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1 in the regs effectively elective, and a trap for

2 the unwary.

3 So, I'd guess we'd respectfully suggest

4 that there's a number of ways this could be

5 addressed. First, you could define the allocation

6 -- instead of using the allocation percentage

7 concept, you could say that the allocations and

8 distributions with respect to the carry are

9 defined in the negative as the allocations and

10 distributions that are not in respect of the

11 capital.

12 Alternatively, if you don't want to

13 provide guidance that people could rely on, and

14 people who are cleverer than me could think of

15 ways to abuse that. You could say something like:

16 the allocation percentage rule is a safe harbor,

17 and inappropriate circumstances, you know, and

18 other methodologies including inappropriate

19 circumstances, the kind of negative by exclusion

20 rule that I just described, could be a way to

21 handle that.

22 The second point I wanted to address was

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1 the 90 percent holding period rule, where

2 substantially all of the holding period is defined

3 as 90 percent. We don't have any issues with that

4 as a concept, but we have questions about how

5 that's administered.

6 And the example I've given in the

7 prepared bullets was, suppose that a Qualified

8 Opportunity Fund invests 100 percent of its assets

9 in a QOCB, that's intended to be a QOCB, and for

10 whatever reason, you know, pick among the many,

11 the menu of options for a QOCB could mess up, they

12 mess it up, and for six months not QOCB.

13 But then they come into compliance and

14 at all times thereafter they're a QOCB. Well, I

15 mean the observation is that 10 percent, that that

16 six-month period of non-compliance represents less

17 than 10 percent of a holding period of greater

18 than five years, and so once you hold the QOCB

19 interest for five years, retroactively you can

20 determine that you have been in compliance for the

21 entire period, and yet you have to report your

22 ASSET Test results every year.

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1 So, what do you do in year three, when

2 your holding period is three years, and that

3 six-month period is more than 10 percent, but then

4 later retroactively becomes less than 10 percent?

5 What we've suggested is that you want to

6 be able to -- given that a (inaudible) vehicle for

7 long-term investment, the statute includes the

8 concept of a 10-year holding period where all the

9 dues comes in, you should be able to take your

10 business plan into account, and your future

11 holding period, if you're going to assess a 10

12 percent standard.

13 Because otherwise you'd have to

14 seemingly report a failed ASSET Test, pay a

15 penalty tax. And then what do you do in year

16 five, when it turns out, well, now that I've held

17 it for long enough, it turns out that I was in

18 compliance all along, and I shouldn't have been

19 paying that penalty tax?

20 So, you could limit the assumed future

21 period of the lesser of 10 years or remaining

22 useful life, and I think that would be

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1 appropriate.

2 Alternatively, I want to, I guess draw

3 the Panel's attention to the fact that the statute

4 permits a Qualified Opportunity Zone business, or

5 a partnership interest to be a good asset for a

6 QOF, if it is a QOCB or if has interest in a

7 startup, or what I think it says, a new entity

8 formed for the purposes of being a QOCB.

9 And in that case I think there should be

10 a defined kind of grace period for a startup,

11 because the statute says, you know, there's two

12 ways that a partnership interest can be good, it

13 can be a QOCB or it can be new, and formed for the

14 purposes of eventually being a QOCB.

15 So I would, you know, respectfully

16 suggest that the grace period ought to be a year,

17 because in the context of the 10-year hold period

18 that the statute contemplates, that would align

19 broadly with the 10 percent standard.

20 The last couple of points that I want to

21 address very quickly, is we were hoping for

22 additional clarification on the definition of a

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1 triple net lease, there's other context in which

2 merely passing through certain costs to the

3 tenant, you know, for taxes and insurance, and

4 everything, could cause the lease to be deemed to

5 be triple net.

6 But we think that if the services in

7 respect of those expenses are being reformed then

8 the cost should be able to be passed through to

9 the tenants without causing an issue there,

10 because we're really trying to define an active

11 standard, and understanding that the statute

12 requires an active trader business, triple net

13 lease isn't enough but, you know, we don't think

14 that simply negotiating cost-sharing should cause

15 an otherwise good lease to be -- to cause you to

16 fail the active trade or business test.

17 Am I out of time? I'd like --

18 SPEAKER: Yes.

19 MR. SACCOPOULOS: Okay. Sorry. Thank

20 you. Thank you very much.

21 MS. BOLTON: All right. Thank you. Do

22 we have any question from the Panel?

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1 MR. CRNKOVICH: Thanks for your

2 testimony. That was very helpful. You talked

3 about the separate carry vehicle, and there are a

4 couple of interesting (inaudible). Do you have

5 those in your written testimony?

6 MR. SACCOPOULOS: Yes. The written

7 testimony --

8 MR. CRNKOVICH: If we could go through

9 those too and I mean --

10 MR. SACCOPOULOS: Well, we submitted two

11 documents one of which was the longer testimony

12 and the other was the bullet points for this

13 speech.

14 MR. CRNKOVICH: Great. Okay. So you

15 can do that?

16 MR. SACCOPOULOS: Yeah.

17 MR. CRNKOVICH: And just if I can just

18 spend 30 seconds or a minute and go through two C

19 issues you raised, and kind of the key, or

20 carrying on of what I asked about two prior people

21 who are testifying. So, if you own interest in a

22 partnership and you sell your interest after 10

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1 years, and assume that the look through applies to

2 a revised step up equivalent for all the assets in

3 the game, so you're aggregating, your point would

4 be the similar rule ought to apply if the

5 partnership were lowered to your (inaudible)

6 assets. Correct?

7 MR. SACCOPOULOS: Yes. Assuming that

8 that was the disposition of an investment, because

9 I think that's the statutory word is investment.

10 MR. CRNKOVICH: Right. And I guess, I

11 just want to drill down on that. How would you

12 define investment? So, again you have been -- you

13 rolled over 100 into a QOF, and then putting aside

14 the 1226 gain recognition, 1231-26, the investment

15 increases in value from 100 to 1,000 if you sold

16 your interest you pay in tax.

17 MR. SACCOPOULOS: Right?

18 MR. CRNKOVICH: Now, assume that the

19 partnership sold off some of or all of its assets,

20 assuming it's just some, how would you envision

21 your work in the new approach?

22 MR. SACCOPOULOS: I think it has to

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1 determine whether what the partnership sold was an

2 investment, and so you raised the example of

3 inventory earlier.

4 MR. CRNKOVICH: Yes.

5 MR. SACCOPOULOS: I think it's obviously

6 inappropriate, because inventory is not an

7 investment, but I think that if it's like a real

8 estate asset, or if it's a tangible asset that

9 simply, where there is capital gain, but there

10 also happens to be 1245 recapture. Or, if it's a

11 collection of assets that represent a trade or

12 business, and I think Section 1060 does a good job

13 of defining that, if goodwill attaches.

14 MR. CRNKOVICH: Okay. And so if you did

15 sell the whole business, in your view, would there

16 be a requirement to distribute the proceeds out to

17 put the investor -- and I can't pronounce your

18 name, I'm sorry.

19 MR. SACCOPOULOS: Argy, that's okay

20 (crosstalk).

21 MR. CRNKOVICH: Argy. In the same

22 position as if you had sold your interest, would

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1 you have a distribution requirement?

2 MR. SACCOPOULOS: I think it would be

3 reasonable to have a distribution requirement in

4 that case.

5 MR. CRNKOVICH: And would the benefit

6 encompass -- only recapture 1258 and 1245

7 recapture in the actual gain as well?

8 MR. SACCOPOULOS: Actual gain, if that

9 gain is in respect of an asset, that's part of the

10 trade or business under 1066.

11 MR. CRNKOVICH: Got it. Okay. That's

12 helpful. Thank you.

13 MR. SACCOPOULOS: Thank you.

14 MS. BOLTON: So, I just want to clarify,

15 for the 90 percent over the period, are you

16 suggesting it's a retroactive rule, so you

17 determine at 10 years that you've hit the 90

18 percent.

19 MR. SACCOPOULOS: Well, what I'm

20 suggesting is that we need a rule that will let us

21 report a good ASSET Test if the bad holding period

22 represents more 10 percent of the holding elapsed

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1 to date, but less than 10 percent of the holding

2 period that you assess will be the final holding

3 period when you dispose of the investment,

4 understanding that that's a hard rule to

5 implement.

6 But the fact is the holding period

7 increases at the rate of one year per year, and

8 that means 10 percent of your holding period

9 increase at the rate of, you know, 37 days per

10 year.

11 And so, if your holding period is

12 constantly going up, eventually it might encompass

13 a bad holding period that was mad initially, and

14 that's a problem that should be addressed, and

15 we've suggested a couple ways of doing it.

16 MR. NOVEY: How does that work in the

17 statute of limitations?

18 MR. SACCOPOULOS: That's a very good

19 question. And that's in fact one of the problems

20 there, because if you report a bad ASSET testing

21 in the first year, and then in year six or seven

22 you retroactively determine, well, at this point

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1 we can substantiate, we were always good, even

2 back in year one we were good.

3 There's no mechanism to get a refund,

4 and so it just seems like it's setting up a trap

5 for the taxpayer where they have to report that

6 ASSET Test even though their business plan

7 involves only -- have been compliant with the 10

8 percent.

9 MR. NOVEY: Then what happens if the

10 plan on being good after year nine, but they

11 aren't?

12 MR. SACCOPOULOS: Well, in that case I

13 think they would have to report a failed ASSET

14 Test for that year, and I mean it depends how

15 harsh you want to be, I think that if you meant to

16 be good and something happened beyond your

17 control, or that was unforeseen, and it caused

18 your prior ASSET Test reporting that you said was

19 good to be in fact wrong, then there should be a

20 consequence to that. And I frankly don't know how

21 far you could go, but certainly you could have a

22 bad ASSET Test, at least for the year that you

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1 have the changed circumstance.

2 MR. NOVEY: You seem to be suggesting

3 reasonable cause and --

4 MR. SACCOPOULOS: Thank you for the

5 prompt. Yes, I am.

6 MR. NOVEY: But if there isn't

7 reasonable cause, shouldn't the IRS try to come

8 back and say, you know, none of the original

9 investment was okay, the entire and usually one of

10 potential (inaudible)?

11 MR. SACCOPOULOS: I think that if you're

12 -- I think that a taxpayer in that situation is in

13 a perilous position because if they have a failed

14 ASSET Test I don't think there's any mechanism for

15 saying you never had a good QOF, and so there are

16 limited remedies for the IRS in that case, and

17 that is one reason why I suggested the alternative

18 of a one-year grace period for a startup QOCB,

19 which would address about 90 percent of the issue.

20 Understanding that it doesn't address

21 the issue of tangible property used in the zone in

22 some of the other -- but if you had a one-year

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1 grace period at the start that would address the

2 cases of early noncompliance in a QOCB, while

3 maintaining the spirit of the 10 percent rule.

4 MS. BOLTON: Anybody else? All right.

5 Thank you very much.

6 MR. SACCOPOULOS: Thank you.

7 MS. BOLTON: Our next speaker is Brent

8 Carney from Mariziti Falcon, LLP.

9 MR. CARNEY: Good afternoon. My name is

10 Brent Carney. I'm with the firm Mariziti Falcon.

11 We are a small law firm in the State of New

12 Jersey, where we mainly represent public bodies,

13 and we serve as a Special Redevelopment Council

14 for several public bodies in New Jersey, many of

15 which have qualified Opportunity Zone

16 designations.

17 And my public comment this afternoon is

18 going to focus on Qualified Opportunity Zone

19 business property. And the statute there, among

20 its requirements, focuses on the acquisition of

21 property in a Qualified Opportunity Zone where the

22 original use, that's what I really want to focus

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1 on, is the new proposed definition originally

2 used.

3 The original use of such property in the

4 Qualified Opportunity Zone commences with the

5 Qualified Opportunity Fund, and then this is

6 important word "or", or the Qualified Opportunity

7 Fund substantially improves the property. And the

8 statute has a very clear definition of substantial

9 improvement, and it has a timeframe, and in the

10 redevelopment world a timeframe of 30 months, at

11 least in my world, is a very tight timeframe.

12 So, for our practice and for our

13 municipalities we're focused on original use

14 because the statute does not associate a time

15 period with it. And so in the second round of the

16 draft regulations, for the first time, the IRS has

17 put in a proposed definition of "original use" and

18 I am just going to jump around in that definition.

19 The definition includes "used tangible property

20 satisfies the original use requirement if the

21 property has not been previously so used or placed

22 in service in a qualified opportunity zone." That

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1 makes perfect sense. That would be a new use that

2 is acquired by the qualified opportunity fund.

3 It's commencing with the fund, the 30 month time

4 period would not apply in that situation.

5 It follows if the tangible property had

6 been so used or placed in service in the qualified

7 opportunity zone before it acquired by purchase

8 (sic) it must be substantially improved and it's

9 using the same definition of substantial

10 improvement, that also makes perfect sense because

11 that's not really something that commences with

12 the fund. For example, if it was an apartment

13 building that was acquired by the qualified

14 opportunity fund, it's just going to continue the

15 existing use that clearly is not an original use

16 that's commencing with the fund and so it would

17 then follow under the "or substantial."

18 But we also have vacant properties and I

19 was here for the hearing on Valentine's Day and I

20 know that there was a lot of comment there about

21 what period of time would abandoned or vacant

22 property be considered to basically wipe out or

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1 delete the prior use so it could -- if it

2 commenced again, it would be considered original

3 use and at that hearing, there were a lot of

4 comments proposing basically one year, a one year

5 period of time for abandonment and vacancy -- that

6 should wipe out the prior use and it could count

7 as original use. In the federal register, the IRS

8 and the Department of Treasury commented back.

9 They disagreed with the 1 year proposal given the

10 different operation of opportunity zone to

11 intentionally cease occupancy property for 12

12 months in order to increase its marketability to

13 potential purchasers after 2017. Other

14 commentators proposed longer vacancy thresholds

15 ranging to five years.

16 In other words, I think the concern was

17 that property owners would intentionally vacate

18 their properties to get the benefit of either

19 property acquisition by a qualified opportunity

20 fund and so 12 months didn't make much sense. Our

21 proposal is rather than going to the extreme of

22 five years which was sort of the upper end I think

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1 of the public comment, that perhaps you can retch

2 that debt back down to two years because there are

3 a lot of properties, at least in some of the towns

4 I represent that do have vacancies of properties

5 that are less than five years that would certainly

6 benefit under the qualified opportunity fund

7 program if that prior use was deleted or

8 considered vacated after a vacancy of at least two

9 years so that is our suggestion and wish and

10 desire before the final regulations are proposed

11 so that's really -- I had other comments but

12 that's really what I wanted to focus on.

13 MS. BOLTON: Comments?

14 MR. NOVEY: One question about the

15 commenting in paper. You suggested that five and

16 seven year basis --

17 MR. CARNEY: Oh.

18 MR. NOVEY: Should be available at least

19 until the expiration of status as a quality

20 opportunity zone and in any event, the basis is

21 measured not by the current -- I'm sorry, the

22 stack up is measured not by the current basis but

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1 by the amount of (inaudible) so you seem to say if

2 we can get the ten year benefits until --

3 MR. CARNEY: Mm-hmm.

4 MR. NOVEY: Until 137, even if we don't

5 get (inaudible) do this. I think that there were

6 two suggestions that you made, one of which may

7 have more probable with the statute than the

8 other.

9 MR. CARNEY: Okay.

10 MR. NOVEY: The idea that one could

11 start the seven year period and the five year

12 period after 12/31/2026 would have a problem

13 because you get the benefit of that step up only

14 if the investment is associated with a deferral

15 election and a deferral election could be made --

16 MR. CARNEY: So if --

17 MR. NOVEY: The other one, where you are

18 saying if I had a good deferral election earlier,

19 maybe I should be able to continue to get my

20 (inaudible) ten percent -- subsequently, the

21 12/31/2026, as long as I started out okay, that

22 one might have less trouble with the statute.

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1 MR. CARNEY: So, actually, I wasn't

2 necessarily tying the step up and the basis for

3 the ten percent and the 15 percent cumulative

4 based on getting the deferral or not. All I was

5 pointing out there was that also in the statute,

6 in terms of the deferral, the ten year deferral,

7 that is actually statutorily defined to be

8 December 31, 2026, that we pay April 15, 2027,

9 whatever that tax rate is at that point and time

10 but unlike the sections that deal with the ten

11 percent and then the extra five percent in the

12 step up of basis, Congress did not put into the

13 statute a time period and because the proposed

14 regulations were allowing up to the year 2047 for

15 the qualified opportunity fund to actually sell

16 the property and I assume that was done partly so

17 that it wouldn't be a fire sale if it was a bad

18 market after you have been holding it for ten or

19 more years, so two, it would not be beyond your

20 ability, because you would not be -- you're not

21 constrained by the statute, it could be in your

22 regulations to also allow that sort of flexibility

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1 with the step up and gain of ten percent and five

2 percent because everywhere I go at least, when I

3 listen to panels on the -- I am going to talk

4 about the seven year step up, in order to hit

5 that, it's always talked about, well that would

6 mean that the investment has to be done before

7 December 31st of this year.

8 MR. NOVEY: By.

9 MR. CARNEY: By December 31st of this

10 year and all I am suggesting is in your

11 regulations, if you were to allow the same

12 flexibility that you are for the sale of the

13 qualified opportunity fund to sell the property

14 all the way to the year 2047, if you allow that

15 same flexibility, then it would actually enhance,

16 I think, the ability of qualified opportunity

17 funds to go into qualified opportunity zones

18 because they are not losing that seven percent --

19 not seven percent -- they are not losing that 15

20 percent step up in basis over a period of seven

21 years.

