Proposed Rule2026-18574
Information Reporting Regarding Qualified Opportunity Zones and Updated Qualified Opportunity Fund Certification and Decertification Procedures
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Published
September 11, 2026
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document contains proposed regulations that would implement new statutory requirements for qualified opportunity funds to file information returns with the IRS and furnish statements to investors who dispose of investments in those entities and for qualified opportunity zone businesses to furnish statements to qualified opportunity funds that hold interests in them. These proposed regulations would also clarify the applicability of penalties for the failure to file or furnish these information returns and statements. Finally, these proposed regulations would clarify the qualified opportunity fund self-certification rules and provide procedures for qualified opportunity funds to revoke inadvertent certifications or voluntarily decertify.
Full Text
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[Federal Register Volume 91, Number 175 (Friday, September 11, 2026)]
[Proposed Rules]
[Pages 57968-58000]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-18574]
[[Page 57967]]
Vol. 91
Friday,
No. 175
September 11, 2026
Part II
Department of the Treasury
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Internal Revenue Service
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26 CFR Parts 1 and 301
Information Reporting Regarding Qualified Opportunity Zones and Updated
Qualified Opportunity Fund Certification and Decertification
Procedures; Proposed Rule
Federal Register / Vol. 91 , No. 175 / Friday, September 11, 2026 /
Proposed Rules
[[Page 57968]]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 301
[REG-116506-25]
RIN 1545-BR82
Information Reporting Regarding Qualified Opportunity Zones and
Updated Qualified Opportunity Fund Certification and Decertification
Procedures
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations that would
implement new statutory requirements for qualified opportunity funds to
file information returns with the IRS and furnish statements to
investors who dispose of investments in those entities and for
qualified opportunity zone businesses to furnish statements to
qualified opportunity funds that hold interests in them. These proposed
regulations would also clarify the applicability of penalties for the
failure to file or furnish these information returns and statements.
Finally, these proposed regulations would clarify the qualified
opportunity fund self-certification rules and provide procedures for
qualified opportunity funds to revoke inadvertent certifications or
voluntarily decertify.
DATES: Written or electronic comments must be received by October 16,
2026. A telephonic public hearing on this proposed regulation has been
scheduled for November 5, 2026, at 10:00 a.m. ET. Requests to speak and
outlines of topics to be discussed at the public hearing must be
received by October 13, 2026. If no outlines are received by October
13, 2026, the public hearing will be cancelled. Requests to attend the
public hearing must be received by 5 p.m. ET on November 3, 2026.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically. Submit electronic submissions via the Federal
eRulemaking Portal at <a href="https://www.regulations.gov">https://www.regulations.gov</a> (indicate IRS and
REG-116506-25) by following the online instructions for submitting
comments. The public hearing will be conducted by telephone only.
Requests to participate in the public hearing must be submitted as
prescribed in the ``Comments and Public Hearing'' section of this
preamble. Once submitted to the Federal eRulemaking Portal, comments
cannot be edited or withdrawn. The Department of the Treasury (Treasury
Department) and the IRS will publish any comments submitted
electronically or on paper to the public docket. Send paper submissions
to: CC:PA:01:PR (REG-116506-25), Room 5503, Internal Revenue Service,
P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations
under section 1400Z-2, Dominic DiMattia of the Office of the Associate
Chief Counsel (Income Tax and Accounting) at (202) 317-7009 (not a
toll-free number); concerning the remainder of the proposed regulations
under sections 6011, 6037, 6039K, 6039L, 6045, 6722, 6724, and 6726,
Roseann Cutrone of the Office of the Associate Chief Counsel (Procedure
and Administration) at (202) 317-6844 (not a toll-free number); and
concerning submissions of comments or the public hearing, the
Publications and Regulations Section at (202) 317-6901 (not a toll-free
number) or by sending an email to <a href="/cdn-cgi/l/email-protection#92e2e7f0fefbf1faf7f3e0fbfcf5e1d2fbe0e1bcf5fde4"><span class="__cf_email__" data-cfemail="6d1d180f01040e05080c1f04030a1e2d041f1e430a021b">[email protected]</span></a> (preferred).
SUPPLEMENTARY INFORMATION:
Authority
This notice of proposed rulemaking contains proposed amendments to
the Income Tax Regulations (26 CFR part 1) that would revise existing
regulations under sections 1400Z-2 and 6045 of the Internal Revenue
Code (Code) and add new regulations under sections 6039K and 6039L of
the Code, as enacted by section 70421(d)(1) of Public Law 119-21, 139
Stat. 72 (July 4, 2025), commonly known as the One, Big, Beautiful Bill
Act, (OBBBA). This notice of proposed rulemaking also contains proposed
amendments to the Procedure and Administration Regulations (26 CFR part
301) that would revise existing regulations under sections 6011, 6037,
6722, and 6724 of the Code and add new regulations under section 6726
of the Code as enacted by section 70421(d)(2) of the OBBBA.
Section 1400Z-2(e)(4) expressly delegates authority to the
Secretary of the Treasury or the Secretary's delegate (Secretary) to
prescribe such regulations as may be necessary or appropriate to carry
out the purposes of section 1400Z-2, including rules for the
certification of qualified opportunity funds (QOFs) and rules to
prevent abuse.
Section 6039K(a), which requires every QOF to file an annual
return, expressly delegates authority to the Secretary to prescribe the
time and manner for the filing of the annual return and, as provided in
section 6039K(b)(9), to require the inclusion in such annual return of
``such other information as the Secretary may require.'' Section
6039K(c), which requires every QOF to furnish statements (investor
statements) to every person holding a qualifying or non-qualifying
investment in the QOF (investor) who disposed of some or all of that
investment in the QOF during the year, expressly delegates authority to
the Secretary to prescribe the time and manner for the furnishing of
such investor statements.
Section 6039L(a), which requires every applicable qualified
opportunity zone business (QOZB) to furnish statements (QOZB
statements) to certain QOFs, expressly delegates authority to the
Secretary to prescribe not only the time and manner for the furnishing
of such QOZB statements, but the information such QOZB statements must
set forth as the Secretary prescribes by regulations for purposes of
enabling QOFs to meet the information reporting requirements of section
6039K(b)(5).
Section 6045(a) expressly delegates authority to the Secretary to
require every person doing business as a broker to file an information
return in accordance with such regulations as the Secretary may
prescribe. Section 6045(a) further provides that such information
return must show the name and address of each customer, and details
regarding gross proceeds and such other information as the Secretary
may by forms or regulations require with respect to such business.
Lastly, these proposed regulations are also issued under the
express delegation of authority under section 7805 of the Code, which
directs the Secretary to prescribe all needful rules and regulations
for the enforcement of the Code, including all rules and regulations as
may be necessary by reason of any alteration of law in relation to
internal revenue. Accordingly, given the changes in law made by the
OBBBA, the proposed regulations are also issued pursuant to the
authority under section 7805 in conjunction with sections 1400Z-2,
6011, 6039K, 6039L, 6724 and 6726.
Background
I. Sections 1400Z-1 and 1400Z-2
Section 13823 of Public Law 115-97, 131 Stat. 2054 (December 22,
2017), commonly referred to as the Tax Cuts and Jobs Act (TCJA), added
sections 1400Z-1 and 1400Z-2 as part of a new
[[Page 57969]]
subchapter Z of chapter 1 of the Code (subchapter Z).
A. Qualified Opportunity Zones
Section 1400Z-1(a) defines the term ``qualified opportunity zone''
(QOZ) for purposes of subchapter Z, and section 1400Z-1(b) and (d)
address the process by which certain population census tracts located
in the 50 states, U.S. territories, and the District of Columbia may be
nominated, certified, and designated as QOZs. The list of population
census tracts designated as QOZs pursuant to section 1400Z-1(b) prior
to amendment by the OBBBA are set forth in Notice 2018-48, 2018-28
I.R.B. 9, as amplified by Notice 2019-42, 2019-29 I.R.B. 352. Section
70421 of the OBBBA amended section 1400Z-1 to provide for recurring
nomination, certification, and designation cycles for QOZs every 10
years beginning July 1, 2026. See Rev. Proc. 2026-14, 2026-02 I.R.B.
910 for more information.
B. Section 1400Z-2 and Regulations Under the TCJA
1. Overview
Section 1400Z-2 provides rules regarding the two main Federal
income tax benefits to eligible taxpayers who make certain investments
in QOFs, rules authorizing the certification of eligible entities as
QOFs, and the requirements such entities must satisfy to be certified
as QOFs.
As enacted under the TCJA, the first specified opportunity zone tax
benefit provided by section 1400Z-2(a) and (b) was the deferral of
certain gains from gross income until as late as December 31, 2026, if
a taxpayer invests a corresponding amount of such gain in a qualifying
investment in a QOF within 180 days of the date of the sale or exchange
giving rise to the gain. Additionally, section 1400Z-2(b) provided an
upward basis adjustment of 10 percent of the amount of deferred gain if
the taxpayer held the qualifying investment in the QOF for at least 5
years and an upward basis adjustment of an additional 5 percent of the
amount of deferred gain if the taxpayer held the qualifying investment
for at least 7 years.
The second specified opportunity zone tax benefit was provided by
section 1400Z-2(c), under which an eligible taxpayer, upon the making
of a second valid election, may also exclude any appreciation on the
qualifying investment if the eligible taxpayer held the qualifying
investment for at least 10 years.
On October 29, 2018, the Treasury Department and the IRS published
in the Federal Register (83 FR 54279) a notice of proposed rulemaking
(REG-115420-18) providing guidance under section 1400Z-2 for investing
in QOFs (October 2018 proposed regulations). A second notice of
proposed rulemaking (REG-120186-18) was published in the Federal
Register (84 FR 18652) on May 1, 2019, containing additional proposed
regulations under section 1400Z-2 (May 2019 proposed regulations). The
May 2019 proposed regulations also updated portions of the October 2018
proposed regulations.
On January 13, 2020, final regulations (TD 9889) under section
1400Z-2 were published in the Federal Register (85 FR 1866, as
corrected on April 6, 2020, at 85 FR 19082), effective for taxable
years beginning after March 13, 2020 (section 1400Z-2 regulations).
Under Sec. 1.1400Z2(a)-1(c)(5), a taxpayer's gain qualifies for
deferral under section 1400Z-2(a) to the extent the taxpayer makes or
acquires a qualifying investment in a QOF. Section 1.1400Z2(a)-1(b)(34)
defines a ``qualifying investment'' as an eligible interest, or portion
thereof, in a QOF to the extent that a deferral election is made and
applies with respect to such eligible interest and that the IRS has
been timely notified of the deferral election. Section 1.1400Z2(a)-
1(b)(12) defines an ``eligible interest'' in a QOF as an equity
interest issued by a QOF, which includes stock or a partnership
interest but excludes any debt instrument. Pursuant to Sec.
1.1400Z2(a)-1(b)(34), an eligible interest ceases to be a qualifying
interest upon, and to the extent of, the occurrence of an inclusion
event regarding that eligible interest, or portion thereof. Under Sec.
1.1400Z2(b)-1(c)(15), the decertification of a QOF is an inclusion
event.
2. Qualified Opportunity Funds
a. In General
Section 1400Z-2(d)(1) provides that a QOF is a partnership or
corporation that (i) is organized for the purpose of investing in
qualified opportunity zone property (QOZ property) (other than another
QOF), and (ii) must hold at least 90 percent of its assets in QOZ
property, determined by the average of the percentage of QOZ property
held by the entity as measured on two semiannual testing dates (90-
percent investment standard).
Section 1.1400Z2(d)-1(a)(1)(i) and (ii) require that a QOF be an
entity that is classified as a corporation or partnership for Federal
income tax purposes and be formed under the laws of the United States,
one of the 50 states, the District of Columbia, a Federally recognized
Tribal government, or a U.S. territory.
Section 1400Z-2(d)(1)(A) and (B) provide that the 90-percent
investment standard is measured by determining the average of the
percentage of QOZ property held on the last day of the 6-month mark of
the QOF's taxable year and on the last day of the QOF's taxable year.
Section 1.1400Z2(d)-1(b)(1) requires the QOF to include all assets
owned or leased by the QOF in determining the 90-percent investment
standard. Section 1.1400Z2(d)-1(b)(2) requires that the QOF value its
assets using an applicable financial statement valuation method or an
alternative valuation method promulgated under the regulations.
b. Certification and Decertification of QOFs
The section 1400Z-2 regulations provide the requirements for an
eligible entity to self-certify as a QOF. To be eligible to be a QOF,
Sec. 1.1400Z2(d)-1(a)(1) provides that an entity must be classified as
either a corporation or partnership for Federal income tax purposes.
Under Sec. 1.1400Z2(d)-1(a) through (c), the eligible entity must
self-certify that it satisfies the 90-percent investment standard. The
self-certification must be made in the form and manner as prescribed by
the Commissioner of Internal Revenue (Commissioner) in the forms and
instructions, or in publications or guidance published in the Internal
Revenue Bulletin (IRB) and must identify the taxable year for which the
self-certification takes effect. See Sec. 1.1400Z2(d)-1(a)(2).
Section 1.1400Z2(d)-1(a)(3) provides that a QOF may voluntarily
decertify in the form and manner as may be prescribed in forms and
instructions, or in publications or guidance published in the IRB. In
August 2021, Sec. 1.1400Z2(d)-1(a)(3) and the preamble to TD 9889 were
corrected (86 FR 42716) to remove a reference to a timing requirement
for voluntary decertification.
3. QOZ Property
Both Section 1400Z-2(d)(2)(A) and Sec. 1.1400Z2(d)-1(c)(1) define
QOZ property as: (i) QOZ stock, (ii) QOZ partnership interest, or (iii)
QOZ business property. Section 1.1400Z2(d)-1(c)(1) provides further
guidance on whether these assets will qualify for inclusion in the
determination of the 90-percent investment standard (or the 70-percent
tangible property standard in the case of QOZBs and QOZ business
property).
[[Page 57970]]
a. QOZ Stock
Pursuant to Sec. 1.1400Z2(d)-1(c)(2)(i), QOZ stock is stock in an
eligible corporation where: (i) the stock was acquired by a QOF at its
original issue from the corporation solely in exchange for cash after
December 31, 2017; (ii) the corporation was a QOZB (or newly organized
for such purpose) at the time the stock was issued; and (iii) for 90
percent of the QOF's holding period of such stock, the corporation
qualified as a QOZB.
b. QOZ Partnership Interest
Under Sec. 1.1400Z2(d)-1(c)(3)(i), qualified opportunity zone
partnership interest is any capital or profits interest in an eligible
partnership where: (i) the capital or profits interest was acquired by
a QOF from the partnership solely in exchange for cash after December
31, 2017; (ii) the partnership was a QOZB (or newly formed for such
purpose) at the time the capital or profits interest was issued; and
(iii) for 90 percent of the QOF's holding period of such interest, the
partnership qualified as a QOZB.
c. QOZ Business Property
Section 1400Z-2(d)(2)(D) defines ``QOZ business property'' as
property: (i) acquired by purchase after December 31, 2017; (ii) the
original use of which commences in the QOZ with the QOF or the QOZB (or
that the QOF or QOZB substantially improves the property); and (iii)
substantially all of the use was in a QOZ during substantially all of
the QOF's or QOZB's holding period of such property. See also Sec.
1.1400Z2(d)-2(a)(2). Section 1.1400Z2(d)-2(c) permits a QOF or QOZB to
treat leased property as QOZ business property subject to certain
requirements. Section 1400Z-2(d)(2)(D)(ii) also provides that a QOF or
QOZB must substantially improve the property within a 30-month period
if the property will not meet the original use requirement. Section
1.1400Z2(d)-2(b)(4) clarifies these rules by providing additional
guidance on the 30-month substantial improvement period.
4. QOZBs
Section 1400Z-2(d)(3)(A) defines a QOZB as a trade or business
(other than one specified in the statutory list of businesses in
section 144(c)(6)(B)) that meets each of the following two
requirements. First, substantially all of the tangible property owned
or leased in connection with the trade or business must be QOZ business
property. See section 1400Z-2(d)(3)(A)(i). Second, the trade or
business must satisfy the following requirements provided in section
1397C(b)(2), (4), and (8): (i) at least 50 percent of the gross income
of such business is derived from an active trade or business in the
QOZ; (ii) a substantial portion of the intangible property of such
entity is used in the active conduct of a trade or business in the QOZ;
and (iii) less than five percent of the average of the aggregate
adjusted bases of the entity's property must be attributable to
nonqualified financial property. See section 1400Z-2(d)(3)(A)(ii);
Sec. 1.1400Z2(d)-1(d)(3).
Under Sec. 1.1400Z2(d)-1(d)(1)(i), which clarifies the
``substantially all'' requirement provided in section 1400Z-
2(d)(3)(A)(i), an entity must satisfy the 70-percent tangible property
standard with respect to its tangible property, meaning that at least
70-percent of the tangible property owned or leased by the entity is
QOZ business property. To determine satisfaction of the 70-percent
tangible property standard, under Sec. 1.1400Z2(d)-1(d)(2)(ii)(A), the
entity uses a fraction, the numerator of which is the total value of
all QOZ business property owned or leased by the entity and the
denominator of which is the total value of all tangible property owned
or leased by the entity, whether located inside or outside a QOZ.
Pursuant to Sec. 1.1400Z2(d)-1(d)(2)(ii)(B), an entity must value its
assets using either the applicable financial statement valuation method
(if it has an applicable financial statement) or the alternative
valuation method.
The section 1400Z-2 regulations provide further guidance on the
other statutory requirements of section 1400Z-2(d)(3). To meet the
gross income requirement of section 1400Z-2(d)(3)(A)(ii), Sec.
1.1400Z2(d)-1(d)(3)(i) provides three separate safe harbors that a
business can rely upon and, if none of those apply, a general facts and
circumstances test. These safe harbors look to where the tangible
property, business activities or the business's employees are located.
To meet the intangible property requirement of section 1400Z-2(d)(3),
Sec. 1.1400Z2(d)-1(d)(3)(ii) provides that at least 40 percent of the
business's intangible property must be used in the active conduct of a
trade or business in a QOZ. Finally, Sec. 1.1400Z2(d)-1(d)(3)(v)
provides a safe harbor for QOZBs to treat the amount of working capital
assets held by the business as reasonable if certain requirements are
met. Under Sec. 1.1400Z2(d)-1(d)(3)(vi), the use of the working
capital safe harbor permits the QOZB to utilize other safe harbors to
meet the requirements of section 1397C(b).
Notably, for purposes of these proposed regulations, the statutory
and regulatory requirements to treat a business as a QOZB are met on
two different testing dates. To satisfy the 70-percent tangible
property standard, a QOZB must measure compliance between two
semiannual testing dates. To satisfy the other section 1397C(b)
requirements, the QOZB measures compliance on the last day of its
taxable year.
As previously noted, a QOF must test compliance with the 90-percent
investment standard on its two testing dates (the last day of the first
6-month period of its taxable year and the last day of its taxable
year, respectively). The section 1400Z-2 regulations recognize that a
QOF's taxable year and testing dates may not match up with a QOZB's
taxable year and testing dates, making it difficult to determine
whether the entity qualifies as a QOZB of the QOF on a semiannual basis
based on the QOF's taxable year. Accordingly, Sec. 1.1400Z2(d)-
1(b)(2)(i)(C) provides a safe harbor for determining on the two
semiannual testing dates of a QOF whether an entity is a QOZB and
whether the QOF may treat the equity in that entity as QOZ property.
Under the safe harbor, the QOF may limit the period tested to the
period that starts with the beginning of the QOF's status as a QOF and
lasts until the last day of the entity's latest taxable year that ends
on or before the relevant testing date. If an entity satisfies all of
the requirements of a QOZB determined as of the end of the entity's
taxable year, the entity qualifies as a QOZB for the entire taxable
year of the entity.
Section 1.1400Z2(d)-1(b)(2)(i)(C)(2) also provides that if an
entity would not be treated as a QOZB as of the last day of its taxable
year ending on or before a semiannual testing date of the QOF it may be
treated as a QOZB with respect to that QOF for that taxable year of the
entity if a cure is achieved for the entity under Sec. 1.1400Z2(d)-
1(d)(6) and the QOF timely files its Federal tax return \1\ for the
taxable year of the QOF containing the testing date on a date that is
timely and that is not earlier than when that cure is achieved.
Pursuant to Sec. 1.1400Z2(d)-1(d)(6)(iii), each QOF is permitted only
one correction for a trade or business.
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\1\ References in this preamble and these proposed regulations
to a Federal tax return are to the individual income tax return
(Form 1040) for a person that is an individual, to the applicable
Federal income tax return (Form 1120 series) for a person that is a
corporation, to the Federal return of partnership income (Form 1065)
for a person that is a partnership, and to the income tax return for
estates and trusts (Form 1041) for a person that is an estate or
trust.
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[[Page 57971]]
C. Section 1400Z-2 as Amended by the OBBBA
The OBBBA amended subchapter Z, in part, to make section 1400Z-2
permanent with the modifications described in this part I.C.
