July 10, 2019

Enterprise Community Partners Senior Director of Public Policy Sarah Brundage Testifies Before the IRS on Opportunity Zones

SB OZone

On July 9, Sarah Brundage, Senior Director, Public Policy, testified before the IRS on behalf of Enterprise on the second tranche of proposed guidance for Investing in Qualified Opportunity Funds. The IRS released the second tranche of proposed regulations on May 1, which Enterprise submitted formal comments in response to.  

The public hearing took place in the IRS New Carrollton Federal Building in Maryland. The IRS previously held a public hearing following the release of the first round of guidance in Washington, DC on February 14. Enterprise Community Loan Fund President Lori Chatman testified at the first hearing. 

Hosting the hearing was a panel of IRS and Department of Treasury officials, including Julie Hanlon Bolton, Special Counsel to the Associate Chief Counsel at the IRS, and Michael Novey, Associate Tax Legislative Counsel for the Department of Treasury Office of Tax Legislative Counsel. Nineteen speakers were scheduled to deliver comments at the July 9 hearing including representatives on behalf of Opportunity Finance Network, U.S. Impact Investing Alliance, Novogradac Opportunity Zones Working Group, and EIG Opportunity Zones Coalition. 

In her testimony, Brundage urged the IRS to modify the proposed regulations to:

  1. Clarify the treatment of vacant land to prevent land banking;
  2. Encourage paring with Low-Income Housing Tax Credits (Housing Credit) and New Markets Tax Credits; and
  3. Implement requirements to collect and publicly share meaningful data on Qualified Opportunity Fund investments. 

Regarding the first topic, Brundage remarked that subtracting the value of land from Qualified Opportunity Zone Property for the substantial improvement test might unintentionally result in predatory land-banking and long-term land holding. She noted that this is particularly true in areas experiencing rapidly rising costs, and the potential for abuse would be especially problematic in the case of land that is vacant, significantly underdeveloped or with significant depreciating assets. Enterprise recommends that the IRS clarify that in circumstances where property is being used for Housing Credit properties, the requirement to substantially improve property comply with Section 42 requirements, which is a 20 percent threshold. Enterprise also recommends that the IRS provide a threshold above which land would have to be substantially improved for all other circumstances, and in anticipation of the IRS panel requesting a specific recommendation, Brundage deferred to Enterprise partner Novogradac’s recommended threshold of at least 20 percent of the cost basis of the land. 

Brundage also provided two recommendations to modify the proposed regulations that would better support the pairing of Qualified Opportunity Fund (QOF) investments with the Housing Credit, noting that the Housing Credit and the New Markets Tax Credit are proven, powerful tools with long track records in community revitalization. First, Enterprise recommends that the IRS clarify that the Fair Market Value excluding debt, as well as any cash flow distributions to investors, be the standard for calculating a differed tax bill in 2026, and, second, that the IRS allow taxpayers investing in QOFs and then in Housing Credit partnerships be allowed to use capital gains from consolidated affiliates of the taxpayer. 

Lastly, Brundage strongly urged the IRS to require data collection and publicly report on QOF investments and outcomes. She thanked the Treasury for their prior RFI on data collection and tracking, and referenced Enterprise’s previous comment letter providing detailed recommendations on data collection and reporting. Enterprise believes the Opportunity Zones tax incentive should be used to advance equitable and inclusive growth, and that the federal government must collect and publicly report on meaningful data in order for Congress and the public to evaluate whether this new tax incentive is driving equitable investments. Enterprise strongly supports a bipartisan bill that would amend the Opportunity Zones statute and establish data collection and reporting requirements

Many of the other speakers echoed Enterprise’s recommendations, notably the need to establish reporting requirements and prevent predatory or speculative purchasing of vacant land. The IRS panel also expressed an interest in further understanding how the Opportunity Zone regulations could support affordable housing development, which Novogradac and Enterprise will follow-up on. The IRS panel also repeatedly reminded stakeholders of the statutory limitations that any related rulemaking must follow. 

Click here to read Enterprise’s comment letter to the IRS on the second round of proposed regulations.
Click here to watch the July 9 IRS hearing. 

Next Steps

Over the past few months, Enterprise has completed a flurry of federal policy engagement related to Opportunity Zones, providing public comments in response to the Treasury RFI on data collection, the HUD RFI on maximizing Opportunity Zones, and the IRS second tranche of guidance. Enterprise will continue to advocate for establishing reporting requirements and other modifications to the Opportunity Zones tax incentive or related policies that will support equitable and inclusive development. Next, the IRS is expected to finalize the guidance on Opportunity Zones. Stay tuned to our policy newsletters and Enterprise’s Opportunity Zones webpage for updates about the implementation of Opportunity Zones.

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