22 MR. NOVEY: I understand that point that

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1 you are making. You seem to be making an

2 additional point which was you would be able to

3 get the five percent and seven percent even --

4 MR. CARNEY: Five and ten.

5 MR. NOVEY: Even investments into a QOF

6 subsequent to I guess the latest possible date

7 would be -- the sale, you could defer something

8 that was sold in December 31st, 2026, then you

9 could make your investment as late as June of 2027

10 but beyond then --

11 MR. CARNEY: Right.

12 MR. NOVEY: You would not have a valid

13 deferral election and therefore, the five percent

14 and ten percent step ups would be unavailable for

15 investments that --

16 MR. CARNEY: Well, correct, and also the

17 zones themselves will automatically expire.

18 MR. NOVEY: So that we --

19 MR. CARNEY: Yeah.

20 MR. NOVEY: We indicated that maybe even

21 the -- since we didn't want to have a situation

22 where virtually all -- we didn't want to have a

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1 situation where virtually all of the ten year

2 basis benefits would be gone once the zones

3 expired --

4 MR. CARNEY: Right.

5 MR. NOVEY: And we also didn't want to

6 have a situation where we preserved the step up

7 but once the zones expired, it was -- there was no

8 continued requirements of complying with the

9 economic focus in the zone. We soft-peddled the

10 consequences of that exploration.

11 MR. CARNEY: Yeah, and I think that's a

12 good thing. Thank you.

13 MR. NOVEY: All right, thank you very

14 much.

15 MR. CARNEY: Thanks.

16 MS. BOLTON: All right, our next speaker

17 is Jill Homan from Javelin 19 Investments LLC.

18 MS. HOMAN: Good afternoon. Good

19 afternoon, everybody. This lunch again. My name

20 is Jill Holman and I am president of Javelin 19

21 Investments, a Washington, D.C. based development

22 and advisory firm. I have 15 years experience in

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1 real estate acquisitions and development and to

2 date, my firm has been involved with almost 200

3 million in qualified opportunities to investments.

4 I also serve on the Board of Directors of the

5 Opportunity Zone Focus Trade Association and the

6 Opportunity Zone Association of America and since

7 I last spoke to you on Valentine's day, we have

8 capitalized our opportunity zone student housing

9 project in Baltimore, Maryland and are poised to

10 start construction.

11 The project features what the OZ

12 legislation envisioned in fulfilling a need,

13 housing for students in ways that positively

14 impact the community.

15 Well, you have my working group

16 submission. In the interest of time, I will focus

17 my remarks briefly on five quick subjects most

18 likely to unlock still hesitant investors. I

19 appreciate the chance to speak with you.

20 The first topic is qualification of

21 already owned property. So many properties owned

22 by taxpayers as of December 31, 2017 are the

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1 subject of planned development extending into 2018

2 and beyond. Still unclear is whether a sale of

3 that property is needed in order for work done

4 with respect to such property to qualify as

5 qualified opportunity zone business property.

6 Said differently, if a taxpayer has

7 owned land or land in building prior to January 1,

8 2018, can improvements to that land or land and

9 building, in 2018 or later, qualify as QOZBP.

10 The question is whether improvements

11 funded by a QOF investment contribute a separate

12 item of qualified property in situations where

13 expenditures exceed 70 percent of the sum of the

14 investor's basis in the already owned property and

15 otherwise qualifying costs.

16 The regulations could treat the

17 preexisting property as one asset owned by the QOF

18 and its subsidiary entity in the improvements as

19 another and analyze the "substantially all" test

20 with respect to these two assets. I can offer

21 mathematically confirming samples but I think you

22 understand the points.

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1 Other tax credit (inaudible)

2 specifically provide for these special asset

3 treatments and I wholeheartedly support this

4 interpretation. The second topic is aggregating

5 expenditures to satisfy the substantial

6 improvement test.

7 Under the proposed regulations, the

8 substantial improvement test for used property is

9 calculated on an asset by asset basis. Issuing

10 the aggregation of related assets methodology.

11 The statutory language which calls for

12 expenditures with respect to the used property

13 seems to more logically support an aggregating of

14 eligible expenditures. Consider a single owner

15 who owns multiple residential buildings in land on

16 the same parcel in the same opportunity zone and

17 who has a comprehensive community focus

18 development plan to rehabilitate the buildings

19 while adding a new playground for the younger

20 residents in a new commercial area to satisfy the

21 retail needs. These additions are clearly, with

22 respect to the existing buildings, but the current

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1 regulations would require that the rehabilitation

2 meet these substantial improvement requirement on

3 an individual basis.

4 I recommend that the IRS adopt a

5 regulation permitting the substantial improvement

6 test to be passed for -- with three things: One,

7 if a written development plan which meets the

8 substantial improvement test on an aggregate basis

9 including both the rehabilitation of the use

10 buildings and the cost of new construction; two,

11 expenditures are made on contiguous properties;

12 and three, the written plan is approved by a local

13 governmental body responsible for authorizing

14 development activities.

15 The third topic is alternative methods

16 of gain exclusion and we have touched on this a

17 bit before with the other speakers.

18 Currently, dramatically different tax

19 treatments result from the sale of a QOF, a QOZB,

20 and a QOZBP. In fact, the selling of QOZBP

21 appears to not yield any opportunity zone tax

22 benefits.

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1 I strongly urge the IRS to synthesize

2 these three scenarios and explicitly allow for the

3 sale of QOZBPs to produce the desired OZ tax

4 benefits to its QOF investors. Right now, an OZ

5 investor may achieve gain exclusion after ten

6 years only by selling its QOF interest.

7 Gain exclusion is achieved by an

8 investor election to increase a tax basis of the

9 QOF. QOF interest to its fair market value

10 immediately before the sale or exchange.

11 If the QOF is a partnership, the

12 proposed regulations also provide that the QOF

13 increase its basis in the partnership by the same

14 amount. This can benefit a QOF partnership that

15 owns assets that otherwise would generate ordinary

16 income upon disposition but a different result

17 occurs if the QOF sells its interest in the QOCB.

18 In that instance, the proposed

19 regulations provide that if a QOF partnership or

20 S-Corporation recognizes gain upon the disposition

21 of its QOZB investment, an investor that has held

22 its interest in the QOF for at least ten years,

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1 may elect to exclude form income some or all of

2 its share of such gain attributed to the

3 qualifying investment.

4 The election only permits the QOF

5 investor to exclude from income, capital gain from

6 the result of the -- from the sale of the

7 qualified property.

8 It does not specifically or explicitly

9 apply to innate ordinary income resulting from the

10 qualifying sale such as depreciation recapture.

11 I appreciate that there is language in

12 the proposed regulations to suggest that the ten

13 year asset sale applies to sale of property by a

14 QOZB but I do not believe that it explicitly

15 states so.

16 Most QOFs are being structured with

17 subsidiary entities owning the underlying

18 property. For business reasons, not tax reasons,

19 most buyers prefer to purchase property assets

20 rather than interest in entities which own the

21 property.

22 With these observations in mind, I

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1 recommend that the IRS extend the exclusion

2 provision to the entirety of the sales of property

3 held by the QOFs, not just capital gain, as well

4 as the sale of QOZBP held by subsidiary entities

5 in which the QOF invests to the extent such gain

6 is allocated to the QOF.

7 And finally, the tenure asset sale

8 election is not one in which the investors may

9 rely. This chills many potential investors who

10 make investment decisions based on certainty of

11 tax results.

12 Looking at dispositions ten years or

13 more into the future, investors are extremely

14 reluctant to commit dollars today without having a

15 sense of what the rules will be applied when they

16 may dispose of the investment.

17 Investors are being told the no tax

18 after ten years rule may apply and may be

19 available depending on what the IRS ultimately

20 decides with no particular commitment to publisher

21 rule before their investment is made.

22 The proposed regulations should be one

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1 in which the investor may rely. And fourth,

2 triple net lease and active conduct of a trade or

3 business. The proposed regulations confirm that

4 the business of leasing real estate can qualify as

5 an active trade or business for opportunities and

6 purposes.

7 Treasury then muddy the waters a bit by

8 saying however, merely entering into a triple net

9 lease is not enough to be the active conduct of a

10 trade or business. Opportunity zone investments

11 are naturally aligned with the preservation and

12 rehabilitation of communities historically

13 significant buildings and many rehabilitations

14 supported by historic tax credits utilize a master

15 lease structure for credit delivery.

16 With the industry -- with we in the

17 industry are struggling as I think you've heard,

18 in the uncertainty of the word "mere" as Treasury

19 use didn't ask for guidance through the use of

20 examples in clarifying language. For example, you

21 could use section 199(a) in the context of the

22 qualified business income deduction and to keep it

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1 short, I won't keep that and the fifth topic is

2 QOF investor relief if proposed financing or other

3 conditions fail.

4 There are many instances where an

5 investor is admitted into a QOF but the proceeds

6 are not deployed into the project until certain

7 conditions precedent are met so the sponsor is

8 comfortable or financially able to move forward

9 with the -- on the OZ project.

10 Satisfying these conditions may be

11 subject to actions of third parties, force

12 majeure, or the inability or ability of the

13 developer to raise capital equity or receive the

14 financing in which case the sponsor of the QOF may

15 choose to simply return the investor's money if

16 they are not able to meet those conditions.

17 Similar to reinvestment following

18 dispositions, Treasury should allow taxpayers who

19 have returned their gain investment dollars

20 through no fault of their own, 180 day window to

21 reinvest into another QOF.

22 Lastly, I know others are going to speak

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1 on the concern with the netting rule applicable to

2 1231, gains and losses. We provided commentary on

3 that as well and add my voice to reconsideration

4 of that rule and this concludes my remarks and I

5 appreciate the opportunity to share with you today

6 and on what I think will encourage more

7 investments in the zones. Thank you.

8 MS. BOLTON: Thank you, Jill.

9 MR. CRNKOVICH: Jill, thank you for your

10 helpful points. Just the -2C ten year rule, would

11 you envision a rule, as I asked the others, that

12 would require a distribution of the proceeds in

13 order to -- for the QOF to avail itself of the ten

14 year elimination?

15 In other words, if there is a sale

16 outside --

17 MS. HOMAN: Mm-hmm.

18 MR. CRNKOVICH: That's one thing the

19 investor has the cash and the buyer of that can

20 never get the benefit.

21 MS. HOMAN: Mm-hmm.

22 MR. CRNKOVICH: So the question is

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1 should you have something between that and the

2 situation where the sale is inside, such that

3 there would be a requirement to distribute the

4 proceeds.

5 MS. HOMAN: I think that is fair. And

6 ultimately, from a business perspective, I -- most

7 investors I have spoken with who are investing, or

8 considering investing significant amounts of

9 capital, do not understand that there is different

10 treatments at the different tiers and I think

11 whatever gets us to the parity and synthesizing

12 those three outcomes, I am fine with.

13 If that means the distribution, I would

14 be fine with that.

15 MR. CRNKOVICH: Thank you.

16 MS. HOMAN: All right, well, thank you.

17 MS. BOLTON: Okay, our next speaker is

18 Regina Staudacher from Howard and Howard.

19 MS. STAUDACHER: Good afternoon and

20 thanks for having us back. It is a pleasure to be

21 here. One of you said this is a sacrifice of our

22 time and it's really not. It is really a

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1 refreshing experience to have the opportunity to

2 talk with all of you and to listen to all of our

3 colleagues so thank you for listening.

4 My name is Regina Staudacher. I am a

5 partner with Howard and Howard attorneys. I, as

6 well, was back here on Valentine's day and you are

7 correct. There is a lot of energy in this space

8 right now. We have established more than 20

9 opportunity funds in qualified opportunity zone

10 investments and frankly I think -- we're at 25 as

11 of June 30th. From everywhere from Las Vegas to

12 Flint, Michigan and what I am bringing to you

13 today are just a few of the challenges that we

14 have noticed in setting up those structures and a

15 couple -- many of them have been addressed today

16 so I will try not to go in too deep on those

17 comments specifically but some of those

18 challenges, is the way I would describe them,

19 would be with the debt finance distributions that

20 appear to be trapped in the April regulations

21 associated with the modified disguised sale rules.

22 The use of tangible property outside OZ

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1 locations, as it relates to qualified opportunity

2 businesses, the ability to recycle gains and we've

3 talked about this a tad as it relates to the

4 multi-asset funds, but the ability to recycle

5 gains that are triggered from the sale of

6 underlying assets during the ten year holding

7 period continues to be what we view as a --

8 continues to be an area of great disparity in

9 terms of investors that want to come into these

10 funds as opposed to family offices that might be

11 utilizing targeted investments to set up their own

12 funds so I think we are achieving different things

13 by not allowing this recycling of gains within the

14 ten year hold period.

15 Next would be the ability utilized.

16 Related party transactions and I haven't heard a

17 comment on this because it seems to be pretty

18 settled in but in working with family offices and

19 closely held businesses, one of the things that we

20 have identified -- and these were not in my

21 prepared comments so I am happy to prepare

22 something separate on this, is that related party

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1 sales where businesses have sold out or bought out

2 family members or individuals within that are

3 related purely because of sibling relationships or

4 other type of relationships, those are precluded

5 from doing investments into opportunity zones.

6 In particular, what's interesting, we

7 are finding is that a lot of those same type of

8 family offices are no longer -- are not able now

9 to contribute those gains into high qualified

10 community projects that would be unrelated to the

11 transactions or the parties that created that

12 related party gain so I would compel you to give

13 that some consideration.

14 And I also have two additional comments.

15 I am not much of a policy person but I have -- we

16 have gotten comments back from many of our

17 investors as it relates to the need for an

18 intermediary to connect investors with projects

19 and opportunity funds. Essentially a match maker

20 of sorts to put projects and investors together.

21 I know this is not the time and place but I bring

22 it up that we are often asked about this very

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1 concept. We attempt to do that, we can't be part

2 of the promote, that's not what we do but there is

3 definitely a gap between the community and the

4 investors in terms of how to find each other for

5 qualified projects and investors looking for

6 qualified projects.

7 Lastly, we are working with some social

8 impact investment funds who are specifically

9 looking for advantages to invest in women owned

10 businesses and minority owned businesses

11 throughout opportunity zone locations. This is

12 completely absent from the regulations and again,

13 I understand, this is not your place but I

14 mentioned that in terms of if there could be a way

15 to align other incentives for those types of

16 entities within the opportunity zone legislation

17 or an ability to coach the communities on how to,

18 again, match make some of these minority

19 businesses and/or women owned businesses with

20 investors. I think aligning some of these

21 incentives would make this legislation that much

22 more powerful to the people that need access to

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1 capital that currently don't have that.

2 So, the debt finance distribution

3 comment. I'll address that quickly. I know Mr.

4 Colin and a couple of others addressed that

5 comment. I can speak to a specific example of an

6 investor with a $48 million gain from 2018 that

7 had a fund set up.

8 We actually -- as of the week before

9 June 30th, abandoned that transaction for a large

10 development in Minneapolis, specifically because

11 of the new debt finance distribution language

12 associated with the disguised sale modification.

13 That created a big problem. We had

14 banks that were willing to take part of that

15 transaction and so I was very interested in the

16 conversation earlier in terms of looking at what

17 the third party market will do with an opportunity

18 zone investment and their willingness to

19 participate and I think this is a perfect

20 opportunity for us to enlist established banks

21 that want to work with these developers and work

22 with these investors to leverage that interest so

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1 that we can do distributions and then subsequent

2 projects along within that structure.

3 So I think that's one that definitely

4 needs further contemplation and I did go into some

5 more detail on my prepared comments on that.

6 Second to that is the use and location of tangible

7 property. I think Mr. Glickman made comments

8 regarding use and we again -- this is one of the

9 areas, as it relates to qualified opportunity zone

10 businesses where we are finding the 70 percent use

11 of tangible property is a bit prohibitive as it

12 relates to businesses with mobile units, for

13 example, mechanical contracting companies with

14 vehicles that run across -- the use of the

15 tangible property is often used outside of the

16 opportunity zone so the 70 percent test of the

17 tangible property creates a problem if we want to

18 relocate or acquire a mechanical contracting

19 company or even a technology company where they

20 have portable laptop or things of that nature.

21 So the ability to better utilize the

22 testing for businesses would be very helpful. If

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1 we really want to put headquarters and businesses

2 in zones, and still allow them to service their

3 customers outside the zone.

4 The last comment I would make -- as I

5 mentioned earlier as the game rollover within the

6 ten year holding period, I won't address that

7 anymore other than again stating that I think that

8 is what is preventing multi-asset funds from

9 really getting off the ground, at least in terms

10 of our investment base and the funds that we have

11 set up. The inability to reinvest and have gain

12 transactions throughout the life of the tenure

13 holding period seems to be the primary issue that

14 investors are staying back and the lack of clarity

15 around what would be that taxing event during the

16 ten year holding period.

