OZone Record-Keeping: How to Be Prepared
The Sullivan Opportunity Zone Practice Group has previously written a client alert promoting the benefits of detailed record-keeping for taxpayers operating in the OZone world. There are certain specific records that are particularly important and, in fact, in some cases, mandatory. For example, a written plan is a required document under the working capital safe harbor, and documentation of expenditures under that written plan is likewise a mandatory book-keeping requirement.
A recent set of recommendations made to the Treasury Department and IRS in a letter, dated May 4th, 2020 and signed by nine GOP Senators, including Senator Tim Scott (R-South Carolina), whose opinions and suggestions carry particular weight in the OZone world, urges the regulators to exercise their authority to make changes to the existing OZone regulations. The letter highlights another reason that good record-keeping is important – which is to support a request for relief based on the “reasonable cause” exception.
The May 4th letter provided ten specific recommendations, and at least five of these recommendations conditioned the recommended relief on some level of proof by the taxpayer that a particular result relating to its fund, business, or project is a consequence of the COVID-19 pandemic or the effects of it. Some of these recommendations are worth examining in greater detail.
Recommendation #2, relating to a “reasonable cause” exception from a failure to satisfy the 90-percent investment standard, would tie relief to instances where a Qualified Opportunity Fund “can sufficiently demonstrate that the failure is a result of the COVID-19 pandemic.”
Failure on the part of a Qualified Opportunity Zone Business to satisfy the 70-percent tangible property test (recommendation #8 in the Senators’ proposal) recites the same basic standard of proof, namely, that the taxpayer “can sufficiently demonstrate that failure . . . is due to delays caused by the COVID-19 pandemic.”
Recommendation #9, which would grant six additional months to satisfy the 90% asset test, is predicated on a showing that the “loss of qualification was caused or facilitated by the COVID-19 pandemic.”
For those using one of the safe harbors related to determining what percentage of the QOZB’s gross income is derived from business activities within the QOZ and wanting to count employees who are “teleworking” outside their normal work location, proof of where those being counted usually work as well as their current work location may prove to be critical and outcome-determinative.
Perhaps most important of all is the Senators’ final recommendation, addressing the subject of potential abuse. The OZ Act already contains a general “anti-abuse” provision. The Senators’ recommendation goes further, asking for “strong anti-abuse language” and a requirement that anyone “taking advantage of the liberalized timeline document the facts and circumstances to substantiate . . .” the entitlement to relief.
It is unclear what, if anything, Treasury and/or Congress will ultimately do to fashion appropriate relief with respect to the various Ozone requirements and tests impacted by the COVID-19 emergency. It is, however, inferable from what has been proposed that some areas of granting relief, whether on timelines or percentage tests, may be predicated on “demonstrating” that a particular QOF, QOZB, or project has been adversely affected by the pandemic. The level of proof and the supporting details of causation are still being developed and are similarly unclear at this time. One certainty is that good records and documentation will play an important -- and perhaps decisive role -- in establishing eligibility for these relief provisions.
Remember the motto used by the Boy Scouts and Girl Scouts for decades: “BE PREPARED.”