1. QOZ Property
Section 70421(c)(4) of the OBBBA modifies the statutory definitions
of QOZ business property, QOZ stock, and QOZ partnership interests
applicable to property acquired after December 31, 2026, to conform to
the recurring decennial designation of QOZs introduced by the OBBBA.
Section 70421(c)(4)(A) of the OBBBA modifies the acquisition date for
QOZ business property in section 1400Z-2(d)(2)(D)(i)(I) from ``after
December 31, 2017'' to ``after the applicable start date (as defined in
section 1400Z-1(e)(2)) with respect to the [QOZ] described in [section
1400Z-2(d)(2)(D)(i)(III)].'' Section 70421(c)(4)(B) of the OBBBA
modifies section 1400Z-2(d)(2)(B)(i)(I) and (d)(2)(C)(i) by replacing
``December 31, 2017,'' with ``the applicable date'', which section
1400Z-2(d)(2)(E) defines, with respect to any corporation or
partnership that is a QOZB, as the earliest date described in section
1400Z-2(d)(2)(D)(i)(I) with respect to the QOZ business property held
by such QOZB.
2. Specified Opportunity Zone Tax Benefits
Section 70421(c)(2) of the OBBBA replaced the fixed deferred gain
recognition date of the earlier of either the date of sale or exchange
of the qualifying investment or December 31, 2026, with a rolling
deferred gain recognition date occurring on the earlier of either the
date of sale or exchange of the qualifying investment or five years
from the date the taxpayer makes the qualifying investment.
The OBBBA also modified the specified opportunity zone tax benefits
available to an eligible taxpayer. Although section 70421(c)(2) of the
OBBBA retained the basis adjustments of 10 percent of the amount of
deferred gain with respect to qualifying investments held for at least
5 years, the additional basis adjustment of 5 percent for qualifying
investments held for at least 7 years was not retained. In addition,
section 70421(c)(3) of the OBBBA modified the basis adjustments for
investments held for at least 10 years by capping the fair market value
basis adjustment to the fair market value on the date that is 30 years
after the date of investment.
3. Enhanced Incentives for Investing in Rural Areas
The OBBBA created enhanced incentives for investment in rural
areas, including incentives for certain types of QOFs that invest in
QOZs comprised entirely of a rural area. Generally, pursuant to section
70421(c)(2) of the OBBBA, a qualified rural opportunity fund is a QOF
for which substantially all the use of its QOZ business property during
substantially all of the holding period of such property was in a QOZ
comprised entirely of a rural area (rural QOZ).
The OBBBA codified a definition of ``rural area'' applicable to
amounts invested in QOFs after December 31, 2026. Under such
definition, a rural area is defined as any area other than a city or
town that has a population of greater than 50,000 inhabitants, and any
urbanized area contiguous and adjacent to a city or town that has a
population of greater than 50,000 inhabitants. Section 70421(c)(4)(C)
of the OBBBA also amended the general substantial improvement threshold
for improvements to property located in a rural QOZ and reduced the
substantial improvement threshold for required additions to the basis
for such property from 100 percent to 50 percent. Pursuant to section
70421(c)(5)(C) of the OBBBA, the amendment to the substantial
improvement threshold took effect on July 4, 2025.
On September 30, 2025, the Treasury Department and the IRS issued
Notice 2025-50, 2025-43 I.R.B. 542, which provides guidance with
respect to the definition of a ``rural area'' for purposes of applying
the substantial improvement provision under section 1400Z-
2(d)(2)(D)(ii) and provides a list of census tracts designated prior to
the enactments of the OBBBA as QOZs that will be considered rural QOZs.
II. Information Reporting Rules
The OBBBA enacted information reporting requirements under new
sections 6039K and 6039L for QOFs and QOZBs, as well as a new penalty
provision under section 6726.
A. Information Reporting Requirements Before the OBBBA
Prior to the enactment of the OBBBA, the Code did not mandate
information reporting from QOFs or QOZBs. Section 1400Z-2(e)(4),
however, authorized the Secretary to prescribe such regulations as
necessary to carry out the purposes of section 1400Z-2, including (i)
rules for the certification of QOFs; (ii) rules to ensure a QOF has a
reasonable period of time to reinvest the return of capital from
investments in QOZ stock and QOZ partnership interests, and to reinvest
proceeds received from the sale or disposition of QOZ property; and
(iii) rules to prevent abuse.
Pursuant to this authority, Sec. 1.1400Z2(d)-1(a)(2) requires
entities to self-certify as QOFs pursuant to forms and instructions, or
in publications or guidance published in the IRB. An entity self-
certifying as a QOF does so through the filing of Form 8996, Qualified
Opportunity Fund,\2\ on which the entity attests that it is organized
to invest in QOZ property. Form 8996 also requires the QOF to report
that it meets the required investment standards of section 1400Z-2(d),
or if it does not, to calculate and report the penalty imposed by
section 1400Z-2(f). In addition, Form 8996 requires a QOF to report
certain information about the QOF's investments and operations as well
as the investments and operations of any QOZBs in which the QOF has an
interest. Finally, for any investor in the QOF that disposed of the
investor's equity interest in the QOF, Form 8996 requires the QOF to
attach a statement with each investor's name, date of disposition, and
the interest disposed of during the QOFs taxable year. Form 8996 is
required to be attached to the QOF's annual tax return by the due date
(including extensions) for the QOF's annual tax return.
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\2\ References to Form 8996 in these proposed regulations are to
the current iteration of the form, which was last revised in
December 2021.
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A penalty applies to QOFs that do not meet certain investments
standards, but under the section 1400Z-2 regulations, no information
reporting penalty applies to QOFs that do not file Form 8996.
In order for a QOF to report the information required by Form 8996
regarding the QOZ businesses property and operations of any QOZBs in
which the QOF has an interest, the QOF must obtain information from
every QOZB in which it holds a stock or partnership interest. The
section 1400Z-2 regulations, however, do not include a penalty for
QOZBs that fail to provide this necessary information to their QOF
investors.
In addition to the reporting of dispositions by QOF investors on
Form 8996, the IRS also requires each QOF to file Form 1099-B, Proceeds
From Broker and Barter Exchange Transactions, (or Form 1099-DA, Digital
Asset Proceeds From Broker Transactions, if the QOF interest is a dual
classification asset under Sec. 1.6045-1(c)(8)) on dispositions made
by each QOF investor in the QOF during the calendar year. Each QOF is
[[Page 57972]]
also required to furnish statements to each of these investors,
including the information required to be reported to the IRS on Form
1099-B (or Form 1099-DA). No information reporting or information
furnishing penalty applies, however, to a QOF that does not file these
Forms 1099-B (or Forms 1099-DA) with the IRS or furnish these
associated statements to disposing investors.
B. Information Reporting Requirements Under the OBBBA
Section 70421(d)(1) of the OBBBA added section 6039K to the Code to
require every QOF to file an annual return (at such time and in such
manner as the Secretary may prescribe) containing certain information
described in section 6039K(b)(1) through (8). The information described
in section 6039K(b)(1) through (8) generally includes most of the
information that is currently required to be reported on Form 8996 as
well as certain new items of information.\3\ In addition, section
6039K(b)(9) provides authority for the Secretary to require reporting
of additional information not listed in section 6039K(b)(1) through
(8). Section 6039K(c) also requires QOFs to furnish investor statements
to investors who dispose of their interests in the QOF. The investor
statement must generally include the investor's name, address, and
taxpayer identification number (TIN), the date or dates on which the
disposed of investment was acquired, the date or dates on which any
such investment was disposed of, and the amount of the investment.
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\3\ The Treasury Department and the IRS anticipate updating Form
8996 to reflect the necessary changes to such reporting under
section 6039K and these regulations once published as final
regulations in the Federal Register.
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Section 70421(d)(1) of the OBBBA also added new section 6039L to
the Code. Under section 6039L, every applicable QOZB must furnish a
written statement to each QOF that holds an interest in the applicable
QOZB at such time, in such manner, and setting forth such information
as the Secretary may by regulations prescribe for purposes of enabling
such QOFs to meet the reporting requirements of section 6039K. Section
6039L(b) defines ``applicable QOZB'' for this purpose as any QOZB: (1)
which is a trade or business of a QOF, (2) in which a QOF holds QOZ
stock, or (3) in which a QOF holds a QOZ partnership interest.
Section 70421(d)(2)(A) of the OBBBA added a new information
reporting penalty under section 6726 of the Code applicable to QOFs
that fail to meet their information reporting requirements under
section 6039K. Section 6726(a) provides that if any QOF required to
file an information return under section 6039K fails to file a complete
and correct return under such section in the time and in the manner
prescribed therefor, then the QOF must pay a penalty of $500 for each
day during which such failure continues. Under section 6726(b), this
penalty is generally subject to an annual cap of $10,000 per return,
but for large QOFs with gross assets exceeding $10 million at the close
of the QOF's taxable year, the cap for the failure rises from $10,000
to $50,000. Additionally, under section 6726(c), in the case of a
failure that is due to intentional disregard, the daily penalty is
increased from $500 to $2,500 and the annual cap is increased to
$50,000, or $250,000 for a large QOF, per return. Finally, under
section 6726(d), the penalty amounts are all subject to a cost-of-
living inflation adjustment.
Prior to the enactment of the OBBBA, section 6724, which provides
that ``[n]o penalty shall be imposed under this part [II] with respect
to any failure if it is shown that such failure is due to reasonable
cause and not to willful neglect,'' applied to penalties under section
6721 (failure to file correct information returns), section 6722
(failure to furnish correct payee statements), and section 6723
(failure to comply with other information reporting requirements). All
of these penalties are contained in part II (Failure to Comply with
Certain Information Reporting Requirements) of subchapter B (Assessable
Penalties) of chapter 68 of the Code. Because the OBBBA added the
information reporting penalty under section 6726 to part II of
subchapter B of chapter 68 of the Code, the reasonable cause waiver
provisions under section 6724 also apply to penalties imposed under
section 6726.
The OBBBA also provides for the imposition of penalties for QOFs
that fail to furnish the investor statements required by section
6039K(c) and for QOZBs that fail to provide QOFs the QOZB statement
required by section 6039L. Section 70421(d)(2)(B)(iii) of the OBBBA
added investor statements and QOZB statements to the definition of
``payee statements'' under section 6724(d)(2), which are subject to the
failure to furnish penalty under section 6722. Section 6722 generally
provides that for each failure to furnish a complete and correct payee
statement on or before the date prescribed, the person required to
furnish the statement must pay a penalty equal to $250 (adjusted for
inflation) for each statement with respect to which the failure occurs.
The penalty is limited by an annual cap that is generally equal to $3
million (adjusted for inflation). Reduced penalties apply in certain
circumstances if the statement is furnished late (section 6722(b)) and
for filers with gross receipts below a specified threshold (section
6722(d)). However, the penalty does not apply to de minimis failures
(section 6722(c)) and for any failure that is an intentional disregard
of the furnishing requirement, the per-return penalty is increased to
$500 (adjusted for inflation) and the $3 million annual cap is removed
(section 6722(e)). Finally, the reasonable cause waiver under section
6724 applies to penalties otherwise applicable under section 6722.
C. Public Reporting Requirements
Section 70421(e)(1) of the OBBBA appropriates funds through
September 30, 2028, for necessary expenses of the IRS to make annual
reports to the public with information on QOFs. Section 70421(e)(2) of
the OBBBA directs the Secretary to make the report publicly available
as soon as practical after the date of enactment of the OBBBA, and then
annually thereafter. Under section 70421(e)(3) of the OBBBA, the report
must include, to the extent available, the following information: (i)
the total amount of money invested in opportunity zones and QOFs; (ii)
the percentage of eligible census tracts receiving opportunity zone
investment (and how much has been invested in each one); (iii) the
approximate number of employees in opportunity zone-financed businesses
for each census tract; (iv) the number of residential units resulting
from QOF projects; (v) information on investment sectors using North
American Industry Classification System (NAICS) codes; and (vi)
breakdowns of real estate versus business equity investments.
Section 70421(e)(4)(A) of the OBBBA also requires the Secretary to
include in the annual reports beginning in 2031 (the sixth year
following enactment of the OBBBA) information on the impacts and
outcomes resulting from designating a census tract as an opportunity
zone, as measured by economic indicators, such as job creation, poverty
reduction, new business starts, and other metrics. Additionally,
section 70421(e)(4)(B) of the OBBBA requires the Secretary to include
in the annual reports provided in 2031 and 2036 certain comparative
data for QOZs. Section 70421(e)(4)(B)(i)(I) of the OBBBA requires these
reports provided in 2031 and 2036 to include longitudinal comparisons
(based on aggregate
[[Page 57973]]
information) of specific factors for population census tracts
designated as a QOZ during the 5-year period ending on the date of the
enactment of the OBBBA and the most recent 5-year period for which data
is available. These specific factors in section 70421(e)(4)(B)(iii) of
the OBBBA include: (i) the unemployment rate; (ii) the number of
persons working in the population census tract, including the
percentage of such persons who were not residents in the population
census tract in the preceding year; (iii) individual, family, and
household poverty rates; (iv) median family income of residents of the
population census tract; (v) demographic information on residents of
the population census tract, including age, income, education, race,
and employment; (vi) the average percentage of income of residents of
the population census tract spent on rent annually; (vii) the number of
residences in the population census tract; (viii) the rate of home
ownership in the population census tract; (ix) the average value of
residential property in the population census tract; (x) the number of
affordable housing units in the population census tract; (xi) the
number of new business starts in the population census tract; and (xii)
the distribution of employees in the population census tract by NAICS
code. In addition, section 70421(e)(4)(B)(i)(II) of the OBBBA requires
the 2031 and 2036 reports to provide, for the most recent 5-year period
for which data is available, a cross-sectional comparison of these
specific factors, comparing population census tracts designated as a
QOZ with similar population census tracts that were not designated as a
QOZ. For purposes of making these comparisons, section
70421(e)(4)(B)(ii) of the OBBBA permits the Secretary to combine
population census tracts into such groups as the Secretary determines
appropriate.
To ensure that taxpayer return information is protected in making
any of the reports required by section 70421(e) of the OBBBA, section
70421(e)(5) of the OBBBA requires the Secretary to establish
appropriate procedures to ensure that any amounts reported do not
disclose taxpayer return information that can be associated with any
particular taxpayer or competitive or proprietary information. Section
70421(e)(5) also permits the Secretary to combine information required
with respect to individual population census tracts into larger
geographic areas if necessary to protect taxpayer return information.
Finally, section 70421(e)(7) of the OBBBA requires the Secretary to
prepare similar reports with respect to rural QOZs.
Explanation of Provisions
I. Proposed Sec. 1.1400Z2(d)-1
A. QOF Self-Certification and Annual Reporting Procedures
1. Overview
Section 1.1400Z2(d)-1(a)(2)(i) provides that an entity's self-
certification as a QOF must be timely filed and effected annually in
such form and manner as may be prescribed in forms and instructions, or
in publications or guidance published in the IRB. Form 8996 provides
instructions for entities to self-certify as a QOF.
The Treasury Department and the IRS have received several questions
regarding the meaning and scope of Sec. 1.1400Z2(d)-1(a)(2)(i), as
well as Form 8996 and its instructions. For example, stakeholders have
questioned whether an entity's self-certification as a QOF must be
renewed annually through the filing of Form 8996, which would then
create an annual option for voluntary decertification. Others have
questioned whether failure to file Form 8996 would give rise to
penalties. Lastly, stakeholders have questioned whether a failure to
file Form 8996 could, or should, result in the decertification of a
QOF.
In response, the Treasury Department and the IRS have proposed
revisions to the QOF self-certification and annual reporting procedures
(including as imposed by section 6039K) that are intended to clarify
these procedures and facilitate taxpayer compliance with the QOF self-
certification and annual reporting procedures. Furthermore, the
proposed regulations would further enhance the ability of the IRS to
administer and enforce the specified opportunity zone tax benefits
provided by section 1400Z-2. The QOF self-certification and annual
reporting procedures serve as the foundation for the voluntary
decertification procedures proposed by these proposed regulations,
which underscores the importance for clarity and certainty.
The Treasury Department and the IRS encourage comments on these
proposed rules, with particular emphasis on recommendations to further
achieve those intended objectives.
2. Provisions Clarifying Beginning Date of Certification
The QOF self-certification and annual reporting requirements
require clear rules on when self-certification becomes effective and
when an entity self-certifying as a QOF must provide required
information to the IRS. Accordingly, the proposed regulations would
revise Sec. 1.1400Z2(d)-1(a)(2)(i) to clarify the beginning of an
entity's self-certification as a QOF. Proposed Sec. 1.1400Z2(d)-
1(a)(2)(i) would clarify that an entity that satisfies the initial
requirements to self-certify as a QOF would be treated as a QOF from
the date the self-certification is effective (self-certification date).
3. Clarification of First Taxable Year Requirements and Subsequent
Annual Requirements
a. First Taxable Year Requirements
Proposed Sec. 1.1400Z2(d)-1(a)(2)(ii)(A) would provide that self-
certification of an eligible entity as a QOF would not be valid unless
that self-certification is timely filed and effected in the entity's
first taxable year by filing with the IRS a Form 8996 (or any successor
form) by the due date for the eligible entity's original Federal tax
return (including extensions) and in accordance with instructions to
that form. In the view of the Treasury Department and the IRS, Form
8996 (or any successor form) would provide the most responsive and
efficient form of guidance to address specific self-certification
procedures. Comments are requested on the procedures set forth herein.
The proposed regulations would retain the existing rules in the
section 1400Z-2 regulations for determining the first taxable year and
month of the certification (see proposed Sec. 1.1400Z2(d)-
1(a)(2)(ii)(B)) and for applying the section 1400Z-2(f) penalty for
that first taxable year of certification (see proposed Sec.
1.1400Z2(d)-1(a)(2)(ii)(C)).
Additionally, proposed Sec. 1.1400Z2(d)-1(a)(2)(ii)(D) would
provide that the self-certification must include an affirmative
statement that the entity is organized for the purpose of investing in
QOZ property as required by section 1400Z-2(d)(1).
b. Annual Requirements
With regard to an entity that has validly self-certified as a QOF,
the proposed regulations would set forth annual reporting requirements
that the entity would be required to satisfy for the second and each
subsequent taxable year of the QOF. Proposed Sec. 1.1400Z2(d)-
1(a)(2)(iii) would require an entity certified as a QOF, for the second
and each subsequent taxable year of the QOF to file an annual
information return on Form 8996 (or any successor form) consistent with
the instructions provided for that IRS form
[[Page 57974]]
and consistent with the annual reporting requirements under section
6039K. These annual information returns for taxable years after the
initial self-certification taxable year would not require the QOF to
provide an annual self-certification.
B. Revocation of an Election To Self-Certify
The Treasury Department and the IRS have received requests from
stakeholders for a revocation process for inadvertent elections to
self-certify as a QOF. These comments have stated that certain
entities, such as a QOZB, may have unintentionally self-certified as
QOFs by mistakenly filing Form 8996 with the IRS. These comments also
have indicated that owners of entities inadvertently self-certifying as
QOFs have not held a qualifying investment in the entity. Therefore,
according to the comments, no owner of such entity would have derived
any specified opportunity zone tax benefit at any time since the
entity's inadvertent self-certification as a QOF.
Based on these comments from stakeholders, the Treasury Department
and the IRS have proposed a revocation process for inadvertent QOF
elections. In addition to the concern expressed by stakeholders,
permitting the revocation of an unintentional QOF self-certification
for entities that have no qualifying investments would help facilitate
effective tax administration and enforcement of the opportunity zone
tax incentives. Permitting these entities to revoke their self-
certifications would remove them from audit consideration due to their
noncompliance with the statutory and regulatory requirements under
section 1400Z-2(d)(2), while permitting the IRS to consider whether the
entities met the other requirements of section 1400Z-2(d)(3), if
applicable. In addition, a revocation process for these inadvertent QOF
elections would eliminate unnecessary compliance obligations for
investors in these entities who never had any intention to achieve a
specified opportunity zone tax benefit. However, to assist in
enforcement and compliance, as well as to provide certainty for
investors who make a qualifying investment in QOFs, the proposed
regulations would provide that the election to self-certify as a QOF is
not revocable in any situation other than the specific situation
outlined in proposed Sec. 1.1400Z2(d)-1(a)(2)(iv). For entities that
do not qualify for a revocation of their initial self-certification,
the proposed voluntary decertification procedures described in part
I.C. of this Explanation of Provisions would provide a procedure to
terminate QOF certification.
Consistent with the foregoing, the proposed regulations would
provide that an entity inadvertently self-certified as a QOF may revoke
that election only if the entity satisfies the eligibility requirement
set forth in proposed Sec. 1.1400Z2(d)-1(a)(2)(iv)(B) and files the
revocation in accordance with the procedures set forth in proposed
Sec. 1.1400Z2(d)-1(a)(2)(iv)(C). Proposed Sec. 1.1400Z2(d)-
1(a)(2)(iv)(B) would permit an entity that had inadvertently self-
certified as a QOF to revoke its election to self-certify as a QOF only
if no qualifying investment in the QOF was made. In other words, an
entity is only eligible to revoke its election to self-certify if no
qualifying investment by an investor was made between the self-
certification date throughout the entire period in which the entity was
certified. Proposed Sec. 1.1400Z2(d)-1(a)(2)(iv)(C) would provide that
an inadvertent election to self-certify as a QOF may be revoked only
with the consent of the Commissioner in accordance with forms and
instructions, or in publications or guidance published in the IRB.