17 Lastly, again, from a policy standpoint,

18 just make the comment that we represent U.S.

19 Hispanic Chamber of Commerce and Executives from

20 one of the only Latina SBICs in the country who

21 served to corporate sponsors such as the Billion

22 Dollar Roundtable and it's there where we feel

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1 that there is a need for additional incentive to

2 support investments with minority businesses and

3 women owned businesses.

4 So with that, I'll reserve the rest of

5 my time for other speakers.

6 MS. BOLTON: Do you have a suggestion on

7 the 70 percent use test? How we would clarify

8 that?

9 MS. STAUDACHER: Yeah, I think there

10 it's really looking to the nature of the business,

11 really needs to be contemplated and I keep going

12 back to when we talked to our clients that looked

13 at the intent of the statute and so it's really

14 about the fact that if we go on an asset by asset

15 basis test and do the testing, we run afoul of

16 that testing so I would think something -- really

17 the percentage is challenging when you think of a

18 mechanical contracting business, with let's say

19 200 or so service professionals and I bring that

20 one up just because it's one that we are working

21 on right now where they actually constructed a

22 facility in an opportunity zone and they have all

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1 of these vehicles that are out running around and

2 service professionals and they do some business on

3 water repair, frankly, in Flint, Michigan and some

4 outside of that zone.

5 They will fall outside of that 70

6 percent test, or fall beyond the 70 percent test

7 as it relates to their tangible asset yet the

8 heart of the company is in the zone and that's

9 where their revenues are generated and all of

10 these others so I don't -- I think that the

11 linkage of 70 percent to tangible assets is what

12 the issue is so I don't know if it's the amount as

13 much as it is looking to the underlying business

14 and what is really driving the business and why

15 it's located in that zone.

16 MR. CRNKOVICH: Regina, thank you for

17 your comments. What if we drill down on that

18 example. I want to make sure we are not missing

19 something with -- something referred as the

20 disguised sale rule. It's really a rule that

21 limits the amount that is being invested. Looking

22 at the disguised sales rules as a handy mechanism

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1 for that determination.

2 So if you could just tell us a little

3 bit more about that fact pattern -- so someone was

4 going to invest 48 million?

5 MS. STAUDACHER: Yeah, so we had a 48

6 million dollar gain transaction in 2018 that was

7 ready to be deployed by June 30, 2019 --

8 MR. CRNKOVICH: So let's call the

9 individual at 48 million.

10 MS. STAUDACHER: It was a partnership

11 but yes.

12 MR. CRNKOVICH: Okay, and that

13 partnership was going to invest 48 million?

14 MS. STAUDACHER: Into their own

15 opportunity fund.

16 MR. CRNKOVICH: Okay.

17 MS. STAUDACHER: And invest into a new

18 development in Minneapolis.

19 MR. CRNKOVICH: Okay, so 48 million

20 down?

21 MS. STAUDACHER: Yes.

22 MR. CRNKOVICH: And they had financing

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1 lined up?

2 MS. STAUDACHER: Financing lined up with

3 a single bank that has banked them for a number of

4 years.

5 MR. CRNKOVICH: Right, and that bank was

6 going to loan money to the QOF?

7 MS. STAUDACHER: Exactly. And,

8 interestingly, looking to the underlying asset,

9 which would be the new development.

10 MR. CRNKOVICH: Right, and was there an

11 intended distribution of some of those proceeds?

12 MS. STAUDACHER: That's where we got

13 caught up, right? There was intended distribution

14 initially because they roll over and do additional

15 investments.

16 MR. CRNKOVICH: So just to --

17 MS. STAUDACHER: It's really the two

18 year period that's the issue.

19 MR. CRNKOVICH: Well, it's a disguised

20 sale.

21 MS. STAUDACHER: Yeah.

22 MR. CRNKOVICH: And then also if you're

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1 comfortable under the normal facts and

2 circumstances with all the disguised sale rules

3 then you get comfortable with this. Within a

4 short period of time, we are going to distribute

5 say half of that amount so 48 million was

6 invested, they are going to borrow 24 and

7 distribute it out immediately?

8 MS. STAUDACHER: What's interesting

9 about that is it wasn't -- that part of the plan

10 was not defined. It was the normal business

11 process would have been for there to be a

12 distribution.

13 MR. CRNKOVICH: Well, I know operating

14 -- yeah, but they are under the disguised sale

15 rules --

16 MS. STAUDACHER: It could have been as

17 much as half, yes. It could have been -- in terms

18 of the question being what would the plan have

19 been because we abandoned it, it would have been

20 as much as half of the 48 million to go back.

21 MR. CRNKOVICH: And just so I am not

22 missing the obvious point here, the source of the

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1 proceeds say 24 that would be distributed, the

2 source was -- was it the borrowing? Was it

3 operations or a combination thereof?

4 MS. STAUDACHER: It would have been the

5 borrowing itself, yes.

6 MR. CRNKOVICH: And that was prearranged

7 from day one?

8 MS. STAUDACHER: Yes, and what's

9 interesting about that project specifically is

10 that they have a track record of developing

11 projects within 12-25 -- in fact they do

12 government contracts and so they have defined

13 projects that must be constructed within a period

14 of time.

15 MR. CRNKOVICH: Mm-hmm.

16 MS. STAUDACHER: So their project would

17 have been completed before the end of this year

18 which is why the bank was very comfortable with

19 that transaction.

20 MR. CRNKOVICH: So --

21 MS. STAUDACHER: So in our mind, it's

22 all about there being economic substance to the

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1 underlying transaction --

2 MR. CRNKOVICH: Right.

3 MS. STAUDACHER: -- that makes that --

4 so our request is -- the way it's currently

5 written, it appears that there is a presumption of

6 a disguised sale and if we can get over there

7 being a presumption of a disguised sale, I think

8 we could have gotten them comfortable.

9 MR. CRNKOVICH: And just to be clear, we

10 are not within the disguised sales rules, that's

11 the mechanic for purposes of determining the

12 amount of the qualifying investment so 48 was

13 going to go in, and maybe we can clarify this and

14 thank you for your accounts, if 48 goes in and

15 let's say there's a prearranged deal with the bank

16 to borrow 24 and immediately distribute that out

17 but the rules intended to deal with is to take the

18 $48 million investment and say that if this would

19 be a disguised sale based on the rules we put in

20 the regs, then the 24 million distribution would

21 actually reduce the amount of the qualifying

22 investment.

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1 It would have no impact on the

2 underlying fund. It would just say that

3 effectively you've put in 24 and the other 24 came

4 from borrowing so again, it would just (inaudible)

5 down the amount of the investment. That's all

6 (inaudible).

7 MS. STAUDACHER: Yeah, what's

8 unfortunate about the way it resulted for us is

9 that instead of doing then the quality opportunity

10 fund, what they did is split it up between some

11 1031 and other transactions but otherwise, they

12 were looking to do with that 48 probably 3 OZ

13 developments, right?

14 MR. CRNKOVICH: Mm-hmm.

15 MS. STAUDACHER: But instead they didn't

16 have the clarity, at least we weren't able to find

17 the clarity that they needed to be able to pull it

18 out without that being treated as, you know, a not

19 eligible gain.

20 MR. CRNKOVICH: Okay, thank you.

21 MR. NOVEY: Okay, sorry, I just want to

22 make sure that I am not missing an opportunity.

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1 Your concern about the transaction between

2 siblings.

3 MS. STAUDACHER: Mm-hmm.

4 MR. NOVEY: Would like to invest in a

5 quality opportunity fund? That would appear to be

6 facially inconsistent with the statute.

7 MS. STAUDACHER: Correct.

8 MR. NOVEY: Do you have anything that

9 lets us satisfy what you need?

10 MS. STAUDACHER: I don't see it there

11 either. I think it's an unfortunate result and I

12 understand the intention of it.

13 MR. NOVEY: Again, I am not saying that

14 it's a perfect statute --

15 MS. STAUDACHER: Yeah.

16 MR. NOVEY: -- but in terms of where we

17 have elbow room to try to accommodate things that

18 everybody wants to see, when the statute is this

19 clear, that doesn't seem to be a constructive use

20 of our brain power to find a way around.

21 The next, the idea of essentially the

22 QOF being a little bit like an IRA --

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2 MR. NOVEY: -- in terms of free

3 redeployment of assets into their most

4 economically productive location. It's great

5 economics but unless there is a general and

6 explicit provision that realized gain does not get

7 recognized --


9 MR. NOVEY: -- as there is with an IRA,

10 as there is with a variety of other cases where

11 Congress, if they want it to be tax free, they

12 know how to say it --

13 MS. STAUDACHER: Mm.

14 MR. NOVEY: -- and there doesn't seem to

15 be an opening here for that however desirable you

16 feel it would be, other than our saying

17 (inaudible) with the code.


19 MR. NOVEY: Is there an option that we

20 could go with other than ignoring the (inaudible)?

21 MS. STAUDACHER: Well, we have given

22 that some thought as well in terms of the way that

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1 the step up and basis works for the first seven

2 years. If there would be some corollary to even a

3 recovery of bases on that second investment as

4 opposed to a complete non-recognition of gain,

5 that would be the only -- that would be a

6 mechanism that would could demonstrate that there

7 could be some recycling of the original --

8 MR. NOVEY: You are suggesting that the

9 basis step would get sacrificed and extra bases

10 could go in and show some --

11 MS. STAUDACHER: Yes.

12 MR. NOVEY: And then finally, is there

13 something that we have done that makes the ozone

14 incentive less hospitable than it could otherwise

15 be to these other goals? In other words, we tried

16 to make it available to a variety of other kinds

17 of taxpayers -- for example (inaudible) we can

18 imagine being a (inaudible) we could put that in

19 there because it's a responsibility (inaudible).

20 The absence of a back end gain, which would be an

21 unusual development for a real estate investment

22 that has been (inaudible) affordability.

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1 Is there anything that we have done that

2 makes this regime less hospitable than it could be

3 or is it simply that we haven't manhandled the

4 natural consequences (inaudible) that could be --

5 MS. STAUDACHER: I don't -- I think --

6 again, I come back to the spirit of the

7 legislation when we are looking at -- advising our

8 clients so I definitely am hearing your comments

9 in the regulation about the spirit of legislation

10 and that's where I can find comfort with our

11 clients in terms of steering them in the right

12 direction. It's when we get into some of the

13 particulars --

14 MR. NOVEY: The tax lawyers --

15 MS. STAUDACHER: I understand that

16 (laughter) but I think it's when we get into the

17 nuances and the traps that aren't obvious that

18 then three months go by trying to figure out

19 what's the right answer and now we've lost another

20 year of an investment.

21 MR. NOVEY: Mm-hmm.

22 MS. STAUDACHER: So I think to the

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1 extent that we can embrace the spirit of the

2 legislation and I am not concerned about the table

3 sitting here.

4 We are all concerned about five, seven

5 and ten years from now, sitting in front of an IRS

6 exam and having to explain the spirit of the

7 intent was appropriate and yet is being

8 interpreted differently. Right?

9 MR. NOVEY: We will try to make it

10 explicit when we are able to further the intent

11 within the constraints of (inaudible), but the

12 basic structure was caused by enactment and it

13 wasn't something that otherwise (inaudible).

14 MS. STAUDACHER: Understood.

15 MS. BOLTON: Thank you.

16 MS. STAUDACHER: Thank you.

17 MS. BOLTON: Our next speaker is Maurice

18 Daniel of Economic Inclusion Task Force.

19 MR. DANIEL: Good afternoon. Thank you

20 for the opportunity to speak to you today. My

21 name is Maurice Daniel, I am here as a replacement

22 for my colleague Moses Boyd, who was originally

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1 scheduled to give this presentation, but he had

2 unforeseen travel complications. So I am a poor

3 substitute, but I am here nonetheless.

4 Moses and I are a part of the Economic

5 Inclusion Task Force, a stakeholder group whose

6 aim is to see the proper implementation of the

7 opportunity zone legislation. We're committed to

8 assisting the rollout of this new investment tool

9 that was, of course, created by the 2018 Tax Cut

10 and Jobs Act.

11 The Economic Task Force is composed of

12 African American men and women entrepreneurs,

13 formed following the White House meeting with Vice

14 President Pence and U.S. Senator Tim Scott in the

15 spring of 2017. The Economic Task Force advocates

16 for advocating the economic growth in urban

17 communities, and we have worked hard for the

18 passage of the opportunity zone legislation.

19 We believed then, as we believe now,

20 strongly and resolutely, that the opportunity zone

21 law for the first time in decades opens the door

22 for much needed major capital investments in the

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1 urban role and heavily African American

2 concentrated communities. In this regard we are

3 keenly interested in two vital goals, ensuring

4 that the program operates to the benefit of the

5 intended communities, and ensuring that there is

6 significant diverse participation at every level

7 of the program, including at the fund formation

8 levels, ownership and management levels, and with

9 the business enterprises that will be the subject

10 and recipients of these capital investments. The

11 specifics of the Treasury's regulations are

12 crucial to achieving these outcomes.

13 We would like to express our support for

14 certain provisions that we believe are critical

15 for these objectives, and we applaud Treasury for

16 its tremendous work in implementing the

17 regulations for advancing this law.

18 We also believe that the Department has

19 achieved much needed progress in clarification

20 matters that are providing more confidence to

21 investors who are eager to engage in this new

22 national investment tool. However, we do remain

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1 concerned about several issues. The regulations

2 regarding the investment in operating businesses

3 and substantial improvement tests, and the

4 proposed 31-month requirement for determining

5 active trade of businesses.

6 Regulations regarding investments in

7 operating businesses and the substantial

8 improvement test application. This issue concerns

9 the determination of substantial improvement tests

10 either on an asset basis or an aggregate basis.

11 The Department's notice of proposed rulemaking

12 indicates that this test will be applied on an

13 asset by asset basis. However, given the nature

14 of the target communities and what it's going to

15 take to attract capital and realize successful

16 investments in these communities, it is vital that

17 the Department allow for the meeting the 31-month

18 substantial improvement test on an aggregate basis

19 as opposed to an asset by asset basis.

20 For example, if a QOF determines to

21 build a healthcare business part in a qualified

22 opportunity zone, the assets will likely include

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1 adjoining commercial structures and parking lots.

2 On an asset by asset basis, each of these assets

3 would have to meet the test individually.

4 However, no rational investment strategy would

5 operate this way. Only allowing for accounting on

6 an aggregate basis do we believe that such

7 investments are more likely?

8 The proposed 31-month requirement for

9 determining an active trade of business, the

10 notice of proposed rulemaking suggests that the

11 new investment and a new operating businesses and

12 acquires and must be an active trade or business

13 after 31 months of the deployment of capital.

14 However, given that these investments are

15 incurring in distressed and in many ways

16 (inaudible) markets for the purpose of major

17 private capital investments, it is highly probably

18 that it is going to take longer than 31 months

19 before such an enterprise will meet the test of an

20 active trade or business.

21 Consequently, we agree with the position

22 of others who have commented on this issue, that

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1 the Department strongly allow for the satisfaction

2 of this requirement in the event of clear evidence

3 of advancement of the investment for the active

4 trade or business has been made, and on other safe

5 harbor requirements for the capital have been met.

6 I would like to raise one other point as

7 it relates to concerns that have been expressed to

8 our group from local community groups, local

9 organizations, and NGOs play a strong role in

10 attracting investments in these targeted areas.

11 They've struggled with achieving clarity from the

12 complex regulations in a plain and English manner.

13 They're concerned about finding what they need in

14 the regulations, understanding what they find, and

15 being able to interpret what they find to meet

16 their needs.

17 We at the Economic Inclusion Task Force

18 would ask that the regulators consider these

19 concerns, and in the future clarifying statements.

20 Thank you for the opportunity to speak

21 to this hearing. And in addition we would like to

22 comment that we are co-signers with the Economic

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1 Inclusion Task Force and with the Economic

2 Innovation Group Coalition as well.

3 MR. NOVEY: There is an asset in the --

4 is it the cluster of O zone communities in

5 (inaudible) that needs substantial improvement.

6 And the company puts a fair amount of program

7 money into that, but not the (inaudible).

8 MR. DANIEL: But not that.

9 MR. NOVEY: But there is additional

10 moneys that by the same business, in let's say

11 downtown Silver Spring, right near the D.C. line,

12 (inaudible). It doesn't seem to be consistent

13 with the purpose that those two expenditures would

14 be put together as a single qualifying substantial

15 improvement. So we need help deciding when an

16 aggregation rule, if we were to adopt one, should

17 be accommodated so that it really is meaningful in

18 terms of substantially improving a particular

19 asset, even if we don't do it on an asset by asset

20 basis. So we need that help.

21 And we try to write as clearly as we

22 can, but we have to write technically and

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1 specifically. And we hope that others such as

2 your organization can have experts like you who

3 read it and can then help translate it to the

4 people that are waiting for it.

5 MR. DANIEL: I certainly appreciate the

6 dilemma and the restrictions that you are

7 operating within, and don't take them lightly.

8 We always go to the mission of the

9 legislation as our guiding light. And I don't

10 know if I have all the answers, but I know that

11 there's an answer and we're willing to work very

12 closely with the regulators to find it.

13 MS. BOLTON: We have Sarah Brundage from

14 the Enterprise Community Partners.

15 MS. BRUNDAGE: Hello. My name is Sarah

16 Brundage, I'm the Senior Director of Public Policy

17 for Enterprise Community Partners. And on behalf

18 of Enterprise I want to thank you for this

19 opportunity to offer comments.

20 Enterprise is a leading provider of the

21 development capital and expertise it takes to

22 create decent affordable homes and rebuild

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1 communities. Since 1982 we have raised and

2 invested $43.7 billion in equity, grants, and

3 loans, to help build or preserve nearly 585,000

4 affordable homes in diverse thriving community.

5 And Enterprise is launching our own family of

6 qualified opportunity funds intended to advance

7 equitable and inclusive growth in the communities

8 where investments are made.

9 To ensure the tax benefit fulfills its

10 intent, Enterprise recommends that the IRS modify

11 proposed regulations to 1) Clarify the treatment

12 of vacant land to prevent land banking, 2)

13 Encourage paring with the low income housing tax

14 credit and new markets tax credits, and 3)

15 Implement requirements to collect and publicly

16 share meaningful data on qualified opportunity

17 fund investments.

18 To the first point regarding the

19 treatment of vacant land to prevent land banking.

20 We believe that is subtracting the value of land

21 from qualified opportunity zone property for

22 purposes of the substantial improvement test would

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1 be conducive to efforts to preserve affordable

2 housing. However, that same provision could

3 unintentionally result in predatory land banking

4 and long-term landholding. Such an outcome would

5 contradict the goal of making improvements to

6 acquire QEZ property. This is particularly true

7 in areas experiencing rapidly rising costs, and

8 the potential for abuse would be especially

9 problematic in the case of land that is vacant,

10 significantly underdeveloped, or with

11 significantly depreciating assets.

12 We therefore recommend that the IRS

13 clarify that in the circumstance where property is

14 being used for long-term housing tax credit

15 properties, the requirement to substantially

16 improve property comply with Section 42

17 requirements, which are 20 percent. And with the

18 exception of circumstances with the housing

19 credit, we recommend that the IRS provide a

20 threshold above which land would have to be

21 substantially improved, regardless of any assets

22 or buildings on the property. Without such

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1 clarification it is possible that investors would

2 be able to receive a significant tax benefit for

3 holding valuable land for 10 years without making

4 improvements.

5 And I imagine that you might ask me what

6 a specific number for such a threshold would be.

7 And Enterprise did not provide a specific number,

8 however, we would be happy to default to our

9 partners at Novogradac who are speaking after me,

10 but I believe also recommended that at least 20

11 percent as well.

12 On the second point, Enterprise believes

13 that the true potential of opportunity zones lies

14 in the ability to pair this new source of private

15 capital with existing programs to generate social

16 impact. In particular the low income housing tax

17 credit and the new markets tax credit are proven

18 powerful tools with long track records in

19 community revitalization.

20 This round of proposed regulations

21 included provisions that could inhibit the

22 industry's ability to pair these tools however.

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1 The original legislation allows investors to elect

2 between paying the tax on either the original

3 deferred capital gain or the fair market value of

4 the qualified opportunity zone investment in 2026.

5 However, the proposed regulations differ

6 from the original legislation and instead require

7 investors to elect between paying the tax on

8 either the original deferred capital or the

9 capital gain that would result from the sale or

10 transfer of the QEZ investment.

11 So we strongly urge the IRS to ensure

12 the viability of pairing these incentives, and in

13 particular ask that the IRS clarify that the fair

14 market value, excluding debt, plus any cash flow

15 distributions to investors, be the standard for

16 calculating a deferred tax bill in 2026 for

17 long-term housing tax credit projects. And we

18 believe clarification on these regulations would

19 allow housing credit projects to compete with

20 market rate projects and help us maximize the

21 impact that we can have in low-income communities

22 by leveraging other Federal programs.

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1 We also recommend adjustments to the

2 proposed regulations stating that the actual

3 corporate subsidiary with the capital gain has to

4 be the one that makes the investment in a QOF.

5 This could be problematic for banks that invest in

6 housing credits through a community development

7 corporation but which may have capital gains in

8 another corporate affiliate. Therefore we

9 recommend that the IRS allow taxpayers investing

10 in qualified opportunity funds that then invest in

11 low-income housing tax credit partnerships to use

12 capital gains from consolidated affiliates of the

13 taxpayer.

14 Lastly, we once again urge the IRS to

15 collect and publicly share meaningful data on QF

16 investments. We thank the Treasury for its prior

17 RFI on data collection and tracking for qualified

18 opportunity zones, which we are very pleased to

19 provide our recommendations to. We believe the

20 collection and public reporting of meaningful data

21 on QFs and their investments into designated

22 opportunity zones are critical first steps towards

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1 ensuring that the opportunity zones tax incentive

2 is fulfilling its intended purpose. We provided

3 detailed recommendations on requesting

4 requirements that we hope you take into

5 consideration.

6 So with that, thank you, and we

7 appreciate your time and consideration.

8 MS. BOLTON: Thank you. MR: CRNKOVICH:

9 No questions.

10 MR. NOVEY: Is there something other

11 than the debt finance issue which you think we

12 could do to facilitate the pairing of the tax

13 incentive here with (inaudible) and NCC.

14 MS. BRUNDAGE: Yeah. Good question. So

15 as I stated, I am on our Public Policy Team, and

16 we ask this of our loan fund team, and as it has

17 been proving difficult at times to pair the two.

18 And this was the only technical recommendation

19 that we were able to identify.

20 MR. NOVEY: Okay. Because when you look

21 at it one of the things you notice was that there

22 are some of the benefits that many get excited

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1 about for O Zones, which I would be surprised if

2 private investors were looking forward to. Unless

3 the person who has worked with new markets, but

4 there were also changes. There were aspects which

5 didn't seem -- at least no low hanging fruit in

6 any number had to be there. The other one, in

7 terms of what the amount to be included in 2026

8 is, I assume that you would not say that the QOF

9 could load up with debt, distribute that out, do

10 so because of the basis of their debt, and there

11 would be no income to the investor. And then the

12 start-up amount would be reduced close to zero

13 because of the presence of the obligation of the

14 debt. That didn't seem to be something we were

15 thinking would be advocating and not everything is

16 really consistent with what the --

17 MS. BRUNDAGE: Yeah, I don't believe

18 that's our intent, yeah.

19 MR. NOVEY: So in other words the

20 heartache, if I could call it that, which is

21 produced by looking at what would be the result of

22 getting rid of the debt that is internal to your

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1 entity, is the necessary concomitant of a generous

2 rule which allows, at least after that first two

3 years, a distribution without tax based on the

4 predicated, the tax-free nature of that

5 distribution would be predicated on the basis that

6 it is derived from the internal borrower. And I'm

7 willing to bet that we are not getting requests

8 saying that we give up the ability to make those

9 distributions if you would give us a net of debt

10 rule for 2026.

11 MS. BRUNDAGE: Yes, that is not our

12 intent. Thank you.

13 MR. NOVEY: Okay. Thanks.

14 MS. BOLTON: Thank you, sir. Okay. So

15 next up is John Sciaretti from Novogradac

16 Opportunities Working Group. And once John is

17 done we're going to take a 10-minute break.

18 MR. NOVEY: Anybody that has got

19 airplanes to catch and things like that, come up

20 and --

21 MS. BOLTON: You're up, John.

22 MR. SCIARETTI: Good afternoon,

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1 everyone. I'm John Sciaretti from Novogradac

2 Company. And today I'm representing the

3 Novogradac Opportunity Zone Working Group. On

4 behalf of the Working Group we are pleased and

5 want to thank you for our opportunity to give our

6 testimony today.

7 Today I'm going to discuss three topics,

8 none of which are original, going 13. But I think

9 it's great that we're aligning in our interests

10 today. The three topics I will be discussing will

11 be the special not includable rule in the case of

12 an inclusion event for investments in QOF

13 partnerships and S Corps. The second topic is the

14 special 10-year exclusion election, which has been

15 talked about a lot today. And then lastly I'll

16 talk about a grace period for QOFs and QOZBs to

17 use property in a trade or business.

18 So with respect to this special not

19 includable rule, just a little overview. The

20 regulations provide a special rule for an

21 inclusion event, the inclusion amount, with

22 respect to passthroughs. It's a little different

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1 than the statutory provision in that in the

2 statutory provision you take the lesser of the

3 fair market value or remaining deferred gain less

4 the basis in investment. Where with passthroughs

5 you take the lesser of the amount of the deferred

6 gain less basis or the gain that would be

7 recognized on a fully taxable dispositioned

8 investment.

9 We understand why this rule was

10 proposed, that it is intended to prevent taxpayers

11 from avoiding recognizing deferred gain when the

12 fair market value of their investment is

13 diminished due to debt finance distributions.

14 That's what we understand why the rule was

15 presented.

16 However, as Sarah indicated, it is

17 adversely affecting the investment and affordable

18 housing and other high impact community

19 investments. With the 10-year gain exclusion, as

20 Mike's referred to, it is generally less valuable

21 to them as they don't expect to have appreciation

22 in their investment, or much appreciation in their

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1 investment, at the end of 10 years. However, they

2 were pretty excited about the 2026 inclusion rule,

3 the statutory rule, because it did provide value,

4 and that they could recognizes this sort of

5 typical loss in value over time at a certain date.

6 So it gave them an accretion and basis. In my

7 experience in working with a lot of these

8 low-income housing investors, they were excited,

9 we were seeing non-traditional investors coming to

10 the table. And, you know, a lot of plans were

11 being made for funds with syndicators and the

12 like, and as soon as the proposed regs came out

13 it's been quiet. You know, folks have sort of

14 walked away or stepped back from the opportunity

15 zone. And so as a result, I think we have

16 inspiring investors have actually turned away from

17 the program.

18 And so we're recommending, as I think

19 Sarah referred to we're aligned in this, that we

20 make the inclusion rule in 2026 consistent with

21 the mechanics of the statutory rule. But that we

22 modify the definition of fair market value. And

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1 that we use the net value of investment, excluding

2 debt, and then add to that distributions that were

3 made. So it means distributions that folks may

4 have made to reduce the value of their investment.

5 We propose that we add these distributions back.

6 Which we think prevents this artificial reduction

7 in investment without adversely effecting

8 affordable housing and other community impact type

9 investments in these zones. So that's our first

10 issue.

11 The second issue is with respect to the

12 10-year exclusion election, which, as I said, many

13 people presented this issue today, and that this

14 proposed rule only applies to capital gains. It

15 only applies to the sale of property by a QOF, not

16 the business. It excludes gains realized from the

17 sale of property that's characterized as ordinary

18 income, like 1245 appreciation recapture. And it

19 also excludes any gains that are attributable to

20 the sale property at the business level.

21 And so it's not on the same page. We

22 think that the rules should be synthesized with

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1 the rule for selling your QOF interest, where all

2 gains attributable to the appreciation of

3 property, all property, whether capital or

4 ordinary, or whether the property is held by the

5 QOF or the business, are eligible for exclusion.

6 It's common, as it's been said much

7 today, it's common, especially in multi-asset

8 funds, to exit by selling assets. There's also

9 likely to be a significant amount of operating

10 businesses that will sell assets that produce

11 ordinary gains. We see that in the market,

12 especially in the renewable energy space. And

13 then because most of the qualified opportunity

14 zone property, in our experience, is going to be

15 held by a business, not the QOF, simply because we

16 have this flexibility of time to make our

17 investment. And with the working capital rule, we

18 think that it's important that we synthesize these

19 two rules and expand the gain exclusion to apply

20 to all gains attributable to the sale, any

21 property used in a trade of business by a QOF or

22 QOZB. With the exception of inventory or assets

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1 that are held for sale in the ordinary course of

2 business, which is inventory. That was our

3 recommendation.

4 And then lastly, which was sort of

5 hinted on today, with respect to a grace period

6 for QOFs and QOZBs on the use of property in the

7 trade or business. And generally I think folks

8 have talked about it, grace period for a qualified

9 opportunity zone business to become a business.

10 And the statute does sort of allude to that in

11 that the statute says that new businesses must be

12 organized for purpose of being an opportunity zone

13 business. So they're acknowledging that there is

14 sort of this start-up period at the business

15 level. But we know that qualified opportunity

16 zone business property must be used in a trade or

17 business to be considered qualified.

18 And we do have some sort of safe harbor,

19 within the working capital of safe harbor, that

20 allows you to sort of treat tangible property as

21 existing, even before you bought it. But there's

22 really no discussion on use, and there's no

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1 discussion on how much time a business gets to use

2 the property. So if a fund invests in equipment,

3 let's say, and, you know, there's a period of time

4 before they can actually put that in production,

5 you know, does that disqualify property at that

6 point in time, or do they actually have to have it

7 in production. Or even in the case of real estate

8 where if a business kind of satisfies the safe

9 harbor, but in 31 months it's not placed in

10 service yet, and so do they fail the qualified

11 opportunity zone property at that stage because

12 it's not placed in service yet.

13 And so we think the Treasury should

14 consider a rule where a business is not treated as

15 failing to satisfy the use requirements solely

16 because the tangible property is not used in a

17 trade or business before a reasonable start-up

18 period. All businesses are different, it's

19 probably, you know, 12 months might be good for

20 some, but some it may be different based on the

21 nature of the business. And so before a

22 reasonable start period based on the facts and

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1 circumstances is sort of what we're recommending,

2 that a business should have time before they have

3 to use their property.

4 Alternatively, if you do want to provide

5 a safe harbor, provide that businesses have 12

6 months, but that 12 months doesn't start until

7 after the 31 months. So that's our suggestion.

8 And we're really suggesting this both as a QOF and

9 the QOZB level because even at the QOF level we

10 have to use this property in a trade or business.

11 So that completes my testimony today on

12 behalf of the Working Group.

13 MS. BOLTON: Thank you, John, for your

14 comments. There's one thing that keeps popping up

15 for me. I was on a panel with Mr. Novogradac, and

16 there seems to be a lot of push to have sort of

17 special rules for affordable housing areas, just

18 to make it work. I know Jill talked about

19 historic credits, and I've been asked about new

20 markets.

21 So I don't know if someone could provide

22 me, or provide all of us, something with specific

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1 rules that you're looking for just for this

2 industry. Because it keeps coming up and it's all

3 over the place.

4 MR. SCIARETTI: Well I think that -- I

5 mean in my experience I think affordable housing

6 worked well with this program, at least certain

7 types of affordable, you know, bond probably

8 worked better than, the four percent probably

9 worked better than nine percent. But I think that

10 investors are sort of relying on the fact that

11 they are losing value in their investment and the

12 benefit that they don't get at the end of 10

13 years, they can sort of accelerate this loss in

14 value in 2026 and it provided enough incentive to

15 encourage non-traditional investors in the space.

16 Because we saw it happen, I mean there were,

17 people were pretty excited about it.

18 And so it's not what you can do to help,

19 it's what you did do to hurt. By giving us that

20 rule, you know, and I think you modify that rule,

21 and I understand why you did that rule, because

22 generally folks could reduce the value of their

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1 investment by taking distributions before 2026.

2 And so we suggested one way to modify that. There

3 may be some other ways that don't hurt folks, you

4 know, that are not trying to lose the value of

5 their investment, but naturally the value may, you

6 know, not be appreciating, at least at 2026.

7 MS. BOLTON: Well the reason why I ask,

8 Mike and I are very familiar with this space, but

9 a lot of us on the panel, and decision leaders,

10 might not be so familiar with the space. And so I

11 think it would be helpful to highlight those

12 issues.

13 MR. SCIARETTI: Yeah. That's the one

14 thing I can think about, but I think it's

15 something that as a working group we could convene

16 and come up with some written response to answer

17 that question.


19 MR. CRNKOVICH: Thanks, John. Two

20 really quick hits. First, on the calculation of

21 the game, I just want to make sure I'm

22 understanding where you're coming from. But

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1 suppose I invest 100, or roll over 100 or whatever

2 term you want to use. So my outside basis is 100,

3 I look at the statute, look at the deferred gain,

4 100 bucks over the basis.

5 MR. SCIARETTI: Wait a minute --

6 MR. CRNKOVICH: I have 100 of gain that

7 I --

8 MR. SCIARETTI: Outside would be zero.

9 MR. CRNKOVICH: So my outside basis is

10 zero, I put 100 in.

11 MR. SCIARETTI: Yeah.

12 MR. CRNKOVICH: So my turnaround and it

13 was suddenly 12/31/2026, putting aside ten and

14 five percent bump ups, I'd have to pay tax on the

15 100 gain though?

16 MR. SCIARETTI: Right.

17 MR. CRNKOVICH: So I want to make sure I

18 understand where you're coming from with the

19 borrowing. If my gain is 100 and it's tied into

20 that gain, less the basis, and there's a borrowing

21 without a debt for the distribution, I am now

22 going to have a basis in my partnership interest

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1 of $100. Right?

2 MR. SCIARETTI: If there's a borrowing

3 --

4 MR. CRNKOVICH: If there's a borrowing,

5 100 of which is allocated to me, 100 borrowing is

6 allocated to me.

7 MR. SCIARETTI: Right, on the inside.

8 MR. CRNKOVICH: Borrowed $100, borrowed

9 that is allocated to me.