Finally, proposed Sec. 1.1400Z2(d)-1(a)(2)(iv)(D) would provide that
an entity that has revoked its inadvertent election to self-certify may
not again self-certify as a QOF at any future date, and the TIN
assigned to that entity may not be used by another entity to self-
certify as a QOF in the future. The Treasury Department and the IRS
regard these proposed rules as necessary for the administration of
section 1400Z-2 and to prevent abuse of section 1400Z-2.
C. Voluntary Decertification
1. Overview
Proposed Sec. 1.1400Z2(d)-1(a)(3) would provide the exclusive
procedures by which an entity that self-certified as a QOF may
voluntarily decertify as a QOF. In addition, the proposed regulations
would set forth the Federal income tax consequences resulting from
voluntary decertification with regard to each person that held a
qualifying investment in the QOF as of the last day the entity was
certified as a QOF (voluntary decertification date). To facilitate
reinvestment in other QOFs by persons who held investments in the QOF
on the QOF's voluntary decertification date, the proposed regulations
also would require the entity to notify all investors who hold an
investment in the QOF of its decertification as a QOF no later than 15
days after the QOF's voluntary decertification date (15-day
notification). This proposed notification is separate from the
notification required under section 6039K(c) discussed in part II.C. of
this Explanation of Provisions, that is required to be provided on or
before March 1 of the calendar year following the calendar year of the
voluntary decertification date. Lastly, the proposed regulations would
provide rules to clarify the effective date of the voluntary
decertification of the entity (that is, the voluntary decertification
date).
2. Contemporaneous Written Documentation
Proposed Sec. 1.1400Z2(d)-1(a)(3)(i) would require that an entity
certified as a QOF that wants to voluntarily decertify as a QOF may do
so only if the certified entity maintains contemporaneous written
documentation of the intent to decertify in accordance with proposed
Sec. 1.1400Z2(d)-1(a)(3)(iii). Such contemporaneous written
documentation must memorialize the entity's intent to terminate its
certification and identify the last month for which the entity is
certified as a QOF. Proposed Sec. 1.1400Z2(d)-1(a)(3)(iii) would
clarify the contemporaneous written documentation requirement in
proposed Sec. 1.1400Z2(d)-1(a)(3)(i) and would provide an example of
contemporaneous written documentation that would satisfy this
requirement. Proposed Sec. 1.1400Z2(d)-1(a)(3)(iii)(A) would define
``contemporaneous written documentation'' to mean written documentation
that is created at the same time the QOF makes the determination that
it wishes to voluntarily decertify as a QOF. Proposed Sec.
1.1400Z2(d)-1(a)(3)(iii)(B) would provide that such documentation would
include, but is not limited to, contemporaneous meeting minutes
demonstrating the wish to decertify. The Treasury Department and the
IRS view the requirement to maintain contemporaneous written
documentation as necessary because it demonstrates the entity's intent
to self-decertify as of a certain date and that the entity is not
acting with inappropriate hindsight.
Under proposed Sec. 1.1400Z2(d)-1(a)(3)(v)(A), a failure to
fulfill this contemporaneous written documentation requirement would
invalidate the entity's voluntary decertification and would result in
the continued certification of the entity as a QOF for the period
beginning on the date the entity self-certified as a QOF
[[Page 57975]]
until the occurrence of an event that results in the revocation or
decertification of the entity as a QOF. Proposed Sec. 1.1400Z2(d)-
1(a)(3)(v)(B) would also clarify that such entity would continue to be
subject to the requirements of section 1400Z-2 and the section 1400Z-2
regulations (including the statutory penalty under section 1400Z-2(f)
for failure to maintain the 90-percent investment standard) until the
entity decertifies or revokes its election.
To provide flexibility and facilitate compliance with the proposed
voluntary decertification procedures, proposed Sec. 1.1400Z2(d)-
1(a)(3)(vi)(A) would provide that the voluntary decertification is
effective on the last day of the month that the entity identifies in
its contemporaneous written documentation as the last month for which
the entity is certified as a QOF. For example, an entity that indicates
in its contemporaneous written documentation that it voluntarily
decertifies in July would have its last day of QOF certification as
July 31st under this proposed rule and would not be certified as a QOF
starting on August 1st.
3. Required Form and Manner
Under the proposed regulations, a QOF that voluntarily decertifies
would be required to report to the IRS in the form and manner set forth
in proposed Sec. 1.1400Z2(d)-1(a)(3)(ii). Those proposed rules would
provide that an entity certified as a QOF that voluntarily decertifies
must file a Form 8996 (or any successor form) (final information
return) in the manner set forth in the instructions to Form 8996 by the
due date for the entity's original Federal tax return (including
extensions) for the taxable year including the last month in which the
entity seeks to be certified as a QOF, referred to as the entity's
``voluntary decertification year.'' Under proposed Sec. 1.1400Z2(d)-
1(a)(3)(ii), the entity's final information return would be required to
indicate that it is voluntarily decertifying and the last month for
which the entity is intended to be certified as a QOF. See also
proposed Sec. 1.6039K-1(c). See parts III.B.3. and B.4. of this
Explanation of Provisions for an explanation of the investor
information that would be required to be reported to the IRS if a QOF
voluntarily decertifies and the requirement that the information return
containing this information must be attached to the QOF's annual tax
return.
4. Requirement of Entity To Notify Investors Within 15 Days of
Decertification
Proposed Sec. 1.1400Z2(d)-1(a)(3)(iv) would require that the QOF
provide the 15-day notification of the voluntary decertification to its
investors with both qualifying and non-qualifying investments. This 15-
day notification would be separate from the later notification proposed
in the proposed regulations under section 6039K that would require the
entity to provide a timely notification of the voluntary
decertification by the entity (formerly certified as a QOF) to its
investors on or before March 1 of the calendar year following the
calendar year during which the voluntary decertification occurred. The
Treasury Department and the IRS view these two timely notifications as
necessary to facilitate the ability of those investors with investments
resulting in eligible gain to reinvest their gains under section 1400Z-
2(a), if applicable, and to properly and timely report any Federal
income tax consequences arising as a result of the decertification. See
part II.C. of this Explanation of Provisions for an explanation of the
notification that would be required under section 6039K(c).
Proposed Sec. 1.1400Z2(d)-1(a)(3)(iv)(B) would require the entity
formerly certified as a QOF to provide the 15-day notification of the
voluntary decertification to each investor that holds a qualifying or
non-qualifying investment in the QOF by the earlier of 15 days after
the QOF's voluntary decertification date or by the date contracted upon
by the parties for the receipt of such written notification by the
investors. Proposed Sec. 1.1400Z2(d)-1(a)(3)(iv)(C) would require the
notification to be made in writing and furnished to the investors using
any reasonable manner. The Treasury Department and the IRS anticipate
that it may be difficult for entities to know which, if any, of their
investors has an investment that is a qualifying investment in the
entity, and so the proposed regulations' requirement that the entity
send a voluntary decertification notice to each of its investors is
intended to facilitate compliance and tax administration. Additionally,
because the modifications by the OBBBA to section 1400Z-2 provide that
the last day of deferral is dependent upon the date the investor
invests in the QOF, rather than December 31, 2026, as the TCJA
required, the Treasury Department and the IRS view it as necessary that
this notice be sent to all investors because an investor may be able to
reinvest the gain in another QOF to receive the benefits of section
1400Z-2. This requirement would accord with the reporting requirements
in section 6039K(b)(8) and proposed Sec. 1.6039K-1(f) with respect to
each reportable investor on the final Form 8996 in the event of a
voluntary decertification.
The proposed regulations set forth two items that would be required
to be contained in the 15-day notification. First, pursuant to proposed
Sec. 1.1400Z2(d)-1(a)(3)(iv)(A)(1), the notification would be required
to contain a statement that informs each investor that they may no
longer make an election under section 1400Z-2(c) with regard to the
investor's qualifying investment in the QOF because the certification
of the entity as a QOF has terminated. Second, pursuant to proposed
Sec. 1.1400Z2(d)-1(a)(3)(iv)(A)(2), the notification would be required
to contain information sufficient for the investors to report an
inclusion event on the QOF's voluntary decertification date, if the
effective date of voluntary decertification occurs prior to the date
specified in section 1400Z-2(b)(1)(B). Section 1.1400Z2(b)-1(c)(15)
provides (and proposed Sec. 1.1400Z2(b)-1(c)(15) would provide) that
the decertification of a QOF is an inclusion event. The Treasury
Department and the IRS view the 15-day notification that informs the
investors that the ability to make an election under section 1400Z-2(c)
is no longer available and that the investors may have an inclusion
event as critical for tax compliance purposes and to ensure that
investors are fully aware of the decertification, which may carry
Federal income tax consequences. In addition, notification by the
entity to its investors of the voluntary decertification within 15 days
of the QOF's effective date of voluntary decertification would more
readily permit these investors to reinvest in another QOF before the
expiration of the 180-day period, as provided in section 1400Z-2(a)(1).
5. Federal Income Tax Consequences to Qualifying Investors
A QOF's decertification is binding on the investors in the QOF. The
decertification may have Federal income tax consequences to investors
in that QOF, especially for an investor that is a QOF owner. Under
Sec. 1.1400Z2(a)-1(b)(23), a ``QOF owner'' means a QOF shareholder or
a QOF partner. Sections 1.1400Z2(a)-1(b)(24) and (27) provide that a
QOF partner or QOF shareholder are persons that directly or indirectly
own a qualifying investment in a QOF
[[Page 57976]]
that is organized as a corporation or as a partnership, respectively.
Proposed Sec. 1.1400Z2(d)-1(a)(3)(vi) would outline the
consequences of decertification for the investors in the entity that
was formerly certified as a QOF. First, proposed Sec. 1.1400Z2(d)-
1(a)(3)(vi)(B)(1) would provide that voluntary decertification is an
inclusion event with respect to the entire qualifying investment of a
QOF owner. This result is already provided in Sec. 1.1400Z2(b)-
1(c)(15), but proposed Sec. 1.1400Z2(b)-1(c)(15) would include updated
language to mirror the language of Sec. 1.1400Z2(d)-1(a)(3), which
uses the phrase ``voluntary decertification'' instead of ``self-
decertification.'' The date of the inclusion event would be the QOF's
voluntary decertification date, as provided in proposed Sec.
1.1400Z2(d)-1(a)(3)(vi)(A). Additionally, proposed Sec. 1.1400Z2(d)-
1(a)(3)(vi)(B)(2) would provide that gain that is otherwise required to
be included in gross income by a final investor that is a QOF owner is
eligible for continued deferral if the gain is reinvested in a QOF with
a TIN that is different from the decertified QOF and all requirements
to elect to defer eligible gain under section 1400Z-2(a)(1)(A) are
satisfied.
Second, proposed Sec. 1.1400Z2(d)-1(a)(3)(vi)(C) would provide
that each QOF owner of a QOF that voluntarily decertifies is not
eligible to make an election under section 1400Z-2(c) with regard to
the sale or exchange of that investment on any date on or after the
QOF's voluntary decertification date. Such disallowance would also
apply to QOFs that voluntarily decertify after the inclusion date
provided in section 1400Z-2(b)(1)(B) but before the QOF owner makes an
election under section 1400Z-2(c).
II. Proposed Sec. 1.6039K-1
A. Overview
As discussed in part II.B. of the Background, section 6039K(a)
requires every QOF to file an annual return (at such time and in such
manner as the Secretary may prescribe) containing certain information.
These regulations propose the time and manner by which QOFs would have
to file these annual information returns, as well as the information
that would be required to be reported on these returns.
For consistency with the regulations in Sec. 1.1400Z2(d)-1(a),
including proposed Sec. 1.1400Z2(d)-1(a)(2)(i), which treats as a QOF
any entity that makes an election to self-certify as a QOF, proposed
Sec. 1.6039K-1(a)(5) would define a ``QOF'' for this purpose with
respect to an entity's taxable year or portion thereof as any entity
that files a self-certification under Sec. 1.1400Z2(d)-1(a)(2)(i) for
that taxable year or a portion thereof. To ensure that this definition
will treat an entity as a QOF for its first taxable year (or the
portion of that taxable year that begins on the effective date for the
election identified in the entity's self-certification), the definition
also provides that an entity that files a self-certification under
Sec. 1.1400Z2(d)-1(a)(2) for its taxable year will be treated as
certified as a QOF for the portion of the taxable year beginning on the
effective date identified in that self-certification. Proposed Sec.
1.6039K-1(b) would set forth the requirement that every QOF must file
an annual return of information on Form 8996 (or any successor form) to
report the information set forth in proposed Sec. 1.6039K-1(c) through
(f). See parts III.B.1. through 3. of this Explanation of Provisions
for an explanation of the information that would be required to be
reported on this annual information return. Proposed Sec. 1.6039K-
1(e), however, is reserved for future use for when the specific
information reporting rules for qualified rural opportunity funds and
rural QOZBs are promulgated. Proposed Sec. 1.6039K-1(g) would set
forth the due date for the annual information return and the manner by
which a QOF must file it. See part II.B.4. of this Explanation of
Provisions for an explanation of these proposed rules. Finally,
proposed Sec. 1.6039K-1(j)(1) would cross reference to the penalty for
QOFs that fail to comply with these information reporting requirements
as well as to the penalty waiver rules for failures due to reasonable
cause and not due to willful neglect.
As discussed in part II.B. of the Background, section 6039K(c)
requires every QOF to furnish an investor statement to each person who
disposed of an investment in the QOF (reportable investor) during the
year (at such time and in such manner as the Secretary may prescribe).
These proposed regulations also propose the time and manner that QOFs
must furnish these investor statements as well as the information
required to be reported on these statements. Proposed Sec. 1.6039K-
1(h) would set forth the requirement that every QOF must furnish to
each reportable investor an investor statement for each calendar year
containing the information set forth in proposed Sec. 1.6039K-
1(h)(1)(i) though (iv). See part II.C.1 of this Explanation of
Provisions for an explanation of the information that would be required
to be reported on the investor statements, as well as the rationale for
requiring the information to be furnished on a calendar year basis.
Proposed Sec. 1.6039K-1(h)(2) would set forth the due date for the
investor statements. In addition, proposed Sec. 1.6039K-1(h)(3) would
set forth the manner by which these statements must be furnished. See
part II.C.2 of this Explanation of Provisions. Proposed Sec. 1.6039K-
1(j)(2) would cross reference to the penalty for failure to furnish
timely a correct payee statement as well as to the penalty waiver rules
for failures due to reasonable cause and not due to willful neglect.
Finally, proposed Sec. 1.6039K-1(k) would apply the proposed rules
under Sec. 1.6039K-1 regarding information returns and investor
statements to information returns and investor statements originally
due (without extensions) on or after the date of publication of a
Treasury decision adopting these rules as final regulations in the
Federal Register.
B. Information Returns Required To Be Filed Under Section 6039K(a)
As discussed in part II.A. of this Explanation of Provisions,
proposed Sec. 1.6039K-1(b) would set forth the requirement that every
QOF file an annual return of information on Form 8996 (or any successor
form) to report the information set forth in proposed Sec. 1.6039K-
1(c) through (f). Proposed Sec. 1.6039K-1(c) would set forth the
information to be included on this return with respect to the QOF
itself, proposed Sec. 1.6039K-1(d) would set forth the information to
be included on this return with respect to each applicable QOZB in
which the QOF owns an interest, and proposed Sec. 1.6039K-1(f) would
set forth the information to be included on this return with respect to
each reportable investor that disposed of an investment in the QOF
during the calendar year. See parts III.B.2. and III.B.3.a. in this
Explanation of Provisions for explanations of the terms applicable QOZB
and reportable investor, respectively, as used for these purposes.
1. Proposed Sec. 1.6039K-1(c): Information About the QOF
Proposed Sec. 1.6039K-1(c) lists the information that QOFs would
be required to report with respect to the QOF itself. This information
generally falls within three categories.
a. Information Currently Required
First, much of the information that would be required by proposed
Sec. 1.6039K-1(c) is information that QOFs are currently required to
report on Parts
[[Page 57977]]
I through V of the December 2021 revision of Form 8996 (current Form
8996). For example, as currently required to be reported on Part I of
the current Form 8996, proposed Sec. 1.6039K-1(c)(2) and (3) would
require the QOF to indicate whether it is organized as a corporation or
a partnership and whether it is organized for the purpose of investing
in QOZ business property (other than another QOF). In addition, as
currently required to be reported on Parts II through IV of the current
Form 8996, proposed Sec. 1.6039K-1(c)(4) and (5) would require the QOF
to calculate the 90-percent investment standard and, if applicable, the
penalty under section 1400Z-2(f)(1) if the QOF fails to meet that
investment standard. Proposed Sec. 1.6039K-1(a)(1) would define the
term ``90-percent investment standard'' as having the same meaning as
in section 1400Z-2(d)(1) and Sec. 1.1400Z2(a)-1(b)(4). Finally, as
currently required to be reported on Part V of the current Form 8996,
proposed Sec. 1.6039K-1(c)(7) would require the QOF to report each
population census tract number in which QOZ business property is
directly owned or leased by the QOF, and, for each of these tracts,
proposed Sec. 1.6039K-1(c)(7)(iii) would require the QOF to report the
total value of QOZ business property directly owned by the QOF and the
total value of QOZ business property directly leased by the QOF for the
QOF testing dates. The information that would be required to be
reported by the QOFs in this section would ensure compliance with
section 1400Z-2(d), and in particular, with the 90-percent investment
standard.
b. Information for Public Reporting
Second, some of the information that would be required by proposed
Sec. 1.6039K-1(c) is information that would enable the Secretary to
comply with the public reporting requirements under section 70421(e)(3)
of the OBBBA. For example, under proposed Sec. 1.6039K-1(c)(6) and
(c)(7)(vi), QOFs would be required to report the approximate average
monthly number of total full-time equivalent employees of the QOF
working in all locations as well as the approximate average monthly
number of full-time equivalent employees of the QOF that work within
the population census tract for the calendar year ending with or within
the QOF's taxable year. Section 6039K requires this information be
reported ``within numerical ranges identified by the Secretary.'' The
Treasury Department and the IRS anticipate that updated instructions to
Form 8996 will provide these numerical ranges.
The proposed regulations would base the definition of full-time
equivalent employees on the definition of that term section 6039K.
Section 6039K(d)(2) defines full-time equivalent employees with respect
to any month as the sum of: (A) the number full-time employees as
defined in section 4980H(c)(4) for the month; plus (B) the number of
other employees determined (under rules similar to the rules of section
4980H(c)(2)(E)) by dividing the aggregate number of hours of service of
employees who are not full-time employees for the month by 120. A full-
time employee is defined in section 4980H(c)(4)(A), with respect to any
month, as an employee who is employed on average at least 30 hours of
service per week. Section 4980H(c)(4)(B) authorizes the Secretary, in
consultation with the Secretary of Labor, to prescribe regulations
addressing how to calculate an employee's hours of service for this
purpose, including for employees who are not compensated on an hourly
basis.
Consistent with the rules and definitions set forth in section
4980H(c), as required by section 6039K(d)(2), proposed Sec. 1.6039K-
1(a)(4)(i) would define ``full-time equivalent employees'' of the QOF
with respect to a calendar month as the sum of the number of employees
who are employed on average at least 30 hours per week (full-time
employees) plus the number of other employees who are not full-time
employees. The number of employees who are not full-time employees
would be determined for this purpose by dividing the aggregated number
of hours of service of all employees who are not classified as full-
time by 120.
The regulations defining full-time employees under section
4980H(c)(4) provide a rule for converting an employee's monthly service
hours into weekly service hours for purposes of determining if the
employee is a full-time employee. Specifically, under Sec. 54.4980H-
1(a)(21)(ii) of the Pension Excise Tax Regulations (26 CFR part 54),
130 hours of service in a calendar month is treated as the monthly
equivalent of at least 30 hours of service per week. Section 54.4980H-
1(a)(21)(iii) also provides an optional rule that allows employers to
treat as a full-time employee any employee who performs 120 service
hours during months with four weekly periods and any employee who
performs 150 service hours during months with five weekly periods.
For these proposed rules on section 6039K reporting requirements,
the Treasury Department and the IRS considered whether and how the
rules from the section 4980H regulations should apply to the
calculation of full-time employees. In determining the number of full-
time employees under section 6039K(d)(2)(A), the Treasury Department
and the IRS considered whether the QOFs should use the monthly
equivalent rule that treats 130 hours of service as the monthly
equivalent of at least 30 hours of service per week consistent with
Sec. 54.4980H-1(a)(21)(ii) or whether the QOFs should use a monthly
equivalent rule that is consistent with the 120-hour divisor used to
calculate the number of other employees under section 6039K(d)(2)(B).