10 MR. SCIARETTI: Yeah. You have a

11 hundred, yeah, that's correct.

12 MR. CRNKOVICH: Now do I have a

13 preferred gain of 100, I have a basis of 100 in my

14 partnership interest, right, and I don't think

15 you're suggesting it but I just want

16 clarification. One way to read the statute,

17 literally, is to say the excess of the gain,

18 deferred 100, over the basis of 100, is the amount

19 you pick up on 12/31/26.

20 MR. SCIARETTI: No, I think you have to

21 go net, net on that. You can't include that in

22 your basis.

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1 MR. CRNKOVICH: So the question really

2 is when you walk through your calculation, adding

3 back distributions and so on, is that written in

4 your testimony?

5 MR. SCIARETTI: It is. It is. Yeah.

6 MR. CRNKOVICH: Okay, good. Okay. And

7 then back to the same old question on the -2C

8 10-year rule. It sounds like you're trying to get

9 parody between a sale outside and sale inside,

10 right? Except that to the extent there's any of

11 the gain is attributable to property held

12 primarily for sale on a sale outside of that

13 clearly would be excluded?

14 MR. SCIARETTI: That's true.

15 MR. CRANKOVICH: But inside it would not

16 be?

17 MR. SCIARETTI: That's right.

18 MR. CRANKOVICH: Right. So you're not

19 looking for total parody.

20 MR. SCIARETTI: Not total parody. I

21 mean you could always just make a big inventory

22 sale after 10 years and get it excluded, you know.

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1 MR. CRNKOVICH: Right. And again, I've

2 asked others, but would you be in favor of a rule

3 that would require the distribution in order to

4 avail yourself of -- I don't know if it's a

5 10-year rule for sales inside?

6 MR. SCIARETTI: Yeah. The first I

7 thought about that was when you asked others. And

8 I'm trying to figure out, other than creating

9 parody, what else does that -- it doesn't solve

10 anything.

11 MR. CRNKOVICH: Okay. I just wanted to

12 --

13 MR. SCIARETTI: Yeah. Right, right.

14 MR. CRNKOVICH: Okay. Thank you.

15 MR. SCIARETTI: Okay. Thanks.

16 MS. BOLTON: Okay. All right. So let's

17 take a 10-minute break. It is now about 2:29, so

18 be back here at 2:40.

19 (Recess)

20 MS. BOLTON: All right, why don't we get

21 started for the last half of this public hearing?

22 So we have five more speakers. And so our next

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1 speakers are Joseph Darby and Christina Rice from

2 the Boston University School of Law; my hometown.

3 SPEAKER: We had that Professor Atlas

4 was the co- author of the --

5 MR. DARBY:: Right, Professor Atlas is

6 -- she decided not to have it look like the the

7 Mamas and the Papas.

8 But anyway, my name is Jay Darby. I'm a

9 tax attorney, proud of it. On behalf of Boston

10 University School of Law we're going to make a

11 presentation. Joining me is Christina Rice, who's

12 the director of the BU Graduate Tax Program, the

13 LLM Program for the School of Law. Also joining

14 us is Professor Susan Atlas, who helped pull the

15 submission together.

16 We teach at BU what I'm positive is the

17 first full credit course specializing exclusively

18 on the Opportunity Zone Act, you know, code

19 sections.

20 MR. CRNKOVICH: Please send us your

21 syllabus.

22 MR. DARBY:: We will. We're making it

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1 up as we go, but it's the first semester,

2 obviously.

3 MR. CRNKOVICH: Modifying it after.

4 MR. DARBY:: Oh, yeah. Well, you'll

5 appreciate this. I was helping with the ABA and

6 with the Novogradac Group and with the Real Estate

7 Round Table, all answering questions and saying,

8 you know, these are the things that Treasury

9 specifically asked for comments on, which there's

10 a long list. And I said this is perfect, my work

11 is done. So I sent it out to the students and

12 said everybody pick a question to answer. And so

13 we got back, you know, 12 answers from 12

14 students, we put it together in 48 hours. It's

15 got a few typos in there, but it was kind of fun.

16 So we're going to talk about a bunch of

17 things fairly quickly. I'm going to talk about

18 1231, which is a particular important issue that

19 I've been sort of advocating for in every group

20 I've been part of. And then Christina is going to

21 talk about vacant land and I'll come back and do

22 kind of a drive-by presentation on the rest of the

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1 topics.

2 The 1231 issue you're familiar with.

3 The treatment of capital gain came out in the

4 first set of regulations and was treated in a very

5 generous, reasonable way with the special rules

6 for partnerships. The 1231 rules kind of create a

7 lot of stress and tension in the real-world

8 marketplace.

9 I have two people who in April sold

10 businesses. When you sell a business, you'll have

11 often capital gain and 1231 gain on the same day

12 from the same transaction. And for these people I

13 suddenly -- after the regulations came out, they

14 did this before the regulations came out, I said,

15 oh, my gosh, they got 180 days from April 1st to

16 invest the capital gain and they can't invest the

17 1231 gain until, you know, December 31st at the

18 earliest. And it just didn't -- it doesn't work

19 in the real world of reinvesting capital

20 investment.

21 I think that I understand the issue of

22 1231 gain being netted against 1231 loss. If it's

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1 a negative number, it's an ordinary loss. If it's

2 a positive number, it's a capital gain. There is

3 an issue about splitting in there, but I think the

4 statute itself is very clear that it's the sale of

5 property, you know, the gain from the sale of

6 property to an unrelated party. It doesn't

7 distinguish between what kind of property it is.

8 We have identified it should be capital in nature,

9 but obviously, investment into capital assets,

10 which is what 1231 property is, is the kind of

11 capital we're talking about, redeploying capital

12 from other parts of the economy into the

13 opportunity zones.

14 And I think it makes all the sense in

15 the world to have the exact same rules match up as

16 between capital gain and under 1221 -- 1222 of the

17 code and the 1231 assets. And I think it's a very

18 reasonable statute. It seems to suggest that

19 there is -- on the issue of the splitting of the

20 capital -- of the 1231 gain and the 1231 loss,

21 there's a very clear provision in Code Section

22 1231(c), which I think, Mike, we've even talked

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1 about in the past, about treating the -- if you've

2 got a capital -- a 1231 loss, it carries forward

3 for five years. And it converts future 1231 gain

4 into ordinary gain and it's designed to match up.

5 And one of the things we have in our

6 suggestion, which I think is a very good one, is

7 to the extent that there's any possible

8 game-playing where you're sort of, you know,

9 rolling over a 1231 gain tax-free for seven years

10 and harvesting a loss, if we just extend it as one

11 of the elements of electing to have that benefit,

12 you know, extend the rule till 2026, so that when

13 you have to recapture your 1231 gain, I think,

14 again, we all agree if you have a 1231 gain being

15 reinvested, you recognize 1231 gain in December

16 31, 2026. I think that's logical. If you've got

17 sort of split losses, you had ordinary losses

18 you've claimed in the meantime, this would come

19 back as ordinary gain, and so there wouldn't be

20 any mischaracterization or game-playing.

21 There's only a timing issue, which is

22 what 1231 is all -- what the 2026 rule's about

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1 anyway, really, is a forbearance of the tax until,

2 you know, December 31, 2026. So I think that that

3 rule is solvable, and it's pretty necessary.

4 There's just a lot of transactions where people

5 are having, you know, capital gain and 1231 gain

6 the same day. And they really don't even have an

7 overlapping day in the year when they can invest

8 it into a single thing.

9 One other thing I'll teach you -- I'll

10 count as a teacher is people don't know the

11 difference between capital gain and 1231 gain.

12 They don't understand what really is the nuance

13 between them. If you have a -- there aren't that

14 many kinds of property that actually produce 1231

15 gain. Real estate does; tangible property almost

16 never does. When you're buying machinery it does

17 down in value, not up.

18 The only other kind of property you see

19 besides real estate that goes up in value is

20 typically intellectual property, patents and the

21 like. And I teach taxation of intellectual

22 property at BU and I can tell you that patents can

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1 be ordinary assets, capital assets, or 1231 assets

2 depending on who created them or how they're

3 acquired. And the fact that a patent can have all

4 three characterizations just bespeaks to the fact

5 that having complicated exchanges between 1231

6 property and 1221 capital assets strikes me as is

7 going to only cause creation.

8 People are going to make mistakes all

9 the time, and I'm not just talking about

10 taxpayers, I'm really talking about tax advisors,

11 tax professionals, who are at the moderate to low

12 to mid levels of practice aren't really going to

13 know the difference. So it doesn't make any sense

14 to have a distinction that's only going to cause

15 noncompliance on a massive scale.

16 So that's my thoughts on 1231. Let me

17 have Christina come on and comment on the vacant

18 land issues.

19 MS. RICE: Thanks, Jay. So I will be

20 representing the students in this class. I am

21 sort of a quasi-student myself, talking about the

22 vacant property.

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1 So the second set of proposed

2 regulations provided that vacant structures or

3 other tangible property other than land will

4 satisfy the original use requirement if the

5 properties have been vacant or abandoned for at

6 least five years. We agree that some quantifiable

7 minimum period of vacancy is necessary to prevent

8 potential abuse of this favorable guidance

9 allowing vacant property to qualify as original

10 use property. However, we believe an

11 uninterrupted period of five years is

12 unnecessarily long and that a shorter period of

13 one year is sufficient to achieve the anti-abuse

14 goals.

15 There is also a strong public policy

16 need to reduce this period. Cities and towns

17 across the U.S. have recognized the negative

18 impacts of vacant and abandoned properties,

19 including increases in crime and vandalism,

20 decreases in surrounding property values,

21 increased risk to health and welfare, and

22 escalating municipal government costs. We cite

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1 several studies in our report that have found a

2 correlation between the length of vacancy and

3 increased crime, decreased property values, and

4 higher municipal government costs. Local

5 government officials, community organizations, and

6 residents across the country recognize the value

7 in putting vacant land and abandoned properties

8 back into productive use as quickly as possible.

9 It's extremely doubtful that property

10 owners who held vacant property prior to

11 designation of zones in early 2018 intentionally

12 arranged a vacancy with any future tax incentive

13 in mind. We, therefore, recommend that Treasury

14 adopt a standard similar to that applicable to

15 enterprise zones, which states that if property is

16 vacant for at least a one-year period, including

17 the date of zone designation, use prior to that

18 period is disregarded for purposes of determining

19 original use.

20 For property that was not unused or

21 vacant before the designation of the tract as a

22 qualified opportunity zone, we anticipate that

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1 few, if any, property owners intentionally sought

2 to make otherwise productive properties vacant in

3 2018 or 2019 in expectation of favorable

4 treatment, especially in light of the proposed

5 five-year rule put forth by Treasury in the second

6 guidance. Therefore, we think a one-year rule is

7 also appropriate for property that became unused

8 or vacant after 2017.

9 To the extent that prospective one-year

10 rule provides an incentive to abandon property, it

11 will be mitigated by the reduction in tax benefits

12 for anyone waiting at least one year from the

13 issuance of final regulations to act on a vacancy

14 strategy. There is a tradeoff in policy

15 objectives in this case and we favor a policy that

16 helps rescue vacant buildings to the greatest

17 extent possible.

18 MR. DARBY:: Okay. And then as they say

19 on the TV game shows, this is the lightning round.

20 I've got quick comments.

21 Unimproved land, I thought you guys did

22 a great job; 162 is the exact right way to test

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1 whether it's being pulled in and used in a good

2 way. It's not being held as an investment asset,

3 it's being used.

4 A quick observation. You were concerned

5 about somebody buying agricultural property, you

6 know, growing grapes or whatever and doing the

7 exact same thing, you know, haven't really done

8 much to improve it. I agree with that, as well.

9 I think there's two things you could do

10 as an addendum. One is it has to be used in the

11 trader business and then either it has to be a

12 different trader business, meaning you're taking

13 flat farmland and turning into parking lots or

14 swimming pools or something else, or there's some

15 level of improvement. And you had a good

16 standard, it was improvements that are not

17 insignificant. I think you're probably having

18 some kind of safe harbor. It's a minimum of 20

19 percent, it's a safe harbor, but a facts and

20 circumstances test.

21 For people, as you pointed out, with

22 land in general, there's all kinds of reasons

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1 people acquire it and use it. Is this a bona fide

2 use to acquire it included into an overall

3 improvement to the community? I think that that

4 was extremely well handled. That's the only sort

5 of small tweak I'd make there.

6 On leasing rules, you nailed it. The

7 leasing rules are fabulous. The only thing I'd

8 comment there is that on the market rate lease,

9 you proposed a 42 standard. I wouldn't use 42 for

10 unrelated parties. As you pointed out about real

11 estate, there's a very diversified world out there

12 and if people are at arm's length negotiating a

13 lease relationship, it should be respected.

14 I did agree with you on the 12-month

15 minimum -- maximum on prepaid leases for related

16 parties and the other rule of related parties. I

17 thought all those rules plus the alternative

18 valuation method were just absolutely perfect.

19 On the trader business issue under 162,

20 I think you're wrestling with it like everybody

21 else is because 162 is the right standard for

22 trader business. The active conduct is a ringer

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1 for all of us. It gets pulled in out of 1397(c).

2 It isn't even in the O Zone Act anywhere. The

3 active trader business gets pulled in by reference

4 to 1397(c), which itself doesn't define what

5 active trader business is, just to start out,

6 making it as ridiculous as it could possibly be.

7 You got a range of stuff. It could be the very

8 low threshold of the new markets credit, which is

9 basically any effort to make a profit basically is

10 an active trader business. Go Zone has got a much

11 higher thing on -- I think triple net leasing is

12 really the -- where it is.

13 I think 162 is the standard. And we

14 look at the Hazard case the General Counsel

15 Memorandum 38799. And the IRS has acknowledged

16 it's a very low threshold to turn leasing plus a

17 little bit more into an active business for tax

18 purposes. And if that's where we end up, that's

19 okay. It's just that the issue of -- I'm sorry,

20 I've got to be quiet. The -- merely engaging in

21 triple net leasing has got everybody sort of

22 rattled that if you can't do triple net leasing,

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1 you've identified I think 162 as the standard. So

2 it's triple net leasing plus a little bit more.

3 That'd make the world turn in the leasing world.

4 Thank you very much for giving us the

5 time.

6 MS. BOLTON: Thank you. Any questions

7 for the panel?

8 MR. NOVEY: One quick question on the

9 1231 issue.

10 MR. DARBY:: Yes.

11 MR. NOVEY: One of the pain points, I

12 guess you would call it, that we've been hearing

13 about is that if the seven-year basis bump is

14 available only prior to 12-31-26, we were hearing

15 a lot of folks having only one day on which one

16 can make investments with respect to 1231 gain

17 deferral that would be available for the

18 seven-year benefit was pretty tight (inaudible).

19 Some of your predecessors at that podium have

20 suggested that the seven-year and five-year

21 benefits put appropriately within the statute

22 ought to be available beyond 2026, even though the

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1 deferral had ended.

2 To what extent would that relieve part

3 of the challenge of the 1231 timing question? And

4 it would relieve your concern about your capital

5 gains and 1231 being triggered on the same day,

6 but having the different 180-day period.

7 MR. DARBY:: Yeah. I don't really see

8 that as the driver of this issue. There's two

9 kinds of gains in this world: Capital gains and

10 1231 gains. And they're both gigantic amounts, in

11 the potentially trillions of dollars. And having

12 them have dramatically different rules -- and I

13 will guarantee you, people can't tell the

14 difference.

15 Ordinary taxpayers, forget it. Every

16 one of them told me they sold a capital asset and

17 it was real estate. Okay, depreciable real

18 estate, so it wasn't, it was 1231. And so I talk

19 to accountants, they got, oh, yeah, that's right.

20 You know, the accountants aren't even that sharp

21 on it. Okay? So we're going to have mistakes all

22 over the place.

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1 The logic of being able to treat them

2 consistently I think is in the statute is a sale

3 of property. They're both property sold by a

4 taxpayer to an unrelated party. So that's why I

5 really advocate. We're going to have a lot of

6 errors otherwise.

7 MR. NOVEY: So somebody who has a 1231

8 gain let's say in the first half of the year makes

9 the investment in the QOF within 180 days

10 (inaudible).

11 MR. DARBY:: Right.

12 MR. NOVEY: If it turns out when they're

13 filing their return that they don't have capital

14 -- that they have some 1231 losses and, therefore,

15 their net 1231 gain is less than what they had

16 thought they were going to have, they simply

17 cannot defer that much. They will end up with a

18 mixed investment and that's okay?

19 MR. DARBY:: No, I like having the 1231

20 gain be eligible because it says in the statute --

21 you had it exactly right on capital assets. When

22 you sell, then you have 180 days from the date of

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1 the sale, and that's just clear in the statute.

2 It's clear it's an asset-by-asset sale.

3 Same rule because they want to drive

4 capital into investments and opportunity zones.

5 It's already a slow enough train as it is. You

6 got 180 days, plus you got the QOF level plus the

7 QOZB level of 31 months. But, you know, being

8 able to invest it as quickly as people want to

9 after they have -- they recognize a gain event and

10 roll it over is the right way to start it rather

11 than pushing it as much as a year later.

12 And I think the logic of it is -- I'm

13 not so worried about the net. I mean, you net

14 capital gains and capital losses, and we're not

15 worried about the fact you may have, you know,

16 less capital gains at the end of the year than the

17 amount that you invest from a specific

18 disposition. Likewise with 1231, if you have a

19 1231 loss you can claim it. But, again, I'm

20 proposing, first of all, you've got a five-year

21 wait. Any capital -- any 1231 gain you recognize

22 for the next five years is converted to ordinary

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1 gain.

2 And I think it's entirely appropriate to

3 say if you have 1231 losses in a year when you

4 roll over 1231 gains, you know, you're effectively

5 instead of netting it and then rolling over the

6 lesser amount, just have it be recaptured as 1231

7 gain in 2026 and extend the loss rule. You know,

8 but by your election you agree to have the subject

9 of the loss recaptured under 1231(c) through

10 December 31, 2026. It all matches up. It really

11 does nicely.

12 MR. NOVEY: So your proposal basically

13 is that 1231 gains, you treat them the same as

14 capital gains.

15 MR. DARBY:: Exactly the same, including

16 the partnership --

17 MR. NOVEY: Regardless of whether or not

18 for that year there was only a penny of net loss

19 or net gain.

20 MR. DARBY:: That's right. And it

21 reconciles December 31, 2026. And if you've had

22 1231 losses and gotten ordinary losses, you'll

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1 recapture it as ordinary gain, which is exactly

2 what the 1231(c) rules do, which is fair. You've

3 got a deferral. They recognize a deferral

4 throughout the concept of the first of the three

5 tax benefits. And it comes back begin recaptured

6 in the right character at the right time. So I

7 think that'd be a fair rule for all concerned.

8 It'll drive deals. It really will make things

9 happen.

10 Thank you very, very much. Anything

11 else?


13 MR. DARBY:: Good.

14 MS. BOLTON: No, I think we're good.

15 Thank you very much.

16 Our next speaker is John Lettieri from

17 EIG Opportunity Zones Coalition.

18 MR. LETTIERI: Good afternoon now. It

19 seems like just yesterday we were together on

20 Valentine's Day, so it's great to see everybody

21 again. Thanks for having me back.

22 My name's John Lettieri. I'm the

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1 president and co- founder of the Economic

2 Innovation Group, a bipartisan research and

3 advocacy organization. We were deeply involved in

4 the idea behind opportunity zones and worked

5 closely with the policymakers to get it passed, so

6 we have a deep interest in today's proceedings.

7 EIG also works with a broad coalition of

8 stakeholders around the country and it's that work

9 that's informed the detailed comment letter that

10 we submitted in response to the latest proposed

11 rules. I want to speak to some of those

12 recommendations here today. And one of the

13 casualties of being I think 15th in the lineup is

14 that it has all been said, so I'll try to skip

15 over pieces that are particularly redundant, but

16 also emphasize a few things that I think are

17 particularly important.

18 First, I just want to take a step back.

19 I think we've already seen the fact that

20 opportunities on this -- unique opportunity.

21 Let's overuse that word, to make progress in

22 expanding beneficial outcomes and economic

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1 activity for long- term residents around the

2 country. Even today, as we sit here without full

3 regulatory clarity, this policy's already

4 supporting investments as wide ranging as clean

5 energy investments, (inaudible) workforce housing,

6 manufacturing companies, agribusiness, food

7 start-ups, technology incubators and the list goes

8 on and on. And I think that speaks to some of the

9 potential of this policy, particularly once we

10 have regulatory clarity in a mature marketplace.

11 But also underscores why this proceeding is so

12 important because to one of the questions that was

13 asked earlier, if we want investment to go far and

14 wide around the map; if we want it to go to non-

15 traditional places; and if we want to go into

16 deals that are particularly difficult to execute,

17 the rules are going to have a lot to say about how

18 much risk investors are willing to take with

19 committing their capital over a 10-year period or

20 more.

21 Particularly, in areas that are

22 dis-invested and have a stroll with long-term

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1 decline. So, the work you do and are doing is

2 critical to expanding that of investment and

3 economic opportunity and we commend you on work

4 you've done so far.

5 So, as I mentioned, while the incentive

6 was designed to support a wide array of needs

7 across communities, we believe its central purpose

8 really was to facilitate investment in local

9 operating businesses. Particularly, new ventures

10 and small to medium-size local businesses in need

11 of growth. This central goal must be thoroughly

12 reflected in the final rulemaking in order for

13 opportunity zones to achieve the success that they

14 could achieve over the next decade.

15 To this end, a second round of proposed

16 regulations made enormous strides in addressing

17 key structural questions and definitional issues

18 particularly those related to operating business

19 investment that had been holding back the

20 formation of the opportunities known as

21 marketplace nationwide. So, our coalition

22 applauds the efforts of Treasury and the IRS to

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1 resolve a wide range of complex issues so that

2 opportunities can work as intended. For example,

3 the proposed safe harbor's for the gross income

4 test, the extension of the working capital safe

5 harbor provide much greater certainty for

6 operating businesses and will serve the underlying

7 goals of this statute quite well (inaudible).

8 However, I want to focus my comments on

9 areas we believe require additional clarification

10 of the final regulations, so I want to get

11 upfront, we were very pleased and thought that

12 second round did an exceptionally good job of

13 addressing the key questions. So, don't take

14 these comments as anything but, let's just narrow

15 the playing down to the issues we think really

16 require some additional attention. And because

17 the second tranche proposals covered so much

18 ground, most of the recommendations I'll make

19 today really amount to relatively small technical

20 clarifications or tweaks, minor refinements or

21 clarifications, but I hasten to add while

22 relatively minor in scope and complexity, these

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1 changes are nevertheless critical to the real

2 world success of this policy and the communities

3 depending on it.

4 First, I want to talk about the

5 Substantial Improvement Test. This is a central

6 feature, as you know of the opportunities on

7 statute. Now, its purpose is to ensure that

8 investments made under this incentive lead to new

9 value creation and new economic activity in the

10 designated areas. In the preamble, Treasury asked

11 for comments on the advantages and disadvantages

12 of applying this test on an aggregate rather than

13 asset-by-asset basis. As many others have already

14 commented, we believe the aggregate basis test

15 approach has many practical advantages and is

16 consistent with the meaning and purpose of the

17 statute. It is also consistent with the manner in

18 which business actually expand their operations in

19 the real world.

20 On the contrary, the asset-by-asset

21 approach is deeply impractical. We believe it

22 imposed massive and unnecessary compliance burdens

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1 and would reduce the economic benefits to the

2 designated communities by discouraging investment

3 in those local businesses. So, we believe

4 strongly that the final rule should adopt a

5 substantial improvement test on the aggregate

6 basis. This, perhaps, no more important --

7 unresolved issue to our minds to date than this

8 one. It will otherwise be nearly impossible to

9 operate businesses to satisfy substantial

10 improvement tests. So, we recommend two potential

11 safe harbors as have, I believe, the ABA and other

12 commenters in our comment letter that reflect a

13 real world utility of an aggregate basis test.

14 First, assets purchased as part of the

15 same investment decision and located within the

16 same track or contiguous tracks should be treated

17 as an aggregate asset for the substantial

18 improvement test. Second, for either operating

19 for real estate businesses, assets operated as an

20 integrated unit should be aggregated.

21 Next is time and flexibility. This is a

22 key issue for the practical application of this

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1 policy in terms of raising capital from investors

2 to pooling capital into qualifying investments and

3 returning capital to investors after exiting

4 investments held for 10 years or more. While the

5 six-month exemption period for newly received

6 capital included in MPRM, is a big step in the

7 right direction. We recommend extending the

8 six-month period to at least 12 months, which is

9 particularly important for the formation of

10 multi-asset funds. In the same vein, funds need

11 time to wind down and liquidate their investments

12 after 10 years and guidance should permit

13 opportunity funds sufficient time to do so without

14 facing the penalty for failure to meet the 90

15 percent asset test. We provide detailed

16 recommendations in our comment letter on how to do

17 this.

18 Next is non-qualifying property.

19 Clarity is needed regarding how to treat

20 non-qualifying property for the purposes of the 70

21 percent substantial threshold. For example, many

22 projects contain some modest amount of non-

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1 qualifying property, such as land or a structure

2 that was purchased before 2018, or purchased from

3 a related party, or a pre-acquisition development

4 cost incurred by a related party and capitalized

5 to the property. We do not believe that the

6 presence of non-qualifying property should taint

7 the entire project, but rather should be treated

8 as a separate asset for the purposes of the

9 substantially held threshold. In addition, if

10 property is overwhelmingly improved, we support

11 treating it as entirely new originally used

12 property. In our comment letter, we discuss a

13 potential 80/20 standard and safeguards for

14 achieving this.

15 Next is the working capital safe harbor.

16 Our coalition has supported the regulations

17 expansion of the 31- month working capital safe

18 harbor to include activities related to the

19 development of a trader business. We raise two

20 issues in our comment letter that we urge you to

21 consider with respect to this safe harbor.

22 First, the extension provided for delays

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1 related to governmental action is welcomed, but

2 should be broadened further to provide relief for

3 other events beyond the business' control, such as

4 natural disasters, delays in obtaining permitting

5 or licenses, supply shortages and so on. Second,

6 we ask the Treasury to clarify in the final

7 regulations in an active trader business, need not

8 exist at the end of the first 31-month safe

9 harbor, but rather as long as the quas-business is

10 making progress towards the active trader business

11 and is still within the safe harbor, it satisfies

12 the requirements outlined in the statute.

13 I'm going to skip over 1231 again

14 because I associated myself with everybody else's

15 comments on this. It's a big issue, it's a big

16 concern and we hope that you'll take a close look

17 at that.

18 Look, next, we want to look at

19 quas-business subsidiary sales. We applaud the

20 proposed regulations providing clarity on the

21 ability to exit opportunity fund investments after

22 10 years, either by selling opportunity fund

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1 interests or assets. However, the additional

2 clarity is needed for the assets sold by the lower

3 tier opportunities' own business. We suggest

4 extending both the role permitting the sales of

5 assets by the opportunity fund and the rule

6 protecting against hot asset treatment to assets

7 held by the lower tier opportunities' own

8 business. In addition, we have strongly agreed on

9 the need for the proposed rules to permit reliance

10 on the exit rules. This is a big issue that is

11 holding back formation of multi-asset funds.

12 Lastly, I want to report on two things,

13 reporting requirements and anti-abuse rules.

14 Well, not the scope of the MPR under question

15 today, I want to note that we appreciated

16 Treasury's issuance of a clarifying reporting

17 requirement and urge the adoption of data

18 collection framework to govern opportunity fund

19 investments and to track those over time. We

20 believe such reporting requirements are essential

21 in preserving the integrity and demonstrating the

22 efficacy of opportunities on the coming decade of

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1 the (inaudible). And lastly, we support the use

2 of broad anti-abuse rules to ensure the integrity

3 of the emerging opportunities on this market and

4 note that these rules should be sufficiently clear

5 so as not to discourage real economic investment

6 of low-income communities. Our comment letter

7 includes several recommendations to curb abuse

8 while providing clarity to investors that they are

9 in compliance.

10 For example, we believe that final

11 regulation should require that a greater

12 percentage, 90 percent, of the tangible property

13 owned or leased by a real property quas-business

14 must either be located within an opportunity zone

15 or contiguous to an opportunity zone. This 90

16 percent threshold would be in addition to the 70

17 percent asset test which would remain otherwise

18 unchanged for all purposes of the section. And

19 this would help ensure that the economic activity

20 of real estate businesses is truly benefitting the

21 opportunities on its surrounding area.

22 So, in conclusion, our coalition

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1 recognizes and appreciates the hard work of the

2 IRS and Treasury in establishing a regulatory

3 framework for this nation's policy and look

4 forward to answering your questions.

5 MS. BOLTON: Thanks very much. Next up,

6 we have Mark Troppe from the State Economic

7 Development Center.

8 MR. TROPPE: Good afternoon and thank

9 you for the opportunity to testify today. My name

10 is Mark Troppe. I work with the Center for

11 Regional Economic Competitiveness in Arlington,

12 Virginia. And I'm here representing the State

13 Economic Development Executives Network where the

14 S-E-E-D, the SEED Network. The Network is made up

15 of stop state economic development leaders from

16 across the country who gather on a bipartisan

17 basis to discuss issues of mutual interest and it

18 won't surprise you one bit to hear that they're

19 very interested as one of their top priorities in

20 learning about and being involved in and engaging

21 their states in the opportunities that come with

22 opportunity zones.

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1 At your February hearing, the SEED

2 network was represented by Stefan Pryor who was

3 from Rhode Island, the Secretary of Commerce and

4 Kurt Foreman, the president and CEO of the

5 Delaware Prosperity Partnership. The SEED Network

6 did submit a letter commenting on the second

7 tranche of proposed guidance. It was signed by 16

8 state economic development directors and today,

9 I'll summarize some of the comments that were

10 submitted and going number 16, on the day it

11 really does feel like some of this is going to be

12 repetitive, but I'll -- I want to make sure to

13 emphasize these five points in particular that

14 they thought were especially important. And I

15 want to add that while some of the SEED Network's

16 membership had the privilege to select opportunity

17 zones in their respective states and others had

18 inherited the zones from a prior Administration,

19 all of them are equally and actively, eagerly

20 engaged in working on operationalizing opportunity

21 zone program.

22 In the main, we would like to express

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1 today the Network's hope for changes that enable

2 the program to serve both real estate development

3 and the fostering of operating businesses and a

4 number of other folks have stressed that point in

5 particular. It's critical to make sure we -- that

6 the regulations support, track investment to both.

7 So, the five main points that we wanted to convey.

8 Number one, the rule should provide

9 additional flexibility in determining the

10 substantial improvement requirement has been met

11 through applying the requirement on an aggregate

12 basis. The preamble in the proposed regs provide

13 that the requirement is determined on an

14 asset-by-asset basis. The determination of the

15 requirement on an asset-by-asset basis rather than

16 aggregated by especially burden operating

17 businesses. And this could make the ozone

18 investment process difficult in ways that were not

19 necessarily intended. We encourage that the

20 substantial improvement requirement be applied on

21 an aggregate basis rather than asset-by-asset

22 basis with respect to operating businesses which

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1 we expect will decrease the burden for those

2 operating businesses.

3 Number two, the rule should provide

4 sufficient flexibility for opportunity funds to

5 reinvest in interim gains in qualified opportunity

6 zone property in a timely manner without incurring

7 a penalty or trigging a taxable event. The

8 proposed regs provide that the proceeds from the

9 sale of qualified opportunity zoned property that

10 generates gains may then be reinvested, but the

11 gains subjected to income tax and while we

12 understand that the regs indicated the IRS doesn't

13 have the regulatory authority to exempt those

14 gains, we strongly encourage revisiting the issue.

15 Because we're concerned, the main concern that

16 preventing opportunity funds from reinvesting

17 capital proceeds from the sale of qualified stock

18 and partnership interest without triggering a

19 taxable event would reduce the incentive for

20 opportunity funds to invest in operate businesses

21 specifically.

22 Under the draft regs, the incentive for

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1 opportunity funds to invest in operating

2 businesses could be diminished due to the taxation

3 of those interim gains even if the gains are

4 reinvested into qualifying ozone properties. And

5 some states have noted from among our members that

6 the current regulations' treatment of interim

7 gains as significantly curtailed interests in

8 their states in investment and operating

9 businesses when compared to interest that's being

10 expressed and shown in real estate investment.

11 This topic was raised by the Network in

12 previous comments. We believe that the regulation

13 should reflect the kind of basis investment

14 practices where a diverse portfolio of investments

15 is wise. There's an ebb and flow to the

16 investment. We're particularly concerned that

17 opportunity funds be given the ability to reinvest

18 capital proceeds from the sale of qualified stock

19 in partnership interests in the ozone businesses

20 without triggering a taxable event. Future regs

21 or modifications to the regs could provide further

22 flexibility for opportunity funds to reinvest

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1 interim gains in qualified ozone property in a

2 timely manner without subjecting to income tax on

3 such gains.

4 Number three, the rule should provide

5 sufficient flexibility for new opportunity funds

6 to meet the requirements of the 90 percent asset

7 requirement. Allowing recently contributed

8 property a minimum of 12 months before it counts

9 against the 90 percent asset; would provide

10 additional flexibility for funds to thoughtfully

11 establish their investment portfolios. And under

12 the proposed rules and opportunity to finally

13 apply the 90 percent asset requirement without

14 considering any investment received in the

15 preceding six months.

16 In practice, this means that a fund has

17 a minimum of six and a maximum of 12 months to

18 deploy new capital raised before being subjected

19 to a possible penalty for failure to satisfy the

20 requirement. In a typical investment timeline, it

21 takes the fund a minimum of 18 to 30 months to

22 raise capital for investors and to appropriately

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1 deploy it across the balance portfolio.