Because using the more restrictive (130 hours of service) monthly
equivalent rule merely converts employees that would be full-time
employees under section 6039K(d)(2)(A) into other employees under
section 6039K(d)(2)(B), proposed Sec. 1.6039K-1(a)(4)(ii)(A) would use
a monthly equivalent rule that is consistent with the 120-hour divisor
used to calculate the number of other employees under section
6039K(d)(2)(B). Using this less restrictive (120 hours of service)
monthly equivalent rule should also be easier for QOFs to apply because
they are already required to use the 120 hours as a divisor in
calculating other employees under section 6039K(d)(2)(B).
The Treasury Department and the IRS also considered whether the
QOFs should be permitted to use the optional monthly equivalent rule
under Sec. 54.4980H-1(a)(21)(iii) that allows employers to treat as a
full-time employee any employee who performs 120 service hours during
months with four weekly periods and any employee who performs 150
service hours during months with five weekly periods. For the same
reasons that the Treasury Department and the IRS chose to propose
requiring QOFs to use a monthly equivalent rule that is consistent with
the 120-hour divisor used to calculate the number of other employees
under section 6039K(d)(2)(B), the proposed regulations do not adopt
this optional weekly period rule. Accordingly, proposed Sec. 1.6039K-
1(a)(4)(ii)(A) would provide that a QOF may treat an employee who
performs at least 120 total hours of service in a calendar month as the
equivalent of an employee who performs an average of at least 30 hours
of service per week (that is, as a full-time employee) for that month.
This alternative definition would reflect the application of a 30-hour
work week to the shortest month possible and therefore would promote
consistency by
[[Page 57978]]
ensuring the same employee would not be categorized differently in
months of different lengths. No inference is intended with respect to
the definition of these terms for purposes of section 4980H. Comments
are specifically requested regarding this more simplified definition of
full-time employee for purposes of this reporting requirement.
Finally, the regulations defining full-time equivalent employees
under section 4980H(c)(2)(E) permit employers to round to the nearest
one hundredth when the calculation under that section results in a
fraction. To simplify the reporting under section 6039K in the event
that the calculation in proposed Sec. 1.6039K-1(a)(4)(i) results in a
fraction, proposed Sec. 1.6039K-1(a)(4)(ii)(B) would require QOFs to
round the total calculated number to the nearest whole employee. This
rule is also proposed because whole numbers are more easily understood
for purposes of public reporting and will be sufficient to track the
employment impact resulting from QOFs and QOZBs as long as this
rounding is applied consistently. Comments are requested addressing
whether these changes would help make reporting full-time equivalent
employees less burdensome. Comments are also requested addressing
whether any other changes to the definition would make reporting less
burdensome without losing data on the employment impact of the QOZ
regime.
Proposed Sec. 1.6039K-1(c)(7)(ii), (iv), and (v) would also
require reporting of information that would enable the Secretary to
comply with the public reporting requirements under the OBBBA. Proposed
Sec. 1.6039K-1(c)(7)(ii) would require the QOF to report the NAICS
code that applies to the QOF's business activity within each census
tract. In addition, proposed Sec. 1.6039K-1(c)(7)(iv) and (v) would
require the QOF to report, for each census tract, the total value of
QOZ business property directly owned or leased by the QOF that is real
property and the total number of residential units for the calendar
year ending with or within the QOF's taxable year.
Proposed Sec. 1.6039K-1(a)(11) would define ``real property'' for
this purpose as land and any improvements thereto, such as buildings or
other inherently permanent structures (including items that are
structural components of the buildings or structures) that are not
tangible personal property as defined in Sec. 1.48-1(c). See proposed
Sec. 1.6039K-1(a)(14). In addition, proposed Sec. 1.6039K-1(a)(13)
would define ``residential units'' for this purpose as any building or
structure for use as a dwelling unit or as a residence (including a
house, apartment, condominium, mobile home or similar property) and for
which a certificate of occupancy, or similar document indicating that
the unit is available for use, has been received. A dwelling unit has
basic living accommodations, such as a sleeping space, a toilet, and
cooking facilities. A residential unit does not include property used
as a hotel, motel, inn, or similar establishment if it is regularly
available for occupancy by paying customers on a transient basis.
Although the standards applicable to certificates of occupancy may vary
by jurisdiction, these certificates likely provide the best measure of
the impact that the opportunity zone rules have on the housing market.
Proposed Sec. 1.6039K-1(c)(7)(iv) and (v) would require certain
information collected for the public report to be reported as of
December 31 of the calendar year ending with or within the QOF's
taxable year for several reasons. First, reporting the information as
of December 31 would facilitate consistent reporting from the greatest
number of QOFs because the overwhelming majority of all QOFs file their
Federal tax returns using a calendar year (calendar year QOFs).
Additionally, from a standpoint of data analysis and investment review,
calendar year reporting is beneficial to stakeholders and Congress as
it better reflects investment cycles and development plans. Finally,
requiring applicable QOZBs to furnish this information to QOFs as of
the end of a QOF's taxable year could impose unnecessary burdens on
applicable QOZBs with multiple QOF investors to keep track of their QOF
investors' taxable years and to collect this information as of multiple
dates. Comments are requested regarding whether reporting this
information on a calendar year basis would create any undue burdens for
QOFs.
c. Information Regarding Compliance
Third, the remainder of the information that would be required by
proposed Sec. 1.6039K-1(c) is information regarding the QOFs
compliance with the section 1400Z-2 statutory and regulatory
requirements and with the information furnishing requirements under
section 6039K(c). To enable the IRS to enforce the section 1400Z-2
requirements, proposed Sec. 1.6039K-1(c)(7)(i) would require the QOF
to report a physical address for the QOF's business activity within
each census tract in which the business operates. To enable the IRS to
know which decennial designation period is applicable to the QOF,
proposed Sec. 1.6039K-1(c)(7)(vii) would require the QOF to report the
first date that any such QOZ business property was acquired by purchase
or leased by the QOF. Proposed Sec. 1.6039K-1(c)(7)(viii) would
require the QOF to report whether there is any QOZ business property
that the QOF is substantially improving and the date on which that
improvement began. This information would help the IRS to determine
which QOFs are substantially improving QOZ business property and
whether the improvements are completed within the time required by
section 1400Z-2(d)(2)(D)(ii).
Proposed Sec. 1.6039K-1(c)(8) would require the QOF to report
whether it was using the applicable financial statement valuation
method or the alternative valuation method, as defined in Sec.
1.1400Z2(d)-1(b)(3) and (4), respectively, in providing the information
that would be required under proposed Sec. 1.6039K-1(c)(1) through
(10). This information is already requested on Parts VI and VII of the
current Form 8996 with respect to the QOZBs and would provide
information to the IRS that is important for tax administration
purposes. Additionally, for a QOF that is voluntarily decertifying in
the taxable year to which the return relates, as would be permitted by
proposed Sec. 1.1400Z2(d)-1(a)(3), proposed Sec. 1.6039K-1(c)(9)
would require the QOF to report that it is voluntarily decertifying and
would require the QOF to provide the last month for which it was
certified as a QOF. Finally, proposed Sec. 1.6039K-1(c)(10) would
require the QOF to report such other information as required by the
form or instructions.
2. Proposed Sec. 1.6039K-1(d): Information About Applicable QOZBs
In addition to information about the QOF itself, proposed Sec.
1.6039K-1(d) would require the QOF to report certain information with
respect to each applicable QOZB in which the QOF has an ownership
interest. Proposed Sec. 1.6039K-1(a)(2) would define ``applicable
QOZB'' for this purpose as any entity that meets, intends to meet, or
was organized for the purposes of meeting, the requirements to be a
QOZB, as defined in section 1400Z-2(d)(3)(A) and Sec. 1.1400Z2(d)-
1(d)(1), which is either a corporation in which a QOF holds QOZ stock
or a partnership in which a QOF holds a QOZ partnership interest. See
part IV.A. of this Explanation of Provisions for an explanation of the
rationale for using a narrower definition of the applicable QOZB than
the statutory definition of
[[Page 57979]]
applicable QOZB under section 6039L(b).
Akin to the reporting under proposed Sec. 1.6039K-1(c), the
information that would be reported with respect to each applicable QOZB
also generally falls within three categories.
a. Information Currently Required
First, some of the information that would be required by proposed
Sec. 1.6039K-1(d) is information that QOFs are currently required to
be reported on Parts VI and VII of the current Form 8996. For example,
proposed Sec. 1.6039K-1(d)(1) would require the QOF to report the TIN
of each applicable QOZB. Additionally, proposed Sec. 1.6039K-1(d)(6)
would require the QOF to report the population census tract number(s)
in which the QOZ business property directly owned or leased by the
applicable QOZB is used. In addition, proposed Sec. 1.6039K-1(d)(3)
would require the QOF to report, as of the QOF testing dates, the value
of the QOF's investment in the QOZ stock or QOZ partnership interest of
the applicable QOZB. Further, proposed Sec. 1.6039K-1(d)(6)(iii)(A)
and (B) would require the QOF to report, as of the QOF testing dates,
the value of the QOZ business property directly owned by the applicable
QOZB and the value of the QOZ business property directly leased by the
applicable QOZB. Finally, proposed Sec. 1.6039K-1(d)(7) would require
the QOF to report whether the QOZB used the applicable financial
statement valuation method or the alternative valuation method, as
defined in Sec. 1.1400Z2(d)-1(b)(3) and (4), respectively, in
providing any valuation information that would be required under
proposed Sec. 1.6039K-1(d)(1) through (8).
Proposed Sec. 1.6039K-1(a)(6) would define the ``QOF testing
dates'' as the QOF's 6-month testing date and year-end testing date
used for determining if the 90-percent investment standard has been
met. Proposed Sec. 1.6039K-1(a)(9) would define a ``QOZ partnership
interest'' as having the same meaning as in section 1400Z-2(d)(2)(C)
and Sec. 1.1400Z2(d)-1(c)(3), and proposed Sec. 1.6039K-1(a)(10)
would define ``QOZ stock'' as having the same meaning as in section
1400Z-2(d)(2)(B) and Sec. 1.1400Z2(d)-1(c)(2). See part IV.B.1 of this
Explanation of Provisions for an explanation of the testing dates that
these proposed regulations would require applicable QOZBs to use for
purposes of reporting this information to QOFs and the safe harbor
rules that detail how a QOF can use information provided by an
applicable QOZB with a different taxable year than the QOF in
calculating the 90-percent investment standard.
b. Information for Public Reporting
Second, some of the information that would be required under
proposed Sec. 1.6039K-1(d) is information that would enable the
Secretary to comply with the public reporting requirements under
sections 70421(c)(2) and (3) of the OBBBA. For example, proposed Sec.
1.6039K-1(d)(6)(ii) would require the QOF to report the NAICS code that
applies to each applicable QOZB's business activity within each census
tract. Proposed Sec. 1.6039K-1(d)(6)(iv) and (v) would require the QOF
to report for each census tract as of December 31 of the calendar year
ending with or within the applicable QOZB's taxable year, the total
value of QOZ business property directly owned or leased by the
applicable QOZB that is real property and the total number of
residential units. See part II.B.1. of this Explanation of Provisions
for the rationale behind requesting this information as of December 31
of the year for which the return is required. Comments are requested
regarding whether this uniform December 31 valuation date creates any
undue burdens for applicable QOZBs.
In addition, proposed Sec. 1.6039K-1(d)(6)(vi) would require the
QOF to report the approximate average monthly number of full-time
equivalent employees of the QOZB who work within the population census
tract during the calendar year. Finally, although not included in the
specific information required under section 6039K(b)(5) with respect to
the QOF's investments in QOZ stock or QOZ partnership interests,
proposed Sec. 1.6039K-1(d)(2) would have the QOF report the percent of
equity ownership by the QOF in the applicable QOZB (or in the case of
an applicable QOZB that is a partnership, the capital or profits
interest in the applicable QOZB owned by the QOF) as of December 31 of
the calendar year ending with or within the applicable QOZB's taxable
year dates. This information is requested pursuant to the Secretary's
authority to request additional information under section 6039K(b)(9)
to ensure that the information reported with respect to applicable
QOZBs with multiple investors is not double-counted in the public
report.
c. Information Regarding Compliance
Third, the remainder of the information that would be required
under proposed Sec. 1.6039K-1(d) relates to overall compliance with
section 1400Z-2(d). As such, this information would provide certainty
to the QOF that it may treat its stock or partnership interest in the
QOZB as QOZ property.
Proposed Sec. 1.6039K-1(d)(1) would have the QOF report the name
and address of each applicable QOZB in which the QOF owns an interest.
Proposed Sec. 1.6039K-1(d)(6)(i) would require the QOF to report a
physical address for a QOZB's business activity within each census
tract in which the business operates to ensure compliance with the
requirements of section 1400Z-2(d)(3).
To inform the IRS of which decennial designation period applies to
the applicable QOZB, proposed Sec. 1.6039K-1(d)(6)(vii) would require
the QOF to report the first date that any such QOZ business property
was acquired by purchase or leased by the applicable QOZB. Proposed
Sec. 1.6039K-1(d)(6)(viii) would require the QOF to report whether
there is any QOZ business property within each census tract that the
applicable QOZB is substantially improving and (if applicable) the date
on which that improvement began. This information would help the QOF
and the IRS to determine which applicable QOZBs are substantially
improving QOZ business property and whether these improvements are
completed within the time required by section 1400Z-2(d)(2)(D)(ii) as
well as which applicable QOZBs have property that satisfies the
original use requirement of section 1400Z-2(d)(2)(D)(i)(II).
Proposed Sec. 1.6039K-1(d)(6)(ix) would require the QOF to report
for each census tract whether the applicable QOZB is utilizing a
working capital safe harbor, as provided in Sec. 1.1400Z2(d)-
1(d)(3)(v), and (if so) the date that the working capital safe harbor
is expected to end. This information would assist the QOF in
determining whether the QOZB's tangible property, required to be
reported under section 6039K(b)(5)(E) and (F), is QOZ business property
during the safe harbor period. Such information would also assist the
IRS in enforcing the requirements of section 1400Z-2(d)(3) by ensuring
that the property being substantially improved under a working capital
safe harbor eventually becomes QOZ business property used in the QOZB's
trade or business.
In addition, proposed Sec. 1.6039K-1(d)(5) would require the QOF
to report the total value of tangible property of the applicable QOZB
(including tangible property that is both QOZ business property and not
QOZ business property) held by the applicable QOZB as of the 6-month
and year-end testing dates. This information would assist the QOF in
determining whether 70 percent
[[Page 57980]]
of the underlying value of the tangible property owned or leased by the
QOZB is QOZ business property under Sec. 1.1400Z2(a)-1(b)(2).
Proposed Sec. 1.6039K-1(d)(4) would require the QOF to indicate
whether it received an attestation from the applicable QOZB that the
applicable QOZB meets all the requirements of Sec. 1.1400Z2(d)-
1(d)(1)(i) through (iii) or (if applicable) is utilizing the cure
period, as defined in Sec. 1.1400Z2(d)-1(d)(6). Under Sec.
1.1400Z2(d)-1(d)(6)(iii), a QOZB is only permitted to avail itself of
the cure period once and may require the QOF to request an extension of
time to file a Federal tax return. A QOF may need to calculate a
penalty under section 1400Z-2(f) if the QOZB fails to correct the error
in the required time under Sec. 1.1400Z2(d)-1(d)(6). By requesting
this information from the applicable QOZB, the QOF would gain a better
understanding of its Federal income tax obligations, such as whether it
must request an extension of time to file a Federal tax return and
whether it may need to calculate a penalty under section 1400Z-2(f).
This information would also help the IRS ensure that QOFs and QOZBs are
complying with the requirements under section 1400Z-2(d) and ensure
that each QOZB is only receiving one cure period. Finally, proposed
Sec. 1.6039K-1(d)(8) would also require the QOF to report such other
information as required by the form or instructions.
3. Information About Reportable Investors Disposing of QOF Investments
a. Disposition Events and Reportable Investors
In addition to information about the QOF and the applicable QOZBs,
proposed Sec. 1.6039K-1(f) would require the QOF to report certain
information about each reportable investor that has a disposition event
during the calendar year in which the QOF's taxable year began.
Proposed Sec. 1.6039K-1(a)(3) would define a ``disposition event'' for
this purpose as any inclusion event under Sec. 1.1400Z2(b)-1(c). Under
Sec. 1.1400Z2(b)-1(c), an event generally is an inclusion event if and
to the extent that: (i) the event reduces an eligible taxpayer's direct
equity interest for Federal income tax purposes in the qualifying
investment; (ii) an eligible taxpayer receives property in the event
with respect to its qualifying investment and the event is treated as a
distribution for Federal income tax purposes, whether or not the
receipt reduces the eligible taxpayer's ownership of the QOF; (iii) an
eligible taxpayer claims a loss for worthless stock under section
165(g) of the Code, or otherwise claims a worthlessness deduction, with
respect to its qualifying investment; or (iv) a QOF in which an
eligible taxpayer holds a qualifying investment loses its status as a
QOF.
Thus, for example, a disposition event for purposes of proposed
Sec. 1.6039K-1(a)(3) would include: (i) taxable sales or exchanges of
QOF interests; (ii) the termination or liquidation of a QOF for Federal
income tax purposes (for example, the conversion of a QOF C corporation
to an entity disregarded from its owner for Federal income tax
purposes), the voluntary decertification of a QOF, or the QOF's failure
to qualify as a QOF for any other reason; (iii) certain distributions
of property by a QOF partnership, a partnership that directly or
indirectly owns a QOF, a QOF S corporation, or a QOF C corporation with
respect to a qualifying investment; (iv) stock redemptions by QOF C
corporations or QOF S corporations; (v) the receipt of boot by QOF
shareholders in certain corporate transactions involving QOF
corporations; and (vi) certain distributions of stock or securities of
a controlled corporation by a QOF corporation to a QOF shareholder with
respect to a qualifying investment in a transaction to which section
355 of the Code applies. See Sec. 1.1400Z2(b)-1(c) for a more detailed
list of inclusion events and exceptions.
Treating investors that have had an inclusion event as ``person[s]
who disposed of an investment'' in the QOF under section 6039K(b)(8) is
appropriate for several reasons. First, either the QOF no longer
qualifies as such or these investors have reduced or eliminated their
qualifying investment in the QOF (for example, through a sale or
transfer of QOF interests or the receipt of certain distributions).
Second, providing the IRS with the names and TINs of these investors
and informing these investors that they may have Federal income tax
consequences with respect to their qualifying investment in the QOF, is
important to ensure taxpayer awareness of, and compliance with, their
obligations under section 1400Z-2. The Treasury Department and the IRS
anticipate that reporting on these disposition events would improve
taxpayer compliance because QOFs would provide the information
necessary for investors to accurately prepare their Federal tax returns
and reduce the number of errors or intentional omissions or
misstatements shown on those returns.
Proposed Sec. 1.6039K-1(a)(12)(i) would define a ``reportable
investor'' as any person that held a stock or partnership interest in
the QOF for which a disposition event with respect to such stock or
partnership interest occurred during the QOF's taxable year. To ensure
that investors in publicly traded QOFs also receive this information
about disposition events, proposed Sec. 1.6039K-1(a)(12)(ii) would
include in the definition of reportable investor any broker, as defined
in Sec. 1.6045-1(a)(1), that holds a QOF interest on behalf of a
customer, as defined in Sec. 1.6045-1(a)(2), for which a disposition
event occurred. Brokers would be included in the definition of
reportable investor, however, only to the extent the QOF does not
otherwise know the identity of the person for whom the broker holds the
QOF stock or partnership interest. In cases where the QOF knows the
identity of the underlying owner of the QOF stock or partnership
interest, such as where the owner holds a significant portion of the
QOF stock or partnership interests, that underlying owner would be the
reportable investor. In contrast, in cases where the QOF does not know
the identity of the underlying owner of the QOF stock or partnership
interest, the QOF would be required to inform brokers that are the
registered holders of the QOF investment of a voluntary
decertification. To ensure that brokers holding QOF interests on behalf
of customers for which a disposition event occurred report on such
events under the section 6045 broker reporting rules, proposed Sec.
1.6045-1(d)(2)(i)(A) would expand the information that a broker would
be required to report to the IRS with respect to a sale of a QOF
investment to include whether the sale constitutes a disposition of an
ownership interest in a QOF or an inclusion event associated with a
voluntary decertification of a QOF. Finally, proposed Sec. 1.6045-
1(a)(9)(i) would expand the definition of a ``sale'' that a broker is
required to report to the IRS to include an ``inclusion event'' as
defined in Sec. 1.1400Z2(b)-1(c)(1)(iv) caused by the voluntary
decertification of a QOF as defined in Sec. 1.1400Z2(d)-1(a)(3). These
proposed changes are intended to ensure that both the IRS and investors
in publicly traded QOFs are made aware of these taxable transactions.
b. Reporting Period
As discussed in part II.B. of the Background, before the OBBBA was
enacted, Form 8996 required QOFs to report on each investor that
disposed their QOF investment during the QOF's taxable year. In
addition, each QOF was also required to file Form 1099-B (or Form 1099-
DA, if the QOF interest is a dual classification asset under Sec.