2 So, the network is very grateful that

3 the most recent tranche of regulatory guidance

4 provides a degree of flexibility with respect to

5 cash held by an opportunity fund regarding the

6 90-day 90 percent requirement as well as the

7 flexibility that the 31-month working capital safe

8 harbor provides as well. However, as we stated in

9 earlier comments, we recommend a change to allow a

10 minimum of 12 months for investments to be made

11 before incurring a penalty under the 90 percent

12 asset requirement and we ask that you consider

13 extending the option to disregard recently

14 contributed property to contributions or exchanges

15 that occurred not more than 12 months before the

16 test from which it is being excluded, rather than

17 the six months in the current regs, establishing a

18 minimum of 12 months for those investments to be

19 made. While the working capital safe harbor is

20 beneficial to newly established funds, the

21 suggested change would also afford multi-asset

22 funds additional flexibility and allow for a more

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1 realistic investment timeline for the funds.

2 Number four, the rule should encourage,

3 but un- intrusive public reporting requirements

4 for COIF. And due to the unique aspects of the

5 program, it's important to track the efficacy of

6 opportunity zones and identify areas of

7 improvements and modification for the future. So,

8 we suggest that opportunity funds be required to

9 provide a set of simple information, enough to

10 give the public confidence about the initiatives.

11 We encourage the adoption of some simple reporting

12 requirements to collect data on funds and their

13 investments. In our December, 2018 letter, we

14 proposed that they be required to report at least

15 on the specific opportunity zones in which there

16 is capital deployed, the amount of capital

17 deployed; the eventual appreciation of that

18 capital. Beyond that, we're very interested in

19 the RFI process and the responses that come

20 forward in that and we look forward to some of the

21 insights that those responses may provide.

22 Last, but not least, under additional

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1 opportunities, one issue that we did not address

2 in our written comments, but some states have more

3 recently raised as a potential area for

4 improvement, and I know there's many other groups

5 that have also submitted written comments to focus

6 on how the regulations could better encourage

7 affordable housing development. And while the

8 Network has not recommended specific regulatory

9 changes, we support creative approaches that would

10 enable investments in affordable housing projects

11 and make it easier for opportunity funds to invest

12 in LITEC projects. Some states have expressed

13 concerns that there may be issues with the regs

14 around compatibility with the development of

15 low-income housing, so the SEED network would

16 encourage you to explore this and we would be very

17 interested in having further dialogue with you on

18 that particular topic.

19 In closing, defenses tracks were

20 selected because they are, in many case,

21 struggling. Facing challenges in attracting

22 investment, is extremely important to the network

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1 that we recognize that the important -- that the

2 purpose of the program is to attract investment.

3 Both for real estate and for operating businesses

4 and that the regulations support both purposes and

5 we really appreciate the progress that we've seen

6 in the subsequent versions of the regs and

7 appreciate the opportunity to share the thoughts

8 of our networks with you here today.

9 MS. BOLTON: Great. Any questions?

10 MR. NOVEY: One. What were two of the

11 limitations do you see that we should address in

12 election pairing deals on incentives --

13 MR. TROPPE: LITEC, so this is an issue

14 that has just come to our attention in recent days

15 and I would be happy to talk with the members in

16 the states that have expressed those concerns to

17 come back with some specific items. I noticed you

18 raised that earlier today, so we'll check with

19 some of our members and get back to you on that.

20 MR. NOVEY: Okay. Thanks.

21 MR. RIMMKE: You had mentioned that you

22 were looking on the 90 percent asset on the

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1 initial testing date going from six months to 12

2 months, but then I think you also said, or at

3 least I wrote down that it takes an average of

4 between 30 months to actually deploy capital in

5 many cases. Is 12 months going to be sufficient,

6 or just like increment how (inaudible) working

7 capital would that be sufficient?

8 MR. TROPPE: Good question. Yeah, I

9 don't know. I -- our members expressed the

10 concern that 12 months would be more -- the

11 sentiment that 12 months would be certainly more

12 workable than what we have now. Will it be

13 sufficient? We didn't broach that. I'd be happy

14 to get feedback on that point as well.

15 MS. BOLTON: Great, thank you.

16 MR. TROPPE: Thank you.

17 MS. BOLTON: Thank you very much. Okay,

18 number 17, Clayton Wyatt of the Alliant Asset

19 Management.

20 MR. WYATT: Afternoon. Something about

21 being in an auditorium with no cell service for

22 five hours with all you. I feel like I know you

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1 all better. So we're happen to be here. My

2 name's Clayton Wyatt. I'm chief capital officer

3 of the Alliant Companies and our affiliate is

4 Alliance Strategic Investments and our partner

5 Eddie Lauren is here. We've been following this

6 legislation very closely as part of the EIG Group

7 and the Novagratic Working Group and so we echo

8 those statements that were given earlier and I'll

9 keep this very quick because I know we're very

10 close to being done here.

11 There was a couple of things that we

12 just wanted to highlight. And a quick background

13 on Alliant. We're a 20 year plus tax credit

14 syndicator, so we've been in the lytic business as

15 an assets manager, developer, fund manager, and

16 now in these preservation funds, and the funds in

17 the opportunity zones are of particular interest.

18 So we actually, I think, had done the first, if

19 not one of the first tax credit ozone deals which

20 was done in Florida with a bank we were lucky

21 enough to have an investor partner in Sun Trust

22 that had an episodic gain from a division that

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1 they had sold. So they had a capital gain that

2 they could put in and we actually structured it.

3 We don't see that as the norm, and unfortunately,

4 in the regs, you know, the type of gains that

5 these banks are going to have are not going to

6 qualify for investment.

7 So I know there was a couple options

8 that were given earlier and some ideas. We'd love

9 to, you know, converse a little bit more on ideas

10 on how to attract things and because I do think

11 that it's a big miss if we don't have banks that

12 are interested in investing in these areas. So

13 one of those areas I wanted to hit I know it's not

14 necessarily in the purveyance here or in the scope

15 of what you guys can do, but the CRA credit. If

16 there was a way to attract these banks in by

17 giving them CRA credit in these areas. I think

18 that would go very far to helping to attract more

19 capital into this space.

20 So the other two items that I wanted to

21 cover was on impact reporting and then on the

22 substantial improvement test. Again, you know, I

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1 think this has been covered generally here, but

2 one of the things that we really feel strongly

3 about as an affordable housing developer and a tax

4 credit syndicator is that one of the most

5 impactful investments you can make is to give

6 residents in these areas a safe, a clean, you

7 know, place to live that they can afford.

8 And so as part of that I think that

9 requiring, you know, some sort of reporting at a

10 project level would be very helpful which should

11 include things like the address, the number of

12 units that were created at an affordable level,

13 population served, and the average incomes of the

14 residents that occupy those units.

15 As far as the, you know, drawing the

16 banks and, again, I think as I mentioned under

17 CRA, you know, banks have been a driving force in

18 the tax credit housing space and, unfortunately,

19 we don't see them coming into this space in scale.

20 That's going to be episodic investment, so I think

21 if we can figure out, you know, again, this isn't

22 a letter to you guys, but being able to get that

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1 CRA credit would go a long ways.

2 And then lastly just to hit the

3 substantial improvement test as it relates to

4 existing multi-family housing it's been very

5 difficult, as you would imagine, to substantially

6 improve an existing property. And, unfortunately,

7 that's a lot to the product that actually needs

8 some of the improvement. These are, you know, old

9 buildings that have a high occupancy. And even

10 though you could come in and do a very large

11 improvement you're not going to probably spend 100

12 percent of what you bought these products for.

13 So if there was a way to under the

14 change of use rule to figure out that you could

15 take an unrestricted multi- family housing project

16 and change the use by putting in use restriction

17 on that property, and you could do that through

18 the form of a land use restriction. So if you

19 could have a lura and, again, this is done --

20 negotiated state and local levels, but if there

21 was a template for that nationally that could come

22 "off the shelf" and we could apply that to

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1 existing unrestricted properties and under the

2 statute and the definition of change of use

3 restrict the use on that property, and then you

4 wouldn't have to spend 100 percent of the property

5 that you purchased.

6 I think you could create and preserve a

7 lot more units in these areas. I echo the

8 statement about the aggregate test on substantial

9 improvement. There's definitely opportunities

10 where you go buy a property with some adjacent

11 land and put a new building on that land and

12 operate those two buildings as one unit and

13 qualify the aggregate test, but being able to do

14 something a little more creative where we can take

15 the existing housing stock where you don't want to

16 remove tenants in a building for five years, or

17 even one year to qualify that would really open up

18 what we call this naturally occurring affordable

19 housing or NOAH so that we could use the existing

20 housing stock that we have. I'll stop there if

21 there's any questions.

22 MS. BOLTON: Any questions?

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1 MR. NOVEY: In terms of attracting ozone

2 investment by having a CRA (inaudible) very, very

3 little opportunity. So are you talking about

4 investing in CRA even if (inaudible).

5 MR. WYATT: Correct. So, you know, as

6 you may know as a tax credit syndicator we have

7 economic funds and we have CRA driven funds, and

8 so we see that banks will invest for that CRA

9 need, particularly in certain areas where it's

10 difficult for them to get that requirement met.

11 So if there was a -- and, again, I would go back

12 to this land use restriction. If we could have a

13 template that was off the shelf so if you say

14 you're creating housing in these areas and maybe

15 you're serving 60 to 120 percent of AMI and you

16 have this use restriction that would meet the, you

17 know, the regulators' threshold I truly believe

18 banks would invest just for that, without getting

19 the benefit of the OZ incentives they would invest

20 to meet the need of their CRA requirement.

21 MR. NOVEY: I see, so you aren't

22 suggesting that somehow we find some subset of

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1 banks gain from sales of debt which would you say

2 for this purpose be treated as a capital gain?

3 MR. WYATT: I mean, listen, if there's a

4 way to do that it absolutely would help. I think

5 this could be an easier way to do that that might

6 be lowering it for --

7 MR. NOVEY: But we can't control CRA.

8 MR. WYATT: Agree, but you asked the

9 question.

10 MR. NOVEY: Okay. Fair enough. Fair

11 enough.

12 MS. BOLTON: Just real quick on your

13 issue of unrestricted versus restricted use. I

14 mean, my thought was always that we could deal

15 with this at a lower local that they would be

16 doing for zoning, but what you're asking is for a

17 national level?

18 MR. WYATT: Yeah. The problem that

19 we've seen and we've taken existing properties.

20 We're working on one here in the D.C. area where

21 we're trying to put a use restriction on a

22 building and that helps, you know, from our

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1 investor base, help for a number of things, for

2 our impact, you know, mission. But it's hard to

3 negotiate on a one off basis what that use

4 restriction is. And so, again, having this

5 generic template that banks would have confidence

6 in knowing that if this template is set on this

7 building it's just efficient, it's quicker, it's

8 easier. It just becomes a standard. There's a

9 lot of those things that we'd know early.

10 You've seen investors that are hesitant

11 to invest because there is no standard. There's a

12 lot of uncertainty. Eliminate some of that

13 uncertainty with a standard that can be duplicated

14 and used all the time.

15 MS. BOLTON: Anybody else?

16 MR. WYATT: Great. Thanks.

17 MS. BOLTON: All right. Thank you very

18 much. Last, but not least, Julia Gordon from the

19 National Community Stabilization Trust.

20 MS. GORDON: Hi. Good afternoon. Thank

21 you so much for the opportunity to testify today

22 and it is sort of fitting that I go last because

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1 I'm going to talk about the thing that is either

2 last or non-present in conversations about

3 opportunity zones which is single family

4 residential housing, particularly in the home

5 ownership context.

6 My organization, the National Community

7 Stabilization Trust focuses exclusively on single

8 family residential properties in distressed

9 neighborhoods nationally with an enormous amount

10 of overlap with opportunity zones. We've been

11 doing this for ten years. During that time we

12 have facilitated that transfer of 26,000 vacant

13 residential properties and put them back into

14 productive use, mostly for home ownership, some

15 for affordable rental. So that's where we're

16 coming from.

17 Typically when I testify I, like many of

18 the folks you've heard of today, am a subject

19 matter expert and I can talk statutes and regs

20 with anybody. I come to you today to say I have

21 no idea what I'm talking about. I don't do

22 lytech. We don't have any tax credits, you know,

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1 beyond, I guess the mid which doesn't really apply

2 to the affordable folks that we deal with. We

3 don't have a tax credit program that helps us

4 finance the acquisition and rehab of these

5 properties.

6 When we saw opportunity zones happen it

7 was not a conversation we had been in previously,

8 and it is a conversation that's taking us a long

9 time to figure out how to break into. But we are

10 hoping two things, first, we would love to find a

11 way for these funds to provide the kind of

12 well-priced capital to our developers that make

13 the difference between being able to do this rehab

14 and not do this rehab. But if we can't achieve

15 that we want to advance the principle of first do

16 no harm.

17 So I want to speak a little bit to some

18 of what we're already seeing as what may be some

19 unintended consequences of the opportunity zones

20 program. We are seeing, basically, a speculative

21 land grab in opportunity zones, and we are seeing

22 that that is not confined only to either

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1 commercial or multi-family rental properties.

2 We're seeing it in the single family context too.

3 If you look at Zillow prices you'll see that in

4 opportunity zones you've seen something like a 20

5 percent rise in home values or, you know, Zillow

6 generated home values, for what it's worth, in

7 those neighborhoods.

8 We hear from our local partners, we have

9 local partners all over the country, community

10 development corporations, folks like that. We

11 hear from our local partners that they're seeing

12 new behavior in opportunity zones. For example,

13 they're seeing tax lien holder foreclose on these

14 liens at unprecedented rates within an opportunity

15 zone when that behavior isn't changing outside the

16 opportunity zone. So we are a little bit on alert

17 about this whole thing.

18 Something that may not be that familiar

19 to you because it's not what you do every day is

20 that since the financial crisis in 2008 not only

21 did we see close to 10 million home foreclosures

22 on families, but the vast majority of those

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1 properties have never become reoccupied by an

2 owner occupant. They have transformed into single

3 family rental properties. The single family

4 rental industry has become turbo charged in the

5 last decade. It's being helped along, you know,

6 not only by the fact of all of these foreclosures

7 and the availability of those properties in, sort

8 of, the normal course of business events, but by

9 massive sales of pools of distressed mortgages, by

10 FHA, Fannie Mae and Freddie Mac, by technology

11 advances that have enabled investors to purchase

12 residential properties without ever seeing them,

13 and without living anywhere near them. You can

14 have, you know, I can tell you stories about

15 people with laptops in China buying properties

16 from the Detroit land bank and then they find

17 someone to go look at the property and they're

18 like can we give it back?

19 So this is really threatening to us.

20 Everything that folks are trying to do to try to

21 advance the interests of affordable home

22 ownership. I don't need to tell the folks here

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1 that home ownership and the extent of home

2 ownership in the neighborhood can often be the

3 difference between successful revitalization

4 versus, kind of, predatory and displacement

5 oriented gentrification.

6 And I think if what we're really trying

7 to do is to provide the kind of public benefits to

8 these neighborhoods that we're talking about in

9 this program we have to be very mindful of any

10 effects on the single family market and anything

11 we do that makes it far easier to deploy these

12 properties as rental, rather than home ownership,

13 and anything that undermines the requirement to

14 properly rehab these properties. It is a little

15 known fact that most vacant single family

16 residential properties are not so called zombie

17 foreclosures stuck in the foreclosure process.

18 That only accounts for maybe 2 percent of them.

19 The rest are investor held properties, something

20 they're rented out, something they're just sitting

21 vacant.

22 So I'm going to talk about two specific

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1 things related to the rule. And, again, I

2 apologize that this really isn't an area where I'm

3 a subject matter expert. First, vacancy. A

4 number of folks have addressed this today and I'm

5 going to address it as someone who is dealing with

6 vacant properties every single day.

7 The first thing is we need a definition

8 of vacancy. We have problems all the time in the

9 work we do because of the multiple definitions of

10 vacancy out there. The census, the United States

11 Postal Service, Fannie Mae, Freddie Mac, pretty

12 much every municipality, and pretty much every

13 other lender out there has a different definition

14 of vacancy. And this can cause a lot of problems,

15 especially when it comes to property preservation

16 and maintenance. And it certainly could cause

17 problems with respect to basing an exemption of

18 substantial improvement on vacancy.

19 Another terminology topic that I wanted

20 to cover is the term land banking. You've used

21 that term with respect to unimproved land to mean

22 kind of the, you know, acquisition of land with,

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1 sort of, no intention to do anything in

2 particular. I do want to note that land banking

3 has really become a term of art in the last decade

4 with the municipal land banking movement. Land

5 banking is now really a process or policy by which

6 local governments acquire surplus properties and

7 convert them to productive use or hold them for

8 long term strategic purposes. This is a public

9 purpose organization and we don't really want to

10 see the term land banking associated with a

11 behavior that we're more likely to describe as

12 warehousing or even squatting or, you know,

13 whatever. So I just wanted to make that point.

14 In terms of the number of years a

15 property should be vacant before it's eligible for

16 the exemption. If the property -- everybody has

17 already made this point. There is nothing worse

18 for a community than a vacant property. Nothing.

19 You know, the problems that come along with

20 vacancy are legion, so for a property that was

21 vacant prior to the opportunity zones program I

22 don't see any need for any period at all. That

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1 property should be able to be put back into

2 productive use.

3 Similarly, in the single family context

4 and only in the single family context after a

5 property goes through foreclosure it should be

6 able to be eligible immediately. On the other

7 hand, since what we have in many of these

8 neighborhoods are hundreds, thousands, you know,

9 hundreds of thousands collectively single family

10 homes held by investors that have done nothing to

11 improve these properties and really have just

12 become slum lords. These are investors who will

13 have absolutely no qualms about kicking out their

14 tenant so they can sit around and wait for a

15 period of years before they get the exemption.