1.6045-
[[Page 57981]]
1(c)(8)) with the IRS (and furnish a written statement to the investor)
to report on each investor that disposed of their QOF investment during
the calendar year.
Section 6039K(b)(8) does not address whether the dispositions to be
reported by QOFs ``during the year'' should be based on investor
dispositions during the QOF's taxable year or should be based on
investor dispositions during the calendar year. These proposed
regulations would require QOFs to report and furnish information on
disposition events occurring during each calendar year for several
reasons. First, IRS information reporting generally is required on a
calendar year basis. See, for example, Sec. Sec. 1.6041-1(a)(1);
1.6042-2(a)(1)(i); 1.6045-1(c)(6); 1.6050P-1(a)(1); and 1.6050W-
1(a)(1). Second, the calendar year is the standard accounting period
for most individual taxpayers and the default accounting period for
corporations and partnerships that do not keep formal books and records
or otherwise do not qualify for a fiscal taxable year. Requiring QOFs
to report and furnish this information on a calendar year basis is
therefore consistent with the needs of the majority of taxpayers, who
would use this information to prepare their Federal tax returns on a
calendar year basis. Although fiscal year investors with taxable years
that coincide with that of a fiscal year QOF might find the furnished
information to be more useful if it were instead based on the QOF's
fiscal year, these fiscal year investors are also more likely to have
the capability and sophistication to keep track of furnished
information that does not coincide with their taxable years. Finally,
as discussed in part II.C.2. of this Explanation of Provisions,
requiring QOFs to report this information on a calendar year basis
would also facilitate a single due date for investor statements that is
conducive to the tax reporting needs of the reportable investors.
Accordingly, for all of these reasons, proposed Sec. 1.6039K-1(f)
would require QOFs to report on reportable investors that have a
disposition event during the calendar year in which the QOF's taxable
year began. Comments are requested regarding whether this reporting
creates any undue burdens for fiscal year QOFs.
c. Specific Information Required
Proposed Sec. 1.6039K-1(f)(1) would require the QOF to report the
name, address, and TIN of each reportable investor in the QOF that has
a disposition event with respect to their investment in the QOF.
Proposed Sec. 1.6039K-1(f)(2) would require QOFs to report the date of
the disposition event for each share of stock or partnership interest
in the QOF to which the disposition event applies. This information is
consistent with the information required under section 6039K(b)(8)(C)
and the information required to be reported on the current Form 8996.
In addition, for each share of stock or partnership interest in the QOF
to which the disposition event applies, proposed Sec. 1.6039K-1(f)(3)
would require QOFs to report the date that the reportable investor's
share or interest in the QOF was acquired by the reportable investor.
This information is consistent with the information required under
section 6039K(b)(8)(B). Comments are requested with respect to whether
non-publicly traded QOFs would generally know the dates that a
reportable investor acquired and disposed of their ownership interest
in the QOF. Proposed Sec. 1.6039K-1(f)(4) is discussed later in this
part II.B.3.c.
For a disposition event with respect to a disposition of the
reportable investor's ownership interest in the QOF, proposed Sec.
1.6039K-1(f)(5) would also require QOFs to report the total number of
shares of stock or partnership interests in the QOF held immediately
before the disposition event and the total number of shares of stock or
partnership interests that were disposed. This information is
consistent with information required under section 6039K(b)(8)(C),
which asks for the ``amount of the investment disposed.''
Additionally, pursuant to section 6039K(b)(9), which authorizes the
Secretary to require additional information to be reported, the
proposed regulations would require the QOF to report several other
pieces of information.
First, proposed Sec. 1.6039K-1(f)(6) would require QOFs to
indicate whether the disposition is with respect to an inclusion event
caused by the QOF's decertification. Pursuant to proposed Sec.
1.1400Z2(d)-1(a)(3)(iv), a QOF would be required to provide
notification to every investor in a QOF that the QOF voluntarily
decertified and the date of the decertification. As explained in part
I.C.4 of this Explanation of Provisions, an investor in a QOF may have
Federal income tax consequences when a QOF decertifies. Absent a QOF's
notification to its investors of the voluntary decertification,
investors may not be aware of the decertification.
Second, to help reportable investors determine their basis in their
disposed QOF interest, proposed Sec. 1.6039K-1(f)(4) would require
QOFs to report the amount of cash plus the fair market value of
property received by the QOF in exchange for the reportable investor's
shares or partnership interest in the QOF when first acquired by the
reportable investor. Comments are requested with respect to whether
non-publicly traded QOFs would generally know this basis information.
Finally, proposed Sec. 1.6039K-1(f)(7) would require QOFs to report
such other information as the forms or instructions may require.
4. Time and Manner for Filing the QOF Information Return
As discussed in part II.A. of the Background, before the OBBBA was
enacted Form 8996 was required to be attached to the QOF's annual tax
return by the due date (including extensions) for the QOF's annual tax
return. As previously described, the Treasury Department and the IRS
intend to update Form 8996 to include the information required by
section 6039K(b) and final regulations under Sec. 1.6039K-1. Pursuant
to sections 6039K(a) and 6726(a), this updated Form 8996 will be
considered a ``return'' of information that is separate from the QOF's
Federal tax return. Additionally, proposed Sec. 1.6039K-1(g)(1) would
require that Form 8996 be filed with the IRS in the manner set forth in
the instructions to the form. For QOFs that fail to file Form 8996 in
the manner so provided by the due date for the QOF's original Federal
tax return (or fail to include all the correct information required to
be shown on the Form 8996), proposed Sec. 1.6039K-1(g)(2) would direct
the QOF to file the original Form 8996 (or a corrected Form 8996) in
the manner set forth in the instructions to Form 8996 for a late or
corrected filing. Filing the late original Form 8996 (or corrected Form
8996) would be important to terminating the per-day penalty under
section 6726 applicable to QOFs that fail to comply with the
information reporting requirements under section 6039K. See part VIII
of this Explanation of Provisions for an explanation of the penalties
that apply to the failure to timely file a correct information return
under section 6039K.
C. Investor Statements Required To Be Furnished Under Section 6039K(c)
1. Information To Be Included on the Investor Statements
Pursuant to section 6039K(c)(2), proposed Sec. 1.6039K-1(h)(1)(i)
would require every QOF that is required to file an information return
under section 6039K that includes (or is required to include) a
reportable investor's name, address, and TIN to furnish to that
[[Page 57982]]
reportable investor an investor statement showing the information
required by proposed Sec. 1.6039K-1(f)(1) through (7) with respect to
the reportable investor. See also part II.B.3.c. of this Explanation of
Provisions for an explanation of the information that QOFs would be
required to report to the IRS with respect to these reportable
investors. Under this proposed rule, the information required to be
provided to each reportable investor would be only the information
reported to the IRS that is with respect to that particular reportable
investor and not information reported with respect to other reportable
investors with disposition events during the same calendar year. This
proposed rule would thus preserve the privacy of individual investors'
personally identifiable information.
In addition to the information that each QOF would be required to
report under proposed Sec. 1.6039K-1(f)(1) through (7), proposed Sec.
1.6039K-1(h)(1)(ii) and (iii) would require the QOF to include on the
investor statement the name, address, and phone number of a contact at
the QOF regarding the furnished statement, as well as a legend stating
that the information included on the statement is being reported to the
IRS. These requirements are consistent with general information
furnishing requirements. Additionally, proposed Sec. 1.6039K-
1(h)(1)(iv) would require the QOF to include on this investor
statement, if applicable, a statement that the entity has voluntarily
decertified as a QOF under Sec. 1.1400Z2(d)-1(a)(3). Finally, if the
QOF has voluntarily decertified as a QOF, proposed Sec. 1.6039K-
1(h)(1)(iv) would require the QOF to include on the investor statement
a statement that the reportable investor's election under section
1400Z-2(c) is no longer available because the certification of the
entity as a QOF has terminated. Under section 1400Z-2(c) and Sec.
1.1400Z2(c)-1(b)(1)(i), a taxpayer who makes a deferral election with
respect to a qualifying investment in a QOF, recognizes the deferred
gain by the date provided in section 1400Z-2(b)(1)(B), and whose
holding period of such qualifying investment is at least 10 years, may
make an additional election under section 1400Z-2(c) upon the sale or
exchange of that investment. However, under Sec. 1.1400Z2(c)-
1(b)(1)(i), to the extent that an eligible taxpayer has an inclusion
event with respect to any portion of that qualifying investment, that
portion is no longer a qualifying investment and the eligible taxpayer
may not make the section 1400Z-2(c) election for that portion. Section
1.1400Z2(b)-1(c)(15) provides that the decertification of a QOF is an
inclusion event. The Treasury Department and the IRS view the statement
notifying the investors that the section 1400Z-2(c) election is no
longer available critical for tax compliance purposes and to ensure
that investors are fully aware of the decertification, which may carry
attendant Federal income tax consequences.
2. Time and Manner for Furnishing the Investor Statements
a. Due Date for Furnishing the Investor Statements
As discussed in part II.B.3.b. of this Explanation of Provisions,
proposed Sec. 1.6039K-1(f) would require QOFs to report on each
reportable investor that has a disposition event during the calendar
year in which the QOF's taxable year began. This reporting is required
for disposition events occurring in the calendar year in which the
QOF's taxable year began because the calendar year is the standard
accounting period for most individual taxpayers and the default
accounting period for corporations and partnerships that do not qualify
for a fiscal taxable year. It is anticipated that these reportable
investors would use this information on their furnished investor
statements to prepare their Federal tax returns, which, for individuals
are due on April 15 of the year following the calendar year for which
the return is required (excluding extensions).
In proposing the date by which these investor statements should be
furnished, the Treasury Department and the IRS considered the due dates
for other payee statements with respect to taxpayer investments. For
example, under section 6042(c), payee statements reflecting payments of
dividends are required to be furnished to the dividend recipient on or
before January 31 of the year following the calendar year for which
Form 1099-DIV, Dividends and Distributions, is required. Under section
6045(b), payee statements reflecting sale transactions effected by
brokers on behalf of their customers are required to be furnished to
the customer on or before February 15 of the year following the
calendar year in which the transaction occurred.
Except in the case of investor statements required to be furnished
to reportable investors that are brokers, proposed Sec. 1.6039K-
1(h)(2)(i) would require QOFs to furnish investor statements to
reportable investors on or before March 1 of the calendar year
following the calendar year during which the reported disposition
occurred because disposition events are more analogous to sale
transactions than payments of dividends and because QOFs may need more
time after the end of the calendar year to obtain the information
necessary to determine which investors had disposition events. The
Treasury Department and the IRS propose this March 1 due date to
account for the possibility that QOFs may not have sufficient
information necessary to inform investors of the required reporting
under section 6039K. This due date is anticipated to provide individual
investors with the information they need with sufficient time to
prepare their individual tax returns, many of which the Treasury
Department and the IRS anticipate will be filed on extension.
Nevertheless, comments are requested regarding whether this due date
would give reportable investors sufficient time for use in preparing
their tax returns. Comments are also requested regarding whether this
due date would create any undue burdens for QOFs, including for fiscal
year QOFs.
It is the understanding of the Treasury Department and the IRS
that, in the case of publicly traded QOFs, brokers would typically be
the record holders of the QOF stock or partnership interests. As a
result, publicly traded QOFs might not know the identities of all of
the customers for whom brokers hold these interests. As discussed in
part II.B.3.a. of this Explanation of Provisions, to ensure the IRS
receives information returns with respect to disposition events of the
brokers' customers and to ensure that these customers receive
statements indicating that a disposition event has occurred in order to
prepare their tax returns, proposed in Sec. 1.6039K-1(a)(12)(ii) would
include in the definition of ``reportable investor'' any broker that
holds a QOF interest on behalf of a customer for which a disposition
event occurred but only where the QOF does not know the identity of the
actual owners of these QOF interests. In addition, under proposed Sec.
1.6045-1(a)(9)(i) and (d)(2)(i)(A), brokers would be required to report
to the IRS dispositions of ownership interests in a QOF as well as
inclusion events caused by a voluntary decertification of a QOF. Thus,
under these proposed rules, a publicly traded QOF would be required to
furnish an investor statement to a reportable investor that is a
broker, and that broker would be required to file an information return
(Form 1099-B) with respect to the customer and furnish a statement to
[[Page 57983]]
the customer. As a result, publicly traded QOFs that do not know the
identity of the actual owners of QOF interests would be required to
inform brokers that are registered holders of these QOF interests of a
voluntary decertification, and these brokers would be required to
report that information to the IRS and furnish it to their customers.
It is anticipated that the Form 1099-B would be revised to facilitate
this reporting by brokers.
To provide brokers with sufficient time to comply with these filing
and furnishing requirements, the proposed regulations would provide for
an earlier due date for investment statements required to be furnished
to brokers. Proposed Sec. 1.6039K-1(h)(2)(ii) would require QOFs to
furnish investor statements to brokers that are record holders of
interests in the QOF on or before January 15 of the calendar year
following the calendar year of the disposition event. Comments are
requested regarding whether this due date would give brokers sufficient
time to report on these disposition events under section 6045. Comments
are also requested regarding whether the proposed March 1 due date for
furnishing the investor statements to reportable investors other than
brokers should be conformed to this January 15 due date for furnishing
the investor statements to brokers to simplify the furnishing
requirements for publicly traded QOFs.
b. Manner of Furnishing the Investor Statements
Proposed Sec. 1.6039K-1(h)(3)(i) would generally provide that an
investor statement is considered to be furnished to a reportable
investor if it is mailed to the last address of the reportable investor
known to the QOF and is considered to be furnished on the date that it
is so mailed. Proposed Sec. 1.6039K-1(h)(3)(ii)(A) would permit QOFs
to furnish these investor statements in an electronic format in lieu of
a paper format by following the procedures for payee statements
generally as set forth in the applicable revenue procedures relating to
electronic delivery of payee statements. See, for example, section 4.6
of Rev. Proc. 2024-29, 2024-30 I.R.B. 121 (July 22, 2024), which is
published as IRS Publication 1179, General Rules and Specifications for
Substitute Forms 1096, 1098, 1099, 5498, and Certain Other Information
Returns (Publication 1179). In the event that the QOF chooses to
electronically furnish an investor statement to a reportable investor
pursuant to these procedures, proposed Sec. 1.6039K-1(h)(3)(ii)(A)
would provide that such investor statement would be treated as
furnished on: (i) the date that the QOF electronically transmits the
investor statement to that reportable investor, for QOFs that
electronically transmit the investor statement; or (ii) the date that
the QOF sends a notice to the reportable investor that the investor
statement has been posted to an electronically accessible online
platform, for QOFs that so post the investor statement.
For an investor statement that is required to be furnished to a
broker, proposed Sec. 1.6039K-1(h)(3)(ii)(B) would permit the QOF to
furnish the investor statement in an electronic format in lieu of a
paper format if the broker agrees to such manner of furnishing. Like
the general rule for an investor statement furnished electronically,
proposed Sec. 1.6039K-1(h)(3)(ii)(B) would treat an investor statement
that is electronically furnished to a broker pursuant to such written
agreement as furnished on: (i) the date that the QOF electronically
transmits the investor statement to the broker, for QOFs that
electronically transmit the investor statement; or (ii) the date that
the QOF sends notice to the broker that the investor statement has been
posted to an electronically accessible online platform, for QOFs that
so post the investor statement.
III. Proposed Sec. 1.6039L-1
A. Overview
As discussed in part II.B. of the Background, section 6039L(a)
generally requires every applicable QOZB to furnish a QOZB statement to
each QOF that holds an interest in that applicable QOZB at such time,
in such manner, and setting forth such information as the Secretary may
by regulations prescribe for purposes of enabling such QOFs to meet
their reporting obligations under section 6039K(b)(5). These proposed
regulations propose rules for the time and manner that applicable QOZBs
would have to furnish these QOZB statements as well as the information
that would be required to be reported on these statements.
As a starting point for the section 6039L furnishing requirement,
section 6039L(b) defines the term ``applicable QOZB'' to mean any QOZB
which is a trade or business of a QOF, in which a QOF holds QOZ stock,
or in which a QOF holds a QOZ partnership interest. Proposed Sec.
1.6039L-1(a)(3) would generally follow this definition of an
``applicable QOZB'' except it would not include a trade or business of
a QOF in the definition because these trades or businesses are
conducted by the QOF itself. Therefore, QOFs should generally have the
ability to obtain the information they need from such trades or
businesses without being subject to the furnishing requirements of
section 6039L and the penalties under section 6722 that would apply if
these trades or businesses of the QOF failed to comply with these
furnishing requirements. Accordingly, under proposed Sec. 1.6039L-
1(a)(3), an ``applicable QOZB'' is defined to mean any entity that
meets, intends to meet, or was organized for the purposes of meeting,
the requirements to be a QOZB, as defined in section 1400Z-2(d)(3)(A)
and Sec. 1.1400Z2(d)-1(d), which is a corporation in which a QOF holds
QOZ stock, or a partnership in which a QOF holds a QOZ partnership
interest. Comments are requested regarding whether there are any
circumstances under which QOFs need section 6039L to obtain the
information required to be furnished under section 6039L from their
trades or businesses.
Section 6039L(a) cross references to section 6039L(b) for a
description of the QOF to whom every applicable QOZBs must furnish the
QOZB statement. However, section 6039L(b) does not describe any QOF but
instead provides a definition for applicable QOZBs required to furnish
these statements. To account for this drafting anomaly and to clarify
the QOFs to whom the QOZB statements should be furnished, the proposed
regulations would create the term ``relevant QOF.'' Proposed Sec.
1.6039L-1(a)(12) would define ``relevant QOF'' to mean, with respect to
an applicable QOZB that is a corporation, any QOF that holds QOZ stock
in that corporation, and with respect to an applicable QOZB that is a
partnership, any QOF that holds QOZ partnership interest(s) in that
partnership.
Proposed Sec. 1.6039L-1(b) would set forth the requirement that
every applicable QOZB must furnish to each relevant QOF a QOZB
statement, signed under penalties of perjury, for each taxable year of
the applicable QOZB containing the information set forth in proposed
Sec. 1.6039L-1(b)(1) though (7). See parts IV.B.1. through 3. of this
Explanation of Provisions for an explanation of the information that
would be required to be reported on the QOZB statement. Proposed Sec.
1.6039L-1(c) is reserved for future use for when the information
reporting and furnishing rules for qualified rural opportunity funds
and qualified rural opportunity zone businesses are promulgated.
Proposed Sec. 1.6039L-1(d) would set forth the due date for the QOZB
statements and the manner by which the QOZB statements must be
furnished. See part IV.C. of this
[[Page 57984]]
Explanation of Provisions. Finally, proposed Sec. 1.6039L-1(d) would
cross reference to Sec. Sec. 301.6722-1 (failure to furnish timely a
correct payee statement) and 301.6724-1 (penalty waiver for failures
due to reasonable cause and not due to willful neglect), and proposed
Sec. 1.6039L-1(d) proposes to apply Sec. 1.6039L-1 to QOZB statements
required to be furnished on or after the date of publication of a
Treasury decision adopting these rules as final regulations in the
Federal Register.
B. Information To Be Included on the QOZB Statements
As discussed in part IV.A. of this Explanation of Provisions,
proposed Sec. 1.6039L-1(b) would set forth the requirement that every
applicable QOZB must furnish to each relevant QOF a QOZB statement for
each calendar year containing the information set forth in proposed
Sec. 1.6039L-1(b)(1) though (7). This information generally falls
within three categories. First, some of the information that would be
required by proposed Sec. 1.6039L-1(b) is information that QOFs are
generally required to report on Parts VI and VII of the current Form
8996. Second, some of the information that would be required by
proposed Sec. 1.6039L-1(b) is information that would enable the
Secretary to comply with the public reporting requirements under
section 70421(e)(3) of the OBBBA. Third, some of the information that
would be required by proposed Sec. 1.6039L-1(b) is information
regarding the QOZB's compliance with additional requirements under
section 1400Z-2(d)(3). This information would provide certainty to the
QOF that it may treat its ownership interest in the applicable QOZB as
QOZ stock or as a QOZ partnership interest for which the QOF must
provide information under section 6039K(b)(5).
1. Information Generally Required on Current Form 8996
As discussed in part II.B.2. of this Explanation of Provisions,
some of the information required under section 6039L is information
required to be reported on Parts VI and VII of the current Form 8996.
For example, proposed Sec. 1.6039L-1(b)(1) and (4) would require the
applicable QOZB to furnish its TIN and all the population census tract
number(s) in which the QOZ business property directly owned or leased
by the applicable QOZB is used. In addition, some of this information
is needed by the relevant QOF to determine if it meets the 90-percent
investment standard. Each QOF must calculate if it meets the 90-percent
investment standard based on the value of the QOF's investment in the
QOZ stock or QOZ partnership interest of the applicable QOZB, the value
of the QOZ business property directly owned by the applicable QOZB, and
the value of the QOZ business property directly leased by the
applicable QOZB as of the QOF's 6-month testing date and the QOF's
year-end testing date as provided in section 1400Z-2(d)(1).
Although requiring applicable QOZBs to furnish this information
based on a QOF's 6-month and year-end testing dates would coincide with
the needs of the relevant QOFs, the Treasury Department and the IRS are
concerned that requiring applicable QOZBs to report this valuation
information as of the QOFs' testing dates could be unadministrable for
some applicable QOZBs. For example, some applicable QOZBs have multiple
QOF investors with different taxable years. Requiring applicable QOZBs
to report this valuation information based on the testing dates of each
relevant QOF would force these applicable QOZBs to keep track of the
taxable years of each of their relevant QOFs and to collect this
valuation information as of the testing dates of each of these relevant
QOFs. In addition, this requirement would also necessitate multiple due
dates for each QOZB statement based on the due dates of the returns
required under section 6039K.
To address these administrability concerns for applicable QOZBs and
QOFs, the Treasury Department and the IRS considered whether applicable
QOZBs should instead be required to furnish this information to QOFs
based on calendar year testing dates (that is, June 30 and December 31
of the year for which the QOZB statement is required) because calendar
year testing dates are generally the default accounting period for
QOFs. Using calendar year testing dates for this purpose would also
eliminate the need for applicable QOZBs with multiple relevant QOF
investors to keep track of the taxable years of these relevant QOFs and
to furnish valuation information as of multiple testing dates. This
approach was not adopted in these proposed regulations, however,
because it would be inconsistent with the premise that QOZBs must meet
the section 1400Z-2(d)(3) requirements in its taxable year, determined
using the 70-percent use test and the section 1397C(b) tests. Indeed,
the Treasury Department and the IRS provide a safe harbor under Sec.
1.1400Z2(d)-1(b)(2)(i)(C) to permit a QOF to determine whether equity
in an entity with a taxable year that is different from its own is QOZ
property for purposes of the 90-percent investment standard. Generally,
under this safe harbor, the QOF may limit the period tested for
purposes of the 90-percent investment standard to the period that
starts with the beginning of the QOF's status as a QOF and lasts until
the last day of the entity's taxable year ending on or before the
relevant testing date. Under this safe harbor, the QOF may treat the
entity as satisfying the requirements of section 1400Z-2(d)(3) for the
entity's entire taxable year if the entity satisfies the requirements
on the last day of its taxable year.
Finally, the Treasury Department and the IRS considered whether the
information provided by an applicable QOZB should be based on the last
day of the first 6-month period of the applicable QOZB's taxable year
and the last day of the applicable QOZB's taxable year (applicable
QOZB's testing dates). This approach would also alleviate the
administrability concerns of applicable QOZBs that have multiple
relevant QOFs. In addition, this approach would be consistent with the
safe harbor rule under Sec. 1.1400Z2(d)-1(b)(2)(i)(C), which would
permit QOFs with taxable years that are different from an applicable
QOZB to apply the 90-percent investment standard using information
provided by the applicable QOZB based on the testing dates that
coincide with the applicable QOZB's taxable year. Section 1.1400Z2(d)-
2(d)(3) would be clarified by proposed Sec. 1.1400Z2(d)-2(d)(3) to
state explicitly that QOZBs use the semiannual testing dates
corresponding to their taxable year to clarify that the applicable
semiannual testing dates an applicable QOZB uses are the semiannual
dates corresponding to its own taxable year and not the taxable year of
the QOF. In addition, proposed Sec. 1.1400Z2(d)-2(d)(3)(iii) would be
added to clarify that for purposes of determining whether a QOZB
satisfies the 90-percent QOZ business property holding period test, the
QOZB determines whether it has met the 70-percent use test on its
semiannual testing dates, not the QOF's semiannual testing dates.
Comments are requested regarding whether the use of the applicable
QOZB's testing dates for this valuation information creates any undue
burdens for applicable QOZBs or for fiscal year QOFs. Lastly, proposed
Sec. 1.1400Z2(d)-2(d)(1), (d)(3)(i) and (ii), and (d)(4)(i) would
replace references to ``eligible entity'' in the corresponding
provisions of Sec. 1.1400Z2(d)-2 with separate references to QOFs and
QOZBs to emphasize the differences between QOF and QOZB holding period
testing.
[[Page 57985]]
2. Information for the Public Report
In addition to information that QOFs have been required to report
on the current Form 8996, proposed Sec. 1.6039L-1(b)(4)(ii), and (iv)
through (vi) would require the applicable QOZB to furnish information
that would enable the Secretary to comply with the public reporting
requirements under section 70421(e)(3) of the OBBBA. For example,
proposed Sec. 1.6039L-1(b)(4)(i) and (ii) would require the applicable
QOZB to provide the NAICS code that applies to each applicable QOZB's
business activity within each census tract and to provide a physical
address of the QOZB's business activity within each census tract in
which the business operates. In addition, proposed Sec. 1.6039L-
1(b)(4)(iv) and (v) would require the applicable QOZB to provide, for
each census tract as of December 31 of the calendar year ending with or
within the applicable QOZB's taxable year, the total value of QOZ
business property directly owned or leased by the applicable QOZB that
is real property and the total number of residential units. Proposed
Sec. 1.6039L-1(b)(4)(vi) would require the applicable QOZB to provide
the approximate average monthly number of full-time equivalent
employees of the QOZB that work within the population census tract for
the calendar year ending with or within the applicable QOZB's taxable
year. See part II.B.2. of this Explanation of Provisions for the
rationale behind requesting this information as of December 31 of the
year ending with or within the applicable QOZB's taxable year. Comments
are requested regarding whether the use of December 31 for this
information creates any undue burdens for applicable QOZBs. Finally, to
avoid double counting of information provided for the public reporting
requirement if multiple QOFs have investments in the same applicable
QOZBs, proposed Sec. 1.6039L-1(b)(2) would require the applicable QOZB
to report the percent of equity ownership or (if applicable) capital or
profits interest in the applicable QOZB by the relevant QOF as of
December 31 of the calendar year ending with or within the applicable
QOZB's taxable year.
Proposed Sec. 1.6039L-1(b)(3) would require the applicable QOZB to
provide the value of all of its tangible property (including tangible
property that is QOZ business property and tangible property that is
not QOZ business property) held as of the applicable QOZB's testing
dates. This information is required to be reported by the QOF to the
IRS under sections 6039K(b)(5)(E) and (b)(5)(F). Without this
information, the QOF would not likely be able to make a complete and
accurate report to the IRS, which would impair the ability of the
Secretary to make a complete and accurate public report, as required
under section 70421(e) of the OBBBA. Additionally, in order to be
characterized as a QOZB, an entity must meet the 70-percent tangible
property standard, which requires that at least 70 percent of the
tangible property owned or leased must be QOZ business property. The
value of the owned and leased property is used in calculating this 70-
percent tangible property standard. If an entity does not satisfy this
standard, the equity in that entity might not be treated as QOZ
property by the QOF.
3. Other Information Regarding Compliance With QOZB Requirements
These proposed regulations would require certain additional
information to be furnished to the relevant QOFs that is not
specifically enumerated in section 6039K(b)(5) but is nonetheless
required in order for the relevant QOFs to provide accurate information
in response to the specifically enumerated information requested by
that section.
Section 6039L(a) provides that the Secretary may by regulations
require the applicable QOZB to furnish such information to assist the
QOF in meeting the requirements of section 6039K(b)(5). Section
6039K(b)(5) provides that the QOF must report such information for
investments that are treated by the QOF as QOZ stock or QOZ partnership
interests. However, in order for the relevant QOF to know whether it
can treat its investments as QOZ stock or QOZ partnership interests
(and whether it must provide the information required under section
6039K(b)(5) with respect to such investments), the entity in which the
QOF invests must be a QOZB for substantially all of the QOF's holding
period of such investment. Under section 1400Z-2(d)(3) and Sec.
1.1400Z2(d)-2(d)(1), to be treated as a QOZB for substantially all of
the QOF's holding period of such investment, the entity in which the
QOF invests must satisfy the 70-percent tangible property standard with
respect to its tangible property; must be engaged in a trade or
business that satisfies the requirements of sections 1397C(b)(2), (4)
and (8); and must not be a trade or business listed in section
144(c)(6)(B).
Under section 1400Z-2(d)(2)(D)(i), tangible property must meet
three requirements in order to be treated as QOZ business property.
First, the property must be acquired after December 31, 2017, which is
modified by section 70421(c)(4)(A) of the OBBBA to require that the
property be acquired after the applicable start date (as defined in
section 1400Z-1(e)(2)). Second, the original use of the property must
commence with the QOF or QOZB in the QOZ or the QOF or QOZB must
substantially improve the property, as provided in section 1400Z-
2(d)(2)(D)(ii). And third, during substantially all of the QOF or
QOZB's holding period for such property, substantially all of the use
of the property was in a QOZ. If such property meets all of these
requirements, it is characterized as QOZ business property and may be
used by the QOZB in determining its 70-percent tangible property
standard and compliance with the other statutory and regulatory
requirements of section 1400Z-2(d)(3). This determination would then
assist the QOF in reporting the investment on its Federal tax return.
Thus, these proposed regulations would require applicable QOZBs to
furnish additional information to the relevant QOFs to provide
information sufficient for the relevant QOF to determine if the equity
investments it holds in another entity may be characterized as QOZ
stock or QOZ partnership interests about which it is required to
provide the information specifically enumerated in section 6039K(b)(5).
This information would provide an additional compliance benefit since
it would also enable the relevant QOF to determine if the equity
investments can be included in the numerator of the QOF's calculation
of the 90-percent investment standard. As a corollary, these proposed
regulations would also enable the relevant QOFs to provide information
to the IRS to help in determining whether these equity investments
compliant with section 1400Z-2(d)(3) and the regulations thereunder.
Examples of information that would be requested for these purposes
include proposed Sec. 1.6039L-1(b)(3), which would require the
applicable QOZB to provide the value of all of its tangible property
(including tangible property that is QOZ business property and tangible
property that is not QOZ business property) held as of the applicable
QOZB's testing dates. Additionally, proposed Sec. 1.6039L-1(b)(4)(vii)
would require the applicable QOZB to provide the first date that any
QOZ business property directly owned or leased by the applicable QOZB
was leased or purchased by the applicable QOZB. For similar reasons,
proposed Sec. 1.6039L-1(b)(4)(viii) would require the applicable QOZB
to inform the relevant QOF whether there is any QOZ business
[[Page 57986]]
property within each census tract that the applicable QOZB is
substantially improving and (if applicable) the date on which that
improvement began. In addition, proposed Sec. 1.6039L-1(b)(4)(ix)
would require the applicable QOZB to inform the relevant QOF, with
respect to each census tract in which QOZ business property is directly
owned or leased by the applicable QOZB, whether the applicable QOZB is
utilizing a working capital safe harbor to acquire, construct, or
substantially improve tangible property in a QOZ, as provided in Sec.
1.1400Z2(d)-1(d)(3). The applicable QOZB would also be required to
provide, if applicable, the date that the working capital safe harbor
is expected to end.
In addition, for the same reasons, proposed Sec. 1.6039L-1(b)(5)
would require the applicable QOZB to provide an attestation that the
applicable QOZB meets all the requirements of section 1400Z-2(d)(3) and
Sec. 1.1400Z2(d)-1(d) including that--
<bullet> The applicable QOZB meets the 70-percent tangible property
standard;
<bullet> The applicable QOZB meets the gross income requirement
under section 1400Z-2(d)(3)(A)(ii) and Sec. 1.1400Z2(d)-1(d)(3);
<bullet> The applicable QOZB meets the use of intangible property
requirement under section 1400Z-2(d)(3)(A)(ii) and Sec. 1.1400Z2(d)-
1(d)(3);
<bullet> The applicable QOZB satisfies the non-qualified financial
property limitation under section 1400Z-2(d)(3)(A)(ii) and Sec.
1.1400Z2(d)-1(d)(3); and
<bullet> The trade or business of the applicable QOZB is not
described in section 144(c)(6)(B).
If the applicable QOZB cannot provide this attestation because the
applicable QOZB does not meet all the requirements of section 1400Z2-
2(d)(3) and Sec. 1.1400Z2(d)-1(d), proposed Sec. 1.6039L-1(b)(6)
would require the applicable QOZB to provide an attestation that the
applicable QOZB is utilizing the cure period, as defined in Sec.
1.1400Z2(d)-1(d)(6), to correct its failure to meet the requirements of
section 1400Z-2(d)(3) and Sec. 1.1400Z2(d)-1(d). This statement would
also be required to include the month in which the stock or partnership
interest of the applicable QOZB lost its qualification as qualified
opportunity zone stock or a qualified opportunity zone partnership
interest. A QOF receiving this information would be better able to
determine whether its investments in the entity may be treated as QOZ
stock or QOZ partnership interests before, during, and after the cure
period. This information would also help ensure compliance with the
statutory requirements of section 1400Z-2(d), as each QOF is only
entitled to one cure period per QOZB, as provided in Sec. 1.1400Z2(d)-
1(d)(6)(iii).
Finally, proposed Sec. 1.6039L-1(b)(7) would also require the
applicable QOZB to report whether it used the applicable financial
statement valuation method or the alternative valuation method, as
defined used in Sec. 1.1400Z2(d)-1(b)(3) and (4), respectively, in
providing any valuation information that would be required under
proposed Sec. 1.6039L-1(b)(1) through (8). Proposed Sec. 1.6039L-
1(b)(8) would require the applicable QOZB to provide to the relevant
QOF such other information as the relevant QOF is required to report
with respect to the applicable QOZB as set forth in Form 8996 or
instructions. It is anticipated that the IRS will issue a publication
or other announcement to inform applicable QOZBs of any new information
that should be included on the QOZB statements in order for the
relevant QOFs to meet their reporting obligations under section 6039K.
C. Time and Manner for Furnishing the QOZB Statements
Section 6039L(a) authorizes the Secretary to determine the due date
for furnishing the QOZB statements. As discussed in part IV.B.1. of
this Explanation of Provisions, these proposed regulations would
generally require applicable QOZBs to furnish information needed by the
QOFs to compute their 90-percent investment standard as of testing
dates that are based on the QOZB's taxable year. The Treasury
Department and the IRS are of the view that, for the overwhelming
majority of QOFs and QOZBs operating on a calendar year basis (or on
the same fiscal year basis), the due date for furnishing the QOZB
statements should be a reasonable time after the end of the QOZB's
taxable year but in advance of the due date of the relevant QOF's
Federal tax return because relevant QOFs need the information on the
furnished QOZB statements to meet their filing obligations under
section 6039K.
Because it would be administratively burdensome to require
applicable QOZBs to determine whether the relevant QOFs to which the
applicable QOZBs must furnish a QOZB statement will obtain an extension
to file their Federal tax returns, these proposed regulations would
require a due date for the furnished statements in advance of the due
date of the relevant QOFs Federal tax return without extensions. Under
section 6072(b), returns of calendar year QOFs that are partnerships
are required to be filed on or before March 15 following the close of
the calendar year to which the return applies, and returns made on the
basis of a fiscal year are required to be filed on or before the 15th
day of the third month following the close of the fiscal year. Under
section 6072(a), returns of calendar year QOFs that are corporations
are required to be filed on or before April 15 following the close of
the calendar year to which the return applies, and returns made on the
basis of a fiscal year are required to be filed on or before the 15th
day of the fourth month following the close of the fiscal year. Given
these unextended due dates, proposed Sec. 1.6039L-1(d)(1) would
require every applicable QOZB required to furnish a QOZB statement to
one or more relevant QOFs to furnish those statements on or before the
1st day of the second month following the close of the applicable
QOZB's taxable year. For calendar year QOZBs, this rule would result in
QOZB statements being due on February 1, which is one and a half months
before the date that a relevant QOF's partnership return would be due
and two and a half months before the date that a relevant QOF's
corporate return would be due. Comments are requested regarding whether
this due date would provide applicable QOZBs with sufficient time to
complete the QOZB statements. Comments are also requested regarding
whether this due date would provide relevant QOFs with sufficient time
to comply with their reporting obligations under section 6039K.
Proposed Sec. 1.6039L-1(d)(2) would permit an applicable QOZB to
furnish the QOZB statement using any form that includes all the
information set forth in proposed Sec. 1.6039L-1(b). If the IRS
prescribes a form for this QOZB statement, however, proposed Sec.
1.6039L-1(d)(2) would require that the applicable QOZB use that
prescribed form or a form that contains provisions that are
substantially similar to those in the prescribed form. Additionally,
proposed Sec. 1.6039L-1(d)(2) would provide that a QOZB statement is
considered furnished to a relevant QOF if it is mailed to the last
known address of the relevant QOF and is considered furnished on the
date that it is so mailed. Proposed Sec. 1.6039L-1(d)(2) would also
permit an applicable QOZB to furnish the QOZB statement in an
electronic format in lieu of a paper format if the relevant QOF
consents in writing (including electronically) to the electronic
furnishing of the QOZB statement. Proposed Sec. 1.6039L-1(d)(2)
[[Page 57987]]
would also provide that QOZB statements electronically furnished
pursuant to the consent of the relevant QOF will be treated as
furnished on the date that the statement is electronically transmitted
to the relevant QOF.
IV. Proposed Sec. Sec. 1.6011-2(b)(1), 1.6011-3(d)(4), 1.6011-5(d)(4),
and 1.6037-2(d)(3)
Generally, under sections 6011(e)(1), (2) and (5), the Secretary
may not require a person to file a return electronically unless that
person is required to file at least 10 returns during that calendar
year. Section 70421(d)(3) of the OBBBA added section 6011(e)(8) to the
Code, which generally provides that any return filed by a QOF or
qualified rural opportunity fund under section 6039K must be
electronically filed. To ensure that Form 8996 is counted as a return
in determining if the filer has filed 10 returns for purposes of the
QOF's other return filing obligations, proposed Sec. 301.6011-2 would
be amended to include Form 8996 as a form used for the purpose of
making an information return. In addition, proposed Sec. 301.6011-
3(d)(4), proposed Sec. 301.6011-5(d)(4), and proposed Sec. 301.6037-
2(d)(3) would be amended to clarify that a Form 8996 is a separate
return from the partnership return, corporate income tax return, or
electing small business corporation return, respectively, to which the
Form 8996 is attached for purposes of determining if the QOF is
required to file at least 10 returns for the year.
V. Proposed Sec. 1.6045-1
As discussed in parts III.B.3.a. and C.2. of this Explanation of
Provisions, to ensure that the IRS receives information returns with
respect to disposition events of customers for whom brokers hold QOF
investments and to ensure that these brokers' customers receive
investor statements that they need to prepare their Federal tax returns
with respect to these transactions, the proposed rules under Sec.
1.6039K-1 would require QOFs to inform any broker that holds a QOF
interest on behalf of a customer that a disposition event occurred.
This is particularly important because, although it is likely that the
broker would know which customer disposed of the ownership interest in
the QOF (and it is unlikely that the QOF would know the name of such
customer), it is unlikely that the broker would know that the QOF
voluntarily decertified. To ensure that the IRS and customers receive
information about these disposition events as related to specific
customers of the broker, these proposed regulations would modify Sec.
1.6045-1 to require brokers to report this information to the IRS and
furnish statements with this information to the impacted customer.
Accordingly, proposed Sec. 1.6045-1(a)(9)(i) would expand the
definition of a sale that a broker is required to report to the
broker's customers to include an inclusion event as defined in Sec.
1.1400Z2(b)-1(c)(1)(iv) caused by the voluntary decertification of a
QOF as defined in Sec. 1.1400Z2(d)-1(a)(3). In addition, proposed
Sec. 1.6045-1(d)(2)(i)(A) would expand the information that a broker
would be required to report to the IRS with respect to a sale of a QOF
investment to include whether the sale constitutes the disposition of
an ownership interest in a QOF or constitutes an inclusion event as
defined in Sec. 1.1400Z2(b)-1(c). These changes would ensure that both
the IRS and investors in publicly traded QOFs (customers of the broker)
are made aware of these taxable transactions.
Comments are requested regarding whether these additional reporting
requirements create any undue burdens for brokers.
VI. Proposed Sec. Sec. 301.6722-1 and 301.6724-1
To conform with the OBBBA's addition of investor statements and
QOZB statements to the definition of ``payee statements'' that are
subject to the $250 penalty (inflation adjusted) for each failure to
furnish a payee statement (or failure to furnish a correct information
statement) under section 6722(a), proposed Sec. 301.6722-
1(e)(2)(xxxix) and (xl) would modify the definition of ``payee
statements'' subject to these penalties to include investor statements
required by section 6039K(c) and QOZB statements required by section
6039L.
As discussed in part II.B. of the Background, because the OBBBA
added section 6726 as an additional information reporting penalty to
part II of subchapter B of chapter 68 of the Code, the reasonable cause
waiver under section 6724 applies to penalties under section 6726.