16 I'm a little concerned that the five

17 years is both too long and too short. You don't

18 ever want to say out loud in a reg that something

19 should be vacant for five years for any purpose.

20 Because vacancy for five years is just, frankly, a

21 disaster. It may be that, again, I can only speak

22 for single family and the situation is very

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1 different for apartment buildings, for larger

2 buildings that if you have a property that's being

3 rented out like that it is highly likely it is

4 need of the kind of investment where you really

5 want to see substantial improvement in that

6 property, and you may not want to exempt it at

7 all. So, again, just for single family I'm going

8 to put that out there.

9 The last thing I want to say because

10 this is not my area of expertise, but we would

11 like to see these funds to be able to be used for

12 for-sale development. You've already put -- you

13 know, you have the 12-month recycling ability now,

14 but that doesn't necessarily cover all of the

15 taxable events that occur if you're running a

16 business that's rehabbing and selling

17 single-family residential properties.

18 We would suggest that there be -- that

19 you consider having a section of the reg that

20 specifically addresses single family, because lots

21 of these issues, you're kind of putting, you know,

22 a square peg in a round hole when you're trying to

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1 talk about either vacancy or reinvestment periods,

2 or the amount of time it takes either to deploy

3 capital or to actually do the rehab, completely

4 different for a single family than for a

5 multi-family. So I don't -- you know, I will be

6 happy to work with you on that as well.

7 I'm running out of time, but I did wait

8 a long day, so I will just -- my last point is, I

9 just want to underscore what everybody said about

10 the importance of data collection.

11 You know, I have data that I've

12 collected on 26,000 properties from hundreds of

13 different single-family developers. It has been

14 an enormously useful database for developing other

15 statutory and other proposals related to single

16 family. It is imperative that you collect,

17 assemble, track and disclose at least some minimum

18 set of data.

19 I agree that the CDFI Fund may be the

20 appropriate entity with the capacity to do this,

21 and they could probably do it with information

22 that is largely already being collected by the

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1 Funds and just needs to be reported.

2 Thank you so much for this opportunity

3 to speak.

4 MS. BOLTON: Thank you. Do we have any

5 questions?

6 MR. NOVEY: Just one. Which definition

7 of vacancy, or vacant would you recommend that we

8 adopt because there are several in terms of

9 (inaudible)?

10 MS. GORDON: So, I'll be honest with

11 you, it doesn't matter that much, you just have to

12 have a definition. The Postal Service definition

13 is very expansive and includes vacancy, you know,

14 it might be -- and this is true for the census

15 too, it might be vacant because somebody is on

16 vacation, or on some kind of long-term medical

17 care situation.

18 So, it has be to be a vacancy definition

19 that's really oriented toward -- what we're

20 thinking of right now is vacancy when we talk

21 about it, you know, I always think that Fannie and

22 Freddie definitions are good ones, because they

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1 really cover so much of the industry. But again

2 what matters more is to have an agreed-upon

3 definition than particularly which one it is.

4 MS. BOLTON: All right, thank you very

5 much.

6 MS. GORDON: All right. Thanks so much.

7 MS. BOLTON: So, this concludes our

8 formal presentations. What we usually do in

9 public hearings, is we allow anybody else who

10 wants to speak, who has anything to say, they can

11 say it now.

12 MR. CRNKOVICH: Including one of the

13 opposites.

14 MR. HAWKINS: So, as Mike just mentioned

15 -- my name is Shay Hawkins. I was one of the

16 drafters of the Opportunity Zone Provision and Tax

17 Reform that was based on the bipartisan Investing

18 in Opportunity Act, which brought us all here

19 today.

20 I'm here today in my capacity as

21 President and CEO of the Opportunity Funds

22 Association. We work with funds, investors and

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1 entrepreneurs to abdicate for reasonable

2 expansions, the ultimate extension and

3 preservation of the Opportunity Zone Provision.

4 And, you know, in my former role I had a

5 good view towards congressional intent behind the

6 program, and the intent was to get as much capital

7 in the 8700 distressed census tracts is possible,

8 and have as many investors and a range of

9 different type of investors, as many

10 entrepreneurs, a broad range of entrepreneurs are

11 able to utilize this policy and benefit from it,

12 as possible.

13 So, we want that far-reaching,

14 far-ranging utilization was really key to rest my

15 (inaudible) on this. And so as an example, you

16 know, there may have been -- been brought today,

17 our association just like the other 200 people in

18 the room were all part of the EIG's Coalition, so

19 we echo a lot of what's been mentioned today, but

20 I want to emphasize just as an example the -- you

21 know, the aggregation versus the asset-by-asset

22 substantial improvement standard.

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1 You know, I think that's a great example

2 of if we hold to the aggregation standard that

3 will bring in that broader range of entrepreneur,

4 the broader range of business types that will

5 utilize the policy, and a broader range of

6 investment frankly that can ultimately get

7 involved. And so, I'd like to hold that out as an

8 example.

9 And finally, you know, I'd just like to

10 thank Julie, and Mike, and your teams, I'd like to

11 thank you for everything you guys have done in

12 terms of the implementation thus far. But then

13 even beyond that, I wanted just to express

14 appreciation the past year, and that we were, and

15 in this year, and both an example of how seriously

16 you take this process, how seriously you take this

17 critical, critical policy, and how seriously you

18 take those of us, who've taken the time to come

19 here and testify today.

20 So I just want to express our

21 appreciation. And anything you need from our

22 association, and anything you need from the rest

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1 of us in the group, just let us know, because we

2 are here to make sure this policy works for the

3 people.


5 MS. BOLTON: All right. Thank you very

6 much, Shay. Anybody else?

7 SPEAKER: Yes.

8 MS. BOLTON: Go ahead, right here.

9 MR. LORIN: Hello. My name is Eddie

10 Lorin, and I just want to emphasize one thing

11 that, I got involved in the EIG and, you know, the

12 Relic Coalition, for one reason. Primarily a

13 rehabber of apartments, currently take like and

14 make like. The problem with this legislation from

15 day one, is that this 100 percent test is going to

16 do the opposite of what I believe this legislation

17 was intended to do.

18 If we can do what Clayton suggested, if

19 we're going to change the use, and I got this idea

20 over dinner with (inaudible), so this is something

21 I've been milling over, and trying to figure out

22 how to make this work for almost a-year-

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1 and-a-half.

2 If we can take the same regulation

3 interpretation of a change of use from vacant to

4 operational, and take that change of use from an

5 unrestricted property to a restricted property

6 with some form of (inaudible), which has to be

7 off- the-shelf, because it's not so easy to come

8 up with a template to create affordable housing.

9 But there's millions and millions of

10 units that are going to continue to atrophy as the

11 brand new buildings are built next door, because

12 of the way this legislation is set up.

13 So, I strongly beg you to please

14 consider the change of use from an unrestricted to

15 restricted affordable housing so we can take those

16 millions of units that are getting atrophy, and

17 transform them into a good product.

18 Because if you can buy it, let's say in

19 a major urban area at 200 a door, and you're

20 building at 500 a door, what makes more sense?

21 Well, that all makes more sense, but we still need

22 to preserve that existing stock, or that stock is

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1 going to, again, just dilapidate.

2 And my suggestion is 20 percent. If you

3 change the use from an unrestricted to restricted

4 affordable housing, and you spend 20 percent of

5 the capital on renovations that should suffice as

6 a safe harbor for affordable housing.

7 Let's that the example of in D.C., you

8 can buy something for let's say 200 a door, old

9 product -- the best- case scenario is 40 a door,

10 is going to be the equivalent of your appraisal on

11 your land.

12 So, now you're stuck with 160 a door, so

13 20 percent of that would be 32,000 a door, very

14 significant renovation. But certainly you're

15 never going to spend 160 a door, never. And that

16 property will sit there and over the years will

17 atrophy and become more blinded because there's no

18 incentive to rehab.

19 So, sorry to bang this drum so hard, but

20 I think it's critical that people realize this

21 legislation may backfire for that very reason.

22 Thanks.

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2 MS. HARRINGTON: Hi. My name is Ashley

3 Harrington. I'm the Director of Social Justice at

4 UNCF, the United Negro College Fund. We are the

5 largest provider of -- the private provider of

6 scholarships in this country, and we also

7 represent 37 of the private historical Black

8 colleges and universities in this country.

9 We got into this discussion, and we were

10 interested in this work because half of our

11 institutions are located in Opportunity Zones, and

12 these are institutions that have been historically

13 underfunded, and not invested at the levels that

14 they should be.

15 And so if you're thinking about ways of

16 encouraging business to work, not just with

17 minority owned businesses, we also think there

18 should be encouragement to work with our

19 institutions because they're better off in their

20 communities.

21 For those who are not familiar with the

22 story of the Black colleges and universities,

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1 there are 100 or more accredited HBCUs, public or

2 private, concentrated in 19 states, the District

3 of Columbia in the U.S. and U.S. Virgin Islands.

4 They enroll almost 300,000 students, approximately

5 80 percent of whom are African-Americans and 70

6 percent come from low-income families.

7 Only 10 percent of undergraduates alone

8 in non-HBCUs is African-Americans. And we account

9 for only 3 percent of public and not-for-profit

10 private institutions, but we award 17 percent of

11 Bachelor's Degrees to African-Americans, and 24

12 percent of (inaudible) goes African-Americans.

13 We annually generate over 109,000 jobs

14 in our communities, and almost $15 billion in

15 total economic impact. So, we think there are

16 excellent ways to invest in their communities, and

17 we think there's a reason most of them are in

18 Opportunity Zones, and they are those bedrocks.

19 So, if you're going to affect the

20 community around an HBCU in an Opportunity Zone,

21 you can do that through our institutions. There

22 are usually our largest employer, and not just for

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1 being agitator. So, thinking about that, for

2 everyone in this room, but also and to think about

3 how you do that in the regulations. Thank you.

4 MR. NOVEY: Thank you. What have we

5 done or failed to do, that if we do or didn't do

6 would better encourage the results that you're

7 looking for?

8 MS. HARRINGTON: So, I'm also not an

9 expert on this, but I think the normal type

10 incentives that you use to encourage people to

11 partner with certain folks I think, extra credits,

12 extra --

13 MR. NOVEY: We're stuck with the statute

14 bill because (inaudible) --

15 MS. HARRINGTON: Right.

16 MR. NOVEY: -- and they did a wonderful

17 job even though it was (inaudible). (Laughter)

18 MS. HARRINGTON: Yeah.

19 MR. NOVEY: But that's the sort of rules

20 of the game that we have to operate in, and

21 clearly encouraging not just the communities

22 around vacancies, but also encouraging the

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1 institutions themselves would be a wonderful good,

2 but the question though is to what extent does

3 this statute give us a scope to do that?

4 MS. HARRINGTON: So I -- again I'm not

5 an expert in that -- I'm happy to think more about

6 this in the (inaudible), but one problem that I'll

7 say from the institutional side that we've

8 encountered, is that our institutions, because

9 they are often so low-resourced, right, they are

10 very risk-averse. And so much of this process

11 represents a concern because it's new, but also

12 there's potential risk not just for the investors

13 but also for the institutions that they're working

14 with the investors.

15 So, it's clarifying and thinking about

16 ways to -- the statute cannot giving the risk to

17 everyone, but when you're thinking about HBCUs in

18 particular, how to mitigate that risk because they

19 do offer the public good beyond just somebody who

20 needs, and they are definitely in the lead to

21 probably a reduction in economic growth in their

22 communities. And so I think to help we can -- we

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1 are happy to help think about more specific ways

2 you could do that in the regulations.

3 MR. NOVEY: Would love to hear it.

4 MS. HARRINGTON: Thanks.

5 MS. BOLTON: Thank you. Anybody else?

6 Okay, right here. Let me get one right here.

7 SPEAKER: Hi. My name is Alan Walwork.

8 And what I wanted to ask -- I want to thank the

9 panelists and the speakers for their insightful

10 questions and comments. Particular, I was

11 heartened by Mr. Novey's statement at the outset

12 about how we could help Treasury and the IRS in

13 its rule-making process, like focusing comments on

14 regulations that clarify rather than modify and

15 otherwise supplement, or supplant the statutory

16 directives that Congress set forth in 1400Z-2.

17 With that in mind, I'd like to address

18 my questions and comment to the juxtaposition of

19 the proposed regulations, Anti-Abuse Rule with

20 provision in Section 1400Z-2, Z3A. The bias terms

21 defines a range of business activities, the

22 Qualified Opportunity Zone business can engage in,

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1 but not those of the Qualified Opportunity Fund

2 engages in certain businesses directly. For

3 example, at a golf course, or a hot tub facility,

4 a country club, or a liquor store or something of

5 that nature.

6 Now, I think today that difference, the

7 difference between the Qualified Opportunity Zones

8 businesses and the statutory restrictions on the

9 type of "SIN" businesses that it's allowed to

10 engage in. And the fact that there's no statutory

11 restriction on Qualified Opportunity Funds has

12 been referred to as a loophole of some sort.

13 But, you know, it's only one of many,

14 many differences between the rules that apply to

15 Qualified Opportunity Zone businesses, including

16 substantially all requirements or the amount of

17 property advance, the whole -- which Treasury and

18 the IRS are deploying; 70 percent plus 90 percent

19 requirement that Qualified Opportunity Funds would

20 have to, you know, have if they invested directly

21 in the Qualified Opportunity Zone.

22 And so there is this difference in the

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1 statute, and it seems to be reflected --unless I'm

2 mistaken -- in the proposed regulations, which

3 restrict the SIN business rules under

4 144(c)(6)(b), to the part of the regulations that

5 deals with Qualified Opportunity Zone businesses.

6 However, a number of hotel chains,

7 resorts, and obviously, you know, taxpayers who

8 would otherwise engage in one of the enumerated

9 types of businesses are concerned that the

10 anti-abuse provision could be used even though

11 there's no restriction in the statute of

12 regulations against what would seem to be a fairly

13 straightforward application, where Qualified

14 Opportunity Fund engages directly in, for example,

15 the management of the golf course.

16 And so, you know, the question is

17 whether you consider it abusive for an opportunity

18 fund to engage directly in the acquisition, maybe

19 substantial improvement or development of a new --

20 let's just keep it with golf course -- whether

21 that could be Qualified Opportunity Zone property

22 in the hands of that, or Qualified Opportunity

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1 Fund.

2 And sort of as an ancillary issue which

3 sort of applies just to the Qualified Opportunity

4 Zone business, whether you would consider applying

5 a rule similar to the one in Notice 2006-67 for

6 Qualified Opportunity Zones where there's a 10

7 percent -- where there's a 10 percent prohibitive,

8 you know, business safe harbor whereby your gross

9 receipts are under 10 percent, you wouldn't have

10 to -- you know, you wouldn't be disqualified.

11 So, for example, you know, a physical

12 therapist that also engages in massages, you know,

13 or a rehabilitation center, or something of that

14 nature. So those are the three questions.

15 MS. BOLTON: Any questions? I mean, we

16 appreciate your comments. I would suggest writing

17 them in a comment letter to us.

18 SPEAKER: Then I think the New York

19 State Bar Association has --

20 MS. BOLTON: Yeah, but I could -- the

21 SIN business question has been brought to me a

22 number of times, so it's something that we're

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1 actively thinking of.

2 SPEAKER: And would you consider

3 including example in the Anti-Abuse Regulations

4 one way or the other?

5 MS. BOLTON: We will definitely think

6 about it.

7 SPEAKER: Thank you.

8 MS. BOLTON: Yeah. Okay. Anybody --

9 MR. NOVEY: As a matter of Reg drafting,

10 examples are nice but if there's a clean rule that

11 we could articulate, that would be better. Yeah.

12 SPEAKER: Or, I think that's worth the

13 10 percent derivative -- derivative business rule

14 and in the, you know, the Notice 2006-67 is

15 useful.

16 MS. BOLTON: Was that part of the New

17 York Bar comments?

18 SPEAKER: No. No. I'll write it up

19 separately in an article.

20 MS. BOLTON: Okay. All right, thank

21 you. Anybody else? All right then, on behalf of

22 the Panel, we thank you very much for all your

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1 comments and suggestions.

2 And this concludes the Hearing for

3 Investing in Opportunity Zone Funds, Reg Number

4 120186-18. Thank you.

5 (Applause)

6 (Whereupon, at 4:06 p.m., the

7 PROCEEDINGS were adjourned.)

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CERTIFICATE OF NOTARY PUBLIC

STATE OF MARYLAND

I, Thomas M. Watson, notary public in and for the State of

Maryland, do hereby certify that the forgoing PROCEEDING

was duly recorded and thereafter reduced to print under my

direction; that the witnesses were sworn to tell the truth

under penalty of perjury; that said transcript is a true

record of the testimony given by witnesses; that I am

neither counsel for, related to, nor employed by any of the

parties to the action in which this proceeding was called;

and, furthermore, that I am not a relative or employee of

any attorney or counsel employed by the parties hereto, nor

financially or otherwise interested in the outcome of this

action.

Notary Public, in and for the State of Maryland

My Commission Expires: December 2, 2021Commission No. 127812

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