Accordingly, the proposed regulations would modify the references to
the penalties to which the reasonable cause (and not willful neglect)
rules apply to include the penalty under section 6726.
VII. Proposed Sec. 301.6726-1
The proposed regulations under section 6726 applicable to QOFs that
fail to meet their information reporting requirements under section
6039K generally follow the statutory amendments made by the OBBBA.
Proposed Sec. 301.6726-1(a)(1) would impose a penalty of $500 for each
day that a QOF, required to file an information return by section 6039K
(that is, Form 8996 (or any successor form) referred to in proposed
Sec. 301.6726-1 and this Part VII as section 6039K return), fails to
file such return. Proposed Sec. 301.6726-1(a)(1) would also provide
that no more than one penalty would be imposed under section 6726 with
respect to a single section 6039K return, even though there may be more
than one failure with respect to such return. Proposed Sec. 301.6726-
1(a)(1) would also add a cross reference to the penalty waiver rules
under section 6724 applicable to a failure that is due to reasonable
cause. See part VI. of this Explanation of Provisions for an
explanation of proposed Sec. 301.6724-1.
Proposed Sec. 301.6726-1(a)(2)(i) would limit the scope of
``failures'' subject to this penalty as a failure to file the section
6039K return on or before the required filing date (failure to file
timely) and any failure to include all the information required to be
shown on the section 6039K return or including incorrect information
(failure to include correct information).
A failure to file timely, under proposed Sec. 301.6726-1(a)(2)(ii)
would include a failure to file in the required manner, for example,
electronically or in other machine-readable form as provided under
section 6011(e). Thus, to the extent the instructions to Form 8996
require that the section 6039K return be filed electronically, a
penalty for the failure to file timely would apply to a QOF that mails
a paper section 6039K return to the IRS. In addition, under proposed
Sec. 301.6726-1(a)(2)(ii), a failure to include correct information
would include a failure to include all information required by Sec.
1.6039K-1(b), Form 8996 (or any successor form) and the applicable form
instructions. Finally, under proposed Sec. 301.6726-1(a)(2)(ii), a
failure to include information in the correct format could be either a
failure to file timely an information return, or a failure to include
correct information on the information return. For example, an error on
an electronic submission to the IRS that prevents processing by the IRS
may constitute a failure to file timely under this proposed rule.
However, if information is set forth on the wrong field of the
electronic submission, that error may constitute a failure to file
timely or a failure to include correct information under this proposed
rule, depending upon the extent of the failure.
Proposed Sec. 301.6726-1(a)(3) would make it clear that the per-
day penalty
[[Page 57988]]
imposed under Sec. 301.6726-1(a) terminates on the day that the QOF
files the section 6039K return (showing all the correct information
required to be shown on that return) as provided in Sec. 1.6039K-
1(g)(2).
Proposed Sec. 301.6726-1(b) provides limitations on the penalty
that may be imposed under section 6726 with respect to any one section
6039K return. Proposed Sec. 301.6726-1(b)(1) would generally limit the
total penalty amount that may be imposed on any person under section
6726 with respect to a single section 6039K return to $10,000. Proposed
Sec. 301.6726-1(b)(2) would raise that maximum $10,000 penalty to
$50,000; however, in the case of any single section 6039K return
failure if that return is required to be filed by a large QOF. For this
purpose, a large QOF would mean a QOF with gross assets (determined on
the last day of the QOF's taxable year) that exceed $10,000,000.
Proposed Sec. 301.6726-1(d) would provide that each of these dollar
amounts would be adjusted for inflation pursuant to section 6726(d).
Like the cost-of-living inflation adjustment applicable to the
information reporting penalty under section 6721, these inflation
adjustments are made annually pursuant to revenue procedures published
in the IRB.
Proposed Sec. 301.6726-1(c) imposes higher penalties if a failure
is due to intentional disregard of the requirement to file timely
correct information returns. If a failure to file timely or to include
correct information is due to intentional disregard of the requirement
to file timely or to include correct information on a return, the per-
day penalty would be increased from $500 to $2,500 and the annual cap
would be increased to $50,000 (or $250,000 for a large QOF), per
return. To define ``intentional disregard'' for this purpose, similar
to the rules in Sec. 301.6721-1(g)(2), proposed Sec. 301.6726-1(c)(2)
would provide that a failure to file timely or to include correct
information is due to intentional disregard if it is a knowing or
willful failure. Whether a person knowingly or willfully fails to file
timely or fails to include correct information would be determined on
the basis of all the facts and circumstances in the particular case.
Like the information reporting penalty regulations under Sec.
301.6721-1(g)(3), proposed Sec. 301.6726-1(c)(3) would set forth facts
and circumstances that are considered in determining whether a failure
is due to intentional disregard. These facts include, but are not
limited to: (i) whether the failure to file timely or the failure to
include correct information is part of a pattern of conduct by the
person who filed the return of repeatedly failing to file timely or
repeatedly failing to include correct information; (ii) whether
correction was promptly made upon discovery of the failure; (iii)
whether the filer corrects a failure to file or a failure to include
correct information within 30 days after the date of any written
request from the IRS to file or to correct; and (iv) whether the amount
of the information reporting penalties is less than the cost of
complying with the requirement to file timely or to include correct
information on an information return. Comments are requested regarding
whether this definition and the associated facts and circumstances
create any undue burdens for QOFs.
Proposed Applicability Dates
The proposed regulations under section 1400Z-2 regarding the QOF
certification and decertification requirements and QOZ business
property are proposed to be applicable to taxable years ending on or
after the date of publication of a Treasury decision adopting these
rules as final regulations in the Federal Register. The proposed
regulations regarding information returns under sections 6039K(a) and
6045(a) and information reporting penalties under section 6726 are
proposed to apply to information returns and investor statements
required to be filed or furnished (without regard to extensions of the
filer's annual return) on or after the date of publication of a
Treasury decision adopting these rules as final regulations in the
Federal Register. The proposed regulations regarding statements
required to be furnished under sections 6039K(c), 6045(b), and 6039L(a)
and information furnishing penalties under section 6722 are proposed to
apply to investor statements, QOZB statements, and payee statements
required to be furnished on or after the date of publication of a
Treasury decision adopting these rules as final regulations in the
Federal Register. Finally, the proposed regulations under sections 6011
and 6037 that would require Form 8996 to be counted as a return in
determining if the QOF has filed 10 returns for purposes of the QOF's
electronic return filing obligations are proposed to apply to returns
required to be filed on or after the date of publication of a Treasury
decision adopting these rules as final regulations in the Federal
Register.
Special Analyses
I. Regulatory Planning and Review
These proposed regulations are not subject to review under section
6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement
(July 4, 2025) between the Treasury Department and the Office of
Management and Budget regarding review of tax regulations.
II. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA)
generally requires that a Federal agency obtain the approval of the
Office of Management and Budget (OMB) before collecting information
from the public, whether that collection of information is mandatory,
voluntary, or required to obtain or retain a benefit. An agency may not
conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a valid control number.
The collections of information in these proposed regulations are
required under sections 6039K and 6039L of the Code. Proposed Sec.
1.6039K-1(b) would generally require QOFs to report to the IRS certain
information set forth in proposed Sec. 1.6039K-1(c) and (d) with
respect to the QOFs' operations and investments. Proposed Sec.
1.6039K-1(b) would also require QOFs to report to the IRS certain
information set forth in proposed Sec. 1.6039K-1(f) with respect to
investors whose QOF investments were subject to a disposition event
during each calendar year. Responses to this collection of information
are mandatory. This collection of information would be satisfied by
filing an updated Form 8996, annually in the manner set forth in the
instructions to Form 8996. The form would be revised to include the
additional items listed in proposed Sec. 1.6039K-1(c), (d), and (f)
that are not already included on the pre-existing Form 8996. This
information is necessary to allow the IRS to verify whether the
entities qualify for QOF status and whether investors in these entities
qualify for related income tax benefits under sections 1400Z-1 and
1400Z-2.
Proposed Sec. 1.6039K-1(h) would also require QOFs to furnish
investor statements to every investor who had a disposition event
during the calendar year. Publicly traded QOFs would be required to
furnish these investor statements to every broker acting as an
intermediary for an investor that had a disposition event during the
year to the extent the QOF does not otherwise know the identity of the
investor for whom the broker acts. The investor
[[Page 57989]]
statement furnished to the broker would contain the same information
pertaining to the investor reported to the IRS under proposed Sec.
1.6039K-1(f). There is no prescribed form for this furnishing
requirement. This information is necessary to provide notice of
disposition events to investors, and to allow them to determine the tax
consequences of these events under section 1400Z-2.
Brokers that receive the investor statements described in the
previous paragraph would thereafter be required, pursuant to proposed
Sec. 1.6045-1(a)(9)(i) and (d)(2)(i)(A), to report to the IRS the
information received with respect to each investor that had a
disposition event during the year. This collection of information would
be satisfied by filing an updated Form 1099-B, annually. This
information is necessary to provide notice of disposition events to
investors, and to allow them to determine the tax consequences of these
events, including under section 1400Z-2, as well as to allow the IRS to
verify whether QOF investors qualify for related income tax benefits
under section 1400Z-2.
Proposed Sec. 1.6039L-1(b) would generally require applicable
QOZBs to furnish annual QOZB statements to QOFs who hold qualified
opportunity zone stock or a qualified opportunity zone partnership
interest in the applicable QOZBs. These QOZB statements would contain
information regarding the applicable QOZBs' operations. Responses to
this collection of information are mandatory. This information is
necessary to allow the QOFs receiving these statements to comply with
their reporting obligations under proposed Sec. 1.6039K-1(b).
The burdens associated with the collections of information in these
proposed regulations will be included in Form 8996 and its instructions
and approved under OMB control number 1545-0123, and in Form 1099-B and
its instructions and approved under OMB control number 1545-0715, in
accordance with PRA procedures under 5 CFR 1320.10.
III. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) (5 U.S.C. chapter 6) requires
agencies to ``prepare and make available for public comment an initial
regulatory flexibility analysis,'' which will ``describe the impact of
the rule on small entities.'' See 5 U.S.C. 603(a). Unless an agency
determines that a proposal will not have a significant economic impact
on a substantial number of small entities, section 603 of the RFA
requires the agency to present an initial regulatory flexibility
analysis (IRFA) of the proposed regulations. The Treasury Department
and the IRS have not determined whether these proposed regulations,
when finalized, will have a significant economic impact on a
substantial number of small entities. This determination requires
further study. However, because there is a possibility of a significant
economic impact on a substantial number of small entities, these
proposed regulations include an IRFA. The Treasury Department and the
IRS invite comments on both the number of entities affected by these
proposed regulations and the economic impact of these proposed
regulations on small entities.
A. Need for and Objectives of the Rule
These proposed regulations are needed to clarify the rules
governing the time and form of information reporting under sections
6039K and 6039L, to define key terms relating to the information
reporting required, and to establish supplementary information
requirements pursuant to section 6039K(b)(9). In addition, the proposed
regulations would provide the rules necessary to administer information
reporting penalties under sections 6722 and 6726 and to clarify that
the reasonable cause rules under section 6724 apply to the newly
enacted penalty under section 6726.
The proposed regulations are intended to facilitate information
sharing between applicable QOZBs and QOFs, to enable QOFs to meet their
statutory information reporting obligations to the IRS whether 90
percent of the QOF's assets are invested in QOZ property as required
under section 1400Z-2. Additionally, the proposed regulations are
intended to permit QOF investors to have a clear understanding of, and
for the IRS to have clear visibility into, the investor's eligibility
for specified QOZ tax benefits. Finally, the proposed regulations would
enable the Secretary to publish annual reports that would enable policy
makers to evaluate the impact of sections 1400Z-1 and 1400Z-2 on
investment in QOZs.
B. Affected Small Entities
Small Business Administration (SBA) regulations provide small
business size standards by NAICS Industry. See 13 CFR 121.201; 15
U.S.C. 632(a)(2)(A). The entities impacted by these proposed
regulations would be QOFs, which invest in QOZ property, and QOZBs,
which are entities engaged in trades or businesses within QOZs. Because
qualification as either entity type is dependent on the relationship to
one or more QOZ rather than participation in any particular industry,
there could be a large number of NAICS codes representing QOZ entity
investments or business operations. Thus, while it is difficult to
characterize impacted entities as falling under any one specific NAICS
industry or code, it is expected that QOFs and QOZBs will undertake
significant economic activity, such as construction, as part of the
development of the trades or businesses they will operate in the
designated opportunity zones.
The NAICS classification system includes construction as sector 23,
with three construction industry subsector tables. According to SBA
regulations, the lowest maximum annual receipts for a concern and its
affiliates within the construction sector to be considered small is $19
million. See 13 CFR 121.201. Based on tax return data for tax year
2023, approximately 11,280 of the estimated 11,300 QOFs (approximately
99.8%) had total positive income less than the $19 million (small
QOFs). The 2023 tax return data for QOZBs is less complete due to the
inability to identify all tax returns filed by these entities.
Nonetheless, of the 7,900 tax returns for 2023 that are identifiable as
returns for QOZBs, approximately 7,800, or 98.7 percent, had total
positive income less than the $19 million (small QOZBs).
a. Impact of the Rules
The proposed regulations would require every QOF to prepare and
file Form 8996 each year. The average time to complete Form 8996 per
QOF is estimated to be 1.25 hours per form, with a monetized hourly
burden of $62.83. Accordingly, the total combined annual burden for all
of the estimated 11,280 small QOFs to complete and file the updated
Form 8996 is estimated to be 14,100 hours of time burden (11,280 x
1.25) and $885,903 of monetized burden (11,280 x 1.25 x $62.83). These
estimates are based on survey data collected from filers of the current
Form 8996. No material increase is expected in the start-up costs to
complete the updated form. There is no available data to predict the
increase in the number of QOFs that will file Forms 8996. In addition,
the requirement that QOFs furnish investor statements pursuant to
section 6039K(c) in lieu of comparable Form 1099-B statements is not
expected to result in a material increase in burden for these small
QOFs.
The proposed regulations would require applicable QOZBs to prepare
and furnish a QOZB statement to each relevant QOF. The average time to
complete a QOZB statement per QOZB is estimated to be 1.25 hours per
form,
[[Page 57990]]
with a monetized hourly burden of $62.83. Accordingly, the total
combined annual burden for all of the estimated 7,800 small QOZBs to
complete and furnish the QOZB statement is estimated to be 9,750 hours
of time burden (7,800 x 1.25) and $612,593 of monetized burden (7,800 x
1.25 x $62.83). These estimates are based on the fact that the QOZB
will have to provide all of the information in certain parts of Form
8996. No material increase in start-up costs to collect and report the
additional information on the QOZB statement is expected. There is no
available data to predict the increase in the number of QOZBs that will
furnish the QOZB statements.
These estimates could potentially increase once the proposed
regulations are finalized and applicable. However, data that would
allow for an accurate estimate of any increases is not currently
available.
b. Alternatives Considered
The Treasury Department and the IRS considered alternatives to
these proposed regulations but have been unable to identify any that
would also allow QOFs and QOZBs to satisfy the obligations of sections
6039K and 6039L. The information reports set forth in these proposed
regulations are required by statute, and exemptions for impacted
entities based on size or other criteria are not permissible.
Exemptions for certain small business QOZBs from the requirement to
furnish a QOZB statement to their QOF investors would negatively impact
the ability of those QOFs to meet their statutory obligation to file
their Forms 8996. Exemptions for certain small business QOFs from the
requirement to file Forms 8996 with the IRS would also render the
proposed regulations unenforceable and could lead to inaccurate or
incomplete information on the annual reports required to be issued by
the Secretary. Additionally, exemptions for certain small business QOFs
from the requirement to furnish statements to investors disposing of a
QOF interest would pose tax administration difficulties for the IRS and
could lead to inaccurate information reflected on the investor's annual
tax return. In short, because, as indicated in Part III.B. of this
Special Analysis, more than 99 percent of QOFs and 98 percent of QOZBs
would be treated as small businesses under relevant SBA regulations,
any small business exemption from the regulatory requirements would
effectively void the statutory requirements imposed by the OBBBA.
Finally, given the statutory language of sections 6039K and 6039L,
which generally gives the Secretary the authority to set the time and
manner for the information reporting and to require the reporting of
certain additional information, it is unlikely that the Secretary has
the authority to exempt small businesses from these information
reporting requirements.
c. Duplicative, Overlapping, or Conflicting Federal Rules
The proposed regulations would not duplicate, overlap, or conflict
with any relevant Federal rules. The Treasury Department and the IRS
invite input from interested members of the public about identifying
and avoiding overlapping, duplicative, or conflicting requirements.
IV. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 requires
that agencies assess anticipated costs and benefits and take certain
other actions before issuing a final rule that includes any Federal
mandate that may result in expenditures in any one year by a State,
local, or Tribal government, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, updated annually for
inflation. This proposed regulation does not include any Federal
mandate that may result in expenditures by State, local, or Tribal
governments, or by the private sector in excess of that threshold.
V. Executive Order 13132: Federalism
Executive Order 13132 (Federalism) prohibits an agency from
publishing any rule that has federalism implications if the rule either
imposes substantial, direct compliance costs on State and local
governments, and is not required by statute, or preempts State law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive order. This proposed regulation does not
have federalism implications, does not impose substantial direct
compliance costs on State and local governments, and does not preempt
State law within the meaning of the Executive order.
VI. Small Business Administration
Pursuant to section 7805(f) of the Code, this notice of proposed
rulemaking will be submitted to the Chief Counsel for the Office of
Advocacy of the Small Business Administration for comment on its impact
on small business.
Comments and Public Hearing
Before these proposed amendments to the regulations are adopted as
final regulations, consideration will be given to any comments that are
submitted timely to the IRS as prescribed in this preamble under the
ADDRESSES heading. The Treasury Department and the IRS request comments
on all aspects of the proposed rules. All comments that are submitted
by the public will be made available at <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
Once submitted to the Federal eRulemaking Portal, comments cannot be
edited or withdrawn.
A telephonic public hearing has been scheduled for November 5,
2026, beginning at 10 a.m. ET. The rules of 26 CFR 601.601(a)(3) apply
to the hearing. Persons who wish to present oral comments at the
hearing must submit an outline of the topics to be discussed and the
time to be devoted to each topic by October 13, 2026. A period of 10
minutes will be allotted to each person for making comments. An agenda
showing the scheduling of the speakers will be prepared after the
deadline for receiving outlines has passed. Copies of the agenda will
be available free of charge at the hearing. If no outline of the topics
to be discussed at the hearing is received by October 13, 2026, the
public hearing will be cancelled. If the public hearing is cancelled, a
notice of cancellation of the public hearing will be published in the
Federal Register.
Individuals who want to testify at the public hearing must send an
email to <a href="/cdn-cgi/l/email-protection#cfbfbaada3a6aca7aaaebda6a1a8bc8fa6bdbce1a8a0b9"><span class="__cf_email__" data-cfemail="cbbbbea9a7a2a8a3aeaab9a2a5acb88ba2b9b8e5aca4bd">[email protected]</span></a> to receive the telephone number and
access code for the hearing. The subject line of the email must contain
the regulation number REG-116506-25 and the language TESTIFY
Telephonically. For example, the subject line may say: Request to
TESTIFY Telephonically at Hearing for REG-116506-25.
Individuals who want to attend the public hearing by telephone
without testifying must also send an email to <a href="/cdn-cgi/l/email-protection#25555047494c464d4044574c4b4256654c57560b424a53"><span class="__cf_email__" data-cfemail="0d7d786f61646e65686c7f64636a7e4d647f7e236a627b">[email protected]</span></a> to
receive the telephone number and access code for the hearing. The
subject line of the email must contain the regulation number REG-
116506-25 and the language ATTEND Hearing Telephonically. For example,
the subject line may say: Request to ATTEND Hearing Telephonically for
REG-116506-25. Requests to attend the public hearing telephonically
must be received by 5:00 p.m. ET on November 3, 2026.
Hearings will be made accessible to people with disabilities. To
request special assistance during a hearing, please contact the
Publications and Regulations Section of the Office of Associate Chief
Counsel (Procedure and Administration) by sending an email to
<a href="/cdn-cgi/l/email-protection#81f1f4e3ede8e2e9e4e0f3e8efe6f2c1e8f3f2afe6eef7"><span class="__cf_email__" data-cfemail="29595c4b45404a414c485b40474e5a69405b5a074e465f">[email protected]</span></a> (preferred) or by
[[Page 57991]]
telephone at (202) 317-6901 (not a toll-free number) by November 2,
2026.
Statement of Availability of IRS Documents
IRS Revenue Procedures, Revenue Rulings, Notices and other guidance
cited in this document are published in the IRB and are available from
the Superintendent of Documents, U.S. Government Publishing Office,
Washington, DC 20402, or by visiting the IRS website at <a href="https://www.irs.gov">https://www.irs.gov</a>.
Drafting Information
The principal authors of these regulations are Roseann Cutrone,
Office of the Associate Chief Counsel (Procedure and Administration)
and Dominic DiMattia, Office of the Associate Chief Counsel (Income Tax
and Accounting). However, other personnel from the Treasury Department
and the IRS, including Jane Murphy, Office of the Associate Chief
Counsel (Procedure and Administration), and Rishi Jain, Office of the
Associate Chief Counsel (Income Tax and Accounting), participated in
their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 301
Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income
taxes, Penalties, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, the Treasury Department and the IRS propose to amend
26 CFR parts 1 and 301 as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by adding
entries in numerical order for Sec. Sec. 1.6039K-1 and 1.6039L-1 to
read in part as follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Section 1.1400Z2(a)-1 also issued under 26 U.S.C. 1400Z-2(e)(4).
Section 1.1400Z2(b)-1 also issued under 26 U.S.C. 1400Z-2(e)(4).
* * * * *
Section 1.1400Z2(d)-1 also issued under 26 U.S.C. 1400Z-2(e)(4).
Section 1.1400Z2(d)-2 also issued under 26 U.S.C. 1400Z-2(e)(4).
* * * * *
Section 1.6039K-1 also issued under 26 U.S.C. 6039K.
Section 1.6039K-1 also issued under 26 U.S.C. 6039K(a) through
(d).
Section 1.6039L-1 also issued under 26 U.S.C. 6039L.
Section 1.6039L-1 also issued under 26 U.S.C. 6039L(a).
* * * * *
0
Par. 2. Section 1.1400Z2-0 is amended by:
0
1. Revising the entries for Sec. 1.1400Z2(d)-1(a)(2) and (3);
0
2. Adding an entry for Sec. 1.1400Z2(d)-1(e)(3); and
0
3. Revising the entry for Sec. 1.1400Z2(d)-2(d)(3).
The additions and revisions read as follows:
Sec. 1.1400Z2-0 Table of Contents.
* * * * *
Sec. 1.1400Z2(d)-1 Qualified opportunity funds and qualified
opportunity zone businesses.
(a) * * *
(2) Required self-certification of an eligible entity as a QOF.
(3) Voluntary decertification of a QOF.
* * * * *
(e) * * *
(3) Applicability date.
Sec. 1.1400Z2(d)-2 Qualified opportunity zone business property.
* * * * *
(d) * * *
(3) Substantially all of a QOF's or qualified opportunity zone
business's holding period for owned or leased tangible property.
* * * * *
0
Par. 3. Section 1.1400Z2(b)-1 is amended by revising paragraph (c)(15)
and adding paragraph (j)(3) to read as follows:
Sec. 1.1400Z2(b)-1 Inclusion of gains that have been deferred under
section 1400Z-2(a).
* * * * *
(c) * * *
(15) Decertification of a QOF. The decertification of a QOF,
whether a voluntary decertification pursuant to Sec. 1.1400Z2(d)-
1(a)(3) or an involuntary decertification, is an inclusion event.
* * * * *
(j) * * *
(3) Paragraph (c)(15) of this section. The rules of paragraph
(c)(15) of this section apply to taxable years ending on or after [date
of publication of final regulations in the Federal Register].
0
Par. 4. Section 1.1400Z2(d)-1 is amended by:
0
1. In paragraph (a), revising the second sentence.
0
2. Revising paragraphs (a)(2) and (3); and
0
3. Adding paragraph (e)(3).
The additions and revisions read as follows:
Sec. 1.1400Z2(d)-1 Qualified opportunity funds and qualified
opportunity zone businesses.
(a) * * * Paragraphs (a)(2) through (4) of this section provide
rules that an eligible entity must follow to be certified as a QOF and
to revoke an inadvertent self-certification of a QOF, as well as rules
for the decertification of a QOF. * * *
* * * * *
(2) Required self-certification of an eligible entity as a QOF--(i)
In general. An entity that satisfies the requirements of paragraphs
(a)(2)(ii)(A) through (D) of this section to make an election to self-
certify as a QOF will be treated as a QOF from the date the self-
certification under this paragraph (a)(2) is effective.
(ii) Time, form and manner--(A) Timely filing requirement. The
election for a self-certification as a QOF must be timely filed on Form
8996, Qualified Opportunity Fund, or any successor form, in the manner
set forth in the instructions to that form by the due date for the
eligible entity's original Federal tax return (including extensions)
for the first taxable year identified under paragraph (a)(2)(ii)(B) of
this section. See paragraph (a)(2)(iii) of this section for information
required to be reported by QOFs annually.
(B) First taxable year and month identified. The self-certification
of an eligible entity as a QOF must identify the first taxable year for
which the self-certification takes effect and the first month (in that
first taxable year) in which the self-certification takes effect.
(1) Failure to specify first month. If the eligible entity's self-
certification as a QOF fails to specify the month in the initial
taxable year that the self-certification takes effect, then the self-
certification is treated as taking effect in the first month of the
entity's taxable year.
(2) Investments made before eligible entity's first month as QOF
not eligible for deferral. If an investment in eligible interests of an
eligible entity occurs prior to the eligible entity's first month as a
QOF, any election under section 1400Z-2(a)(1) made for that investment
is invalid and the investment is a non-qualifying investment.
(C) Becoming a QOF in a month that is not the first month of the
taxable year. This paragraph (a)(2)(ii)(C) applies to an eligible
entity if its self-certification as a QOF is first effective for a
month that is not the first month of that entity's taxable year.
(1) For purposes of applying section 1400Z-2(d)(1)(A) and (B) in
the first year of the QOF's existence, the phrase first six-month
period of the taxable year of the fund means the first six
[[Page 57992]]
months each of which is in the taxable year of the QOF and in each of
which the entity is a QOF. Thus, if an eligible entity becomes a QOF in
the seventh or later month of a 12-month taxable year, the 90-percent
investment standard in section 1400Z-2(d)(1) takes into account only
the QOF's assets on the last day of the QOF's taxable year.
(2) The computation of any penalty under section 1400Z-2(f)(1) does
not take into account any months before the first month in which an
eligible entity is a QOF.
(D) Organized for the purpose of investing in qualified opportunity
zone property. The self-certification must include an affirmative
statement that the entity is organized for the purpose of investing in
qualified opportunity zone property.
(iii) Annual information requirements under section 6039K. For all
taxable years in which the entity is self-certified as a QOF, see Sec.
1.6039K-1 for the information required to be reported annually.
(iv) Revoking an inadvertent election to self-certify as a QOF--(A)
In general. Except as otherwise provided in this paragraph (a)(2)(iv),
an election to self-certify as a QOF made under this paragraph (a)(2)
is not revocable. Notwithstanding the previous sentence, an entity that
previously made an inadvertent election to self-certify as a QOF may
revoke that election if the entity satisfies the eligibility
requirement in paragraph (a)(2)(iv)(B) of this section and the
revocation is filed in accordance with the procedures set forth in
paragraph (a)(2)(iv)(C) of this section.
(B) Eligibility for revoking an inadvertent election. An entity
self-certified as a QOF may revoke its inadvertent election to self-
certify as a QOF only if no qualifying investment in the QOF was made.
(C) Procedure for revoking an inadvertent election. An inadvertent
election to self-certify as a QOF may be revoked only with the consent
of the Commissioner in accordance with guidance published in the
Internal Revenue Bulletin or in forms and instructions as to the
required time, form, and manner for such consent.
(D) No certification at a later date. An entity that has revoked
its inadvertent election to self-certify as a QOF under this paragraph
(a)(2)(iv) may not self-certify as a QOF at any future date. The
taxpayer identification number assigned to the entity that has revoked
its inadvertent election to self-certify as a QOF may not be used by
any other entity to self-certify as a QOF.
(3) Voluntary decertification of a QOF--(i) In general. A QOF may
voluntarily terminate its certification as a QOF (voluntary
decertification) only if the QOF maintains in its books and records
contemporaneous written documentation, as defined in paragraph
(a)(3)(iii) of this section, of the QOF's intent to terminate its
certification as of the QOF's identified effective date of voluntary
decertification.
(ii) Final form. The election to voluntarily decertify as a QOF
during the QOF's taxable year must be timely filed on a Form 8996, or
any successor form, (final information return) in the manner set forth
in the instructions to that form by the due date for the eligible
entity's original Federal tax return (including extensions) for the
taxable year. In addition, the Form 8996 must include the last month
that the QOF seeks to be certified as a QOF.
(iii) Contemporaneous written documentation. A QOF that chooses to
voluntarily decertify as a QOF during its taxable year must maintain in
its books and records contemporaneous written documentation, as defined
in paragraph (a)(3)(iii)(A) of this section, that memorializes the
entity's intent to terminate its certification as a QOF and identifies
the last month for which the entity is certified as a QOF.
(A) Definition. For purposes of this paragraph (a)(3), the term
contemporaneous written documentation means written documentation
created at the same time a QOF makes the determination that it will
terminate its certification as a QOF.
(B) Example of contemporaneous written documentation. An example of
contemporaneous written documentation includes meeting minutes
memorializing a QOF's intent to voluntarily decertify as of a specific
date.
(iv) Notification to final investors regarding voluntary
decertification--(A) Notification requirement. A QOF that chooses to
voluntarily decertify as a QOF during its taxable year must provide a
written statement of the voluntary decertification (15-day
notification) to each investor that holds a qualifying or non-
qualifying investment in the QOF on the QOF's effective date of
voluntary decertification (final investor). This 15-day notification is
separate from the requirement under section 6039K(c) and Sec. 1.6039K-
1(h) that the QOF must furnish investor statements to reportable
investors. The 15-day notification must be furnished by the time and in
the manner set forth in paragraphs (a)(3)(iv)(B) and (C) of this
section. In addition, the 15-day notification must contain--
(1) A statement that informs each final investor referred to in
this paragraph (a)(3)(iv)(A) that, if applicable, the election under
section 1400Z-2(c) no longer is available for that final investor's
qualifying investment because the certification of the entity as a QOF
has terminated (see paragraph (a)(3)(vi)(C) of this section); and
(2) Any information necessary for each such final investor to
report, if applicable, an inclusion event on the QOF's effective date
of voluntary decertification if the voluntary decertification occurs
before the inclusion date specified in section 1400Z-2(b)(1)(B).
(B) Time for furnishing 15-day notification. The 15-day
notification described in paragraph (a)(3)(iv)(A) of this section must
be furnished to each final investor by the earlier of--
(1) 15 days after the QOF's effective date of voluntary
decertification, as determined under paragraph (a)(3)(vi)(A) of this
section; or
(2) The date contracted upon by the parties for the receipt of such
written notification by investors.
(C) Manner for furnishing 15-day notification. The 15-day
notification required by paragraph (a)(3)(iv)(A) of this section must
be made in writing and furnished to the investors using any reasonable
manner.
(v) Failure to satisfy the voluntary decertification requirements.
If a QOF fails to maintain contemporaneous written documentation of the
QOF's intent to terminate its certification as required by paragraph
(a)(3)(iii) of this section--
(A) The voluntary decertification of the QOF will not be valid; and
(B) The QOF will continue to be subject to the requirements of
section 1400Z-2 and the section 1400Z-2 regulations, as defined in
Sec. 1.1400Z2(a)-1(b)(44).
(vi) Consequences of a voluntary decertification--(A) Effective
date of voluntary decertification. A QOF's voluntary decertification is
effective on the last day of the month that the QOF identifies in its
contemporaneous written documentation as the last month for which the
entity is certified as a QOF.
(B) Voluntary decertification is an inclusion event--(1) In
general. A QOF's voluntary decertification is binding on the QOF's
final investors. Each final investor that is a QOF owner, as defined in
Sec. 1.1400Z2(a-1(b)(23), will have an inclusion event, as defined in
Sec. 1.1400Z2(b-1(c), with respect to their qualifying investment in
the QOF on the
[[Page 57993]]
QOF's effective date of voluntary decertification. See Sec.
1.1400Z2(b-1(c)(15).
(2) Eligibility for continued deferral of gain arising from an
inclusion event due to voluntary decertification. Gain that otherwise
is required to be included in gross income by a final investor is
eligible for continued deferral if the gain is reinvested in a QOF with
a taxpayer identification number (TIN) that is different from the
decertified QOF and all requirements to elect to defer eligible gain
under section 1400Z-2(a)(1)(A) are satisfied. See Sec. 1.1400Z2(a-
1(b)(11)(iv).
(C) No section 1400Z-2(c) election permitted. Each final investor
that is a QOF owner is not eligible to make an election under section
1400Z-2(c) with regard to the sale or exchange of that investment on
any date on or after the QOF's effective date of voluntary
decertification. See Sec. 1.1400Z2(c-1(b)(1)(i).
(vii) Examples. The following examples illustrate the rules
described in this paragraph (a)(3).
(A) Example 1: Valid voluntary decertification--(1) Facts. In 2027,
individuals A and B formed partnership Q, which uses a calendar taxable
year, for the purpose of investing in qualified opportunity zone
property. The partnership agreement does not provide for a date by
which partners must receive written notification of a voluntary
decertification of the partnership's status as a QOF. Q properly self-
certified as a QOF as of February 1, 2027, and has thereafter complied
with section 1400Z-2 and the section 1400Z-2 regulations, as defined in
Sec. 1.1400Z2(a-1(b)(44). A acquired a qualifying investment in Q on
February 28, 2027. B has a non-qualifying investment in Q. On June 30,
2030, A and B held a meeting in which A and B determined that Q would
voluntarily decertify and that July of 2030 would be the last month
that Q is certified as a QOF. Q memorialized the determination to
voluntarily decertify and the last month of Q's certification in the
meeting minutes for the meeting held on June 30, 2030, and thereafter
maintained a copy of the meeting minutes in its records. On August 15,
2030, Q provided written notification to A and B of its voluntary
decertification as of July 31, 2030. Q's notification informs A and B
that Q is voluntarily decertifying as a QOF and that A and B may have
an inclusion event on July 31, 2030, with respect to their investments
in Q. Q's notification also informs A and B that they are, if
applicable, no longer eligible to make an election under section 1400Z-
2(c) on any date on or after July 31, 2030. Q reports its voluntary
decertification on its final information return on Form 8996 with its
timely filed original 2030 Form 1065, U.S. Return of Partnership
Income. Q also reports on Form 8996 that its last month for which Q is
certified as a QOF is July of 2030.
(2) Analysis. Q's voluntary decertification is valid because Q
followed the procedures set forth in paragraph (a)(3)(i) of this
section. Q satisfied the contemporaneous written documentation
requirement under paragraph (a)(3)(iii) of this section by
memorializing A and B's determination to terminate Q's certification as
a QOF in July of 2030, in the meeting minutes for the June 30, 2030,
meeting. Q also furnished the written notification of Q's voluntary
decertification to its final investors, A and B, within the 15-day
period required under paragraph (a)(3)(iv) of this section. Q reported
its voluntary decertification on its final information return on Form
8996, which was timely filed on Q's Form 1065 for the taxable year
ended December 31, 2030. The result of Q following the procedures set
forth in paragraph (a)(3)(i) of this section is that Q's effective date
of voluntary decertification date is July 31, 2030, the last day of the
month identified in Q's contemporaneous written documentation. See
paragraph (a)(3)(vi)(A) of this section. Additionally, on that
effective date, A has an inclusion event with regard to A's qualifying
investment in Q. See paragraph (a)(3)(vi)(B)(1) of this section.
Finally, B does not have an inclusion event with respect to B's
investment because B held a non-qualifying investment in Q on Q's
effective date of voluntary decertification.
(B) Example 2: Disallowance of the election under section 1400Z-
2(c) due to a voluntary decertification--(1) Facts. The facts are the
same as in paragraph (a)(3)(vii)(A)(1) of this section (Example 1)
except that A and B held a meeting on June 1, 2038, and decided to
voluntarily decertify Q effective on June 30, 2038. Q memorialized the
determination and the last month of Q's certification in the meeting
minutes for A and B's meeting on June 1, 2038, and thereafter
maintained a copy of the meeting minutes in its records. On July 15,
2038, Q provided a notification of its voluntary decertification to
both A and B in accordance with paragraph (a)(3)(iv) of this section.
On July 1, 2039, A sells A's investment in Q.
(2) Analysis. The analysis regarding whether Q followed the
procedure for voluntary decertification set forth in paragraph
(a)(3)(i) of this section is the same as in paragraph (a)(3)(vii)(A)(1)
of this section except that Q's effective date of voluntary
decertification is June 30, 2038. In addition, in determining the
amount of gain recognized by A upon A's sale of its partnership
interest in Q, A is not permitted to make an election under section
1400Z-2(c) with regard to A's sale. See paragraph (a)(3)(vi)(C) of this
section. A did not hold a qualifying investment in Q at the time of A's
sale because Q was not certified as a QOF on the date of the sale. See
Sec. 1.1400Z2(c)-1(b).
* * * * *
(e) * * *
(3) Applicability date. The rules of paragraphs (a)(2) and (3) of
this section apply to taxable years ending on or after [date of
publication of final regulations in the Federal Register].
0
Par. 5. Section 1.1400Z2(d)-2 is amended by:
0
1. Revising paragraph (d)(1), the heading of paragraph (d)(3), revising
paragraph (d)(3)(i), and the heading of paragraph (d)(3)(ii);
0
2. Adding paragraph (d)(3)(iii);
0
3. Revising the first sentence of paragraph (d)(4)(i); and
0
4. Adding paragraph (e)(3).
The additions and revisions read as follows:
Sec. 1.1400Z2(d)-2 Qualified opportunity zone business property.
* * * * *
(d) * * *
(1) In general. In the case of tangible property that is owned or
leased by either a QOF or qualified opportunity zone business, during
substantially all of the QOF's or qualified opportunity zone business's
holding period for the tangible property, substantially all of the use
of the tangible property must be in a qualified opportunity zone.
* * * * *
(3) Substantially all of a QOF's or qualified opportunity zone
business's holding period for owned or leased tangible property--(i) In
general. For purposes of determining whether the holding period
requirement in paragraph (d)(1) of this section is satisfied, the term
substantially all means at least 90 percent. The holding period is
applied on a semiannual basis, based on the entire time the QOF or
qualified opportunity zone business has owned or leased such property.
Thus, on each semiannual testing date of the QOF or the qualified
opportunity zone business, the tangible property satisfies the 90-
percent qualified opportunity zone business property holding period
requirement of section 1400Z-2(d)(2)(D)(i)(II) only if, during at least
90 percent of the period during which the QOF or qualified opportunity
zone
[[Page 57994]]
business has owned or leased the property, the property has satisfied
the 70-percent use test in paragraph (d)(4) of this section.
(ii) Semiannual qualified opportunity zone business property test
by a QOF. * * *
(iii) Semiannual qualified opportunity zone business property test
by a qualified opportunity zone business. For purposes of determining
satisfaction of the 90-percent qualified opportunity zone business
property holding period test described in paragraph (d)(3)(i) of this
section in the case of a qualified opportunity zone business, the
determination of whether property satisfies the 70-percent use test is
made on a semiannual basis on the last day of the first 6-month period
and the last day of the qualified opportunity zone business's taxable
year and pursuant to paragraph (d)(4) of this section.
(4) * * *
(i) * * * Tangible property used in a trade or business of a QOF or
qualified opportunity zone business satisfies the substantially all
requirement of paragraph (d)(1) of this section if and only if the
tangible property is qualified tangible property. * * *
* * * * *
(e) * * *
(3) Applicability date. The rules of paragraphs (d)(1), (d)(3)(i)
through (iii), and (d)(4)(i) of this section apply to taxable years
ending on or after [date of publication of final regulations in the
Federal Register].
0
Par. 6. Sections 1.6039K-1 and 1.6039L-1 are added to read as follows:
Sec.
* * * * *
1.6039K-1 Returns of information with respect to qualified
opportunity funds and qualified rural opportunity funds.
1.6039L-1 Statements of information required to be furnished by
qualified opportunity zone businesses and qualified rural
opportunity zone businesses.
* * * * *
Sec. 1.6039K-1 Returns of information with respect to qualified
opportunity funds and qualified rural opportunity funds.
(a) Definitions--(1) 90-percent investment standard. The term 90-
percent investment standard has the same meaning as in section 1400Z-
2(d)(1) and Sec. 1.1400Z2(a)-1(b)(4).
(2) Applicable qualified opportunity zone business. The term
applicable qualified opportunity zone business, or applicable QOZB,
means any entity that meets, intends to meet, or was organized for the
purposes of meeting, the requirements to be a qualified opportunity
zone business as defined in section 1400Z-2(d)(3)(A) and Sec.
1.1400Z2(d)-1(d)(1) that is--
(i) A corporation in which a qualified opportunity fund holds
qualified opportunity zone stock; or
(ii) A partnership in which a qualified opportunity fund holds a
qualified opportunity zone partnership interest.
(3) Disposition event. The term disposition event means any
inclusion event as defined in Sec. 1.1400Z2(b)-1(c).
(4) Full-time equivalent employees--(i) In general. With respect to
a calendar month, the number of full-time equivalent employees is the
sum of--
(A) The number of employees who are employed on average at lea
[…truncated; see source link]Indexed from Federal Register on September 11, 2026.
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