Extension of Relief for Qualified Opportunity Funds and Investors

Extension of Relief for Qualified Opportunity Funds and Investors Affected by Ongoing

Coronavirus Disease 2019 Pandemic

Notice 2021-10

I. PURPOSE

This notice provides additional relief under section 7508A of the Internal

Revenue Code (Code) for qualified opportunity funds (QOFs) and their investors in

response to the ongoing Coronavirus Disease 2019 (COVID-19) pandemic. This notice

also provides additional relief pursuant to section 1400Z-2(f)(3) and Income Tax

Regulations under section 1400Z-2 of the Code (section 1400Z-2 regulations).

Specifically, this notice extends the relief for QOFs and their investors provided by

Notice 2020-39, 2020-26 I.R.B. 984.

II. BACKGROUND

A. 180-Day Investment Requirement for QOF Investors

Section 1400Z-2(a)(1)(A) provides that if a taxpayer has “gain from the sale to, or

exchange with, an unrelated person of any property held by the taxpayer” the taxpayer

may elect to exclude from gross income for the taxable year “so much of such gain as

does not exceed the aggregate amount invested by the taxpayer in a [QOF] during the

180-day period beginning on the date of such sale or exchange” (180-day investment

requirement). Section 1.1400Z2(a)-1 provides definitions and rules to implement the

180-day investment requirement.

B. 30-Month Substantial Improvement Period for QOFs

Section 1400Z-2(d)(2)(D)(i) provides that tangible property is treated as qualified

opportunity zone business property if the tangible property is used in a trade or

business of the QOF and satisfies three general requirements. One of these

requirements is that the original use of post-2017 acquired tangible property in the

qualified opportunity zone must begin with the QOF (referred to as the “original use

requirement”), or the QOF must substantially improve that property (substantial

improvement requirement). See section 1400Z-2(d)(2)(D)(i)(II). The substantial

improvement requirement is met only if, during any 30-month period beginning after the

date of acquisition of the post-2017 acquired tangible property, there are “additions to

basis with respect to such property” held by the QOF that, in the aggregate, exceed the

QOF’s adjusted basis of that property as of the beginning of that 30-month period (30-

month substantial improvement period). See section 1400Z-2(d)(2)(D)(ii).

Section 1.1400Z2(d)-2(b)(4) provides rules to implement the substantial improvement

requirement.

C. 90-Percent Investment Standard for QOFs

Section 1400Z-2(d)(1) defines a QOF as any investment vehicle organized as a

corporation or a partnership for the purpose of investing in qualified opportunity zone

property (other than another QOF). This definition also requires a QOF to hold at least

90 percent of its assets in qualified opportunity zone property, determined by the

average of the percentage of qualified opportunity zone property held by that QOF as

measured (i) on the last day of the first 6-month period of the taxable year of the QOF,

and (ii) on the last day of the taxable year of the QOF. See section 1400Z-2(d)(1). The

requirement that the average percentages of the QOF’s qualified opportunity zone

property on these two dates (semi-annual testing dates) must equal at least 90 percent

of the QOF’s assets is referred to as the 90-percent investment standard. See section

1400Z-2(f). Section 1.1400Z2(d)-1 provides definitions and rules to implement the 90-

percent investment standard.

If the average of the percentages of the qualified opportunity zone property held

by a QOF on these semi-annual testing dates fails to meet the 90-percent investment

standard, section 1400Z-2(f)(1) provides a general rule that the QOF must pay a penalty

for each month that the QOF fails to meet that standard. However, section 1400Z-

2(f)(3) provides that no such penalty is imposed “with respect to any failure if it is shown

that such failure is due to reasonable cause.”

D. Working Capital Safe Harbor for Qualified Opportunity Zone Businesses

An entity must meet certain requirements to be a qualified opportunity zone

business, including the requirement of section 1397C(b)(8) of the Code that less than 5

percent of the average of the aggregate unadjusted bases of the entity’s property be

attributable to nonqualified financial property, as defined in section 1397C(e). See

section 1400Z-2(d)(3)(A)(ii). Section 1397C(e) excludes from nonqualified financial

property reasonable amounts of working capital that are held in cash, cash equivalents,

or debt instruments with a term of 18 months or less. See § 1.1400Z2(d)-1(d)(3)(iv).

The section 1400Z-2 regulations provide qualified opportunity zone businesses

with a safe harbor for treating an amount of working capital as reasonable for purposes

of section 1397C(e) if certain requirements are satisfied (working capital safe harbor).

See § 1.1400Z2(d)-1(d)(3)(v) (providing the scope of the working capital safe harbor

and conditions for eligibility). One of those requirements is that there is a written

schedule consistent with the ordinary start-up of a trade or business for the expenditure

of the working capital assets within 31 months of the receipt by the business of the

assets. See § 1.1400Z2(d)-1(d)(3)(v)(B). A qualified opportunity zone business may

extend the working capital safe harbor period to a maximum 62-month period under

§ 1.1400Z2(d)-1(d)(3)(vi) if certain additional requirements are met.

If such qualified opportunity zone business is located in a qualified opportunity

zone within a Federally declared disaster (as defined in section 165(i)(5)(A) of the

Code), the qualified opportunity zone business may receive not more than an additional

24 months to expend its working capital assets, as long as the qualified opportunity

zone business otherwise meets the requirements of the working capital safe harbor.

See § 1.1400Z2(d)-1(d)(3)(v)(D). Therefore, a qualified opportunity zone business may,

if each applicable requirement of § 1.1400Z2(d)-1(d)(3)(v) and (vi) is satisfied, have up

to a maximum 86-months to expend working capital assets if the qualified opportunity

zone business is located in a qualified opportunity zone within a Federally declared

disaster.

E. 12-Month Reinvestment Period for QOFs

The section 1400Z-2 regulations provide generally that, if (i) a QOF sells or

disposes of some or all of its qualified opportunity zone property or if a distribution with

respect to the QOF’s qualified opportunity zone stock is treated as a return of capital in

the QOF’s hands, and if (ii) the QOF reinvests some or all of the proceeds in qualified

opportunity zone property by the last day of the 12-month period beginning on the date

of the distribution, sale, or disposition, then the proceeds, to the extent that they are so

reinvested, are treated as qualified opportunity zone property for purposes of the 90-

percent investment standard. See § 1.1400Z2(f)-1(b)(1). This treatment is available to

a QOF only to the extent that, prior to the reinvestment in qualified opportunity zone

property, the reinvested proceeds are continuously held in cash, cash equivalents, or

debt instruments with a term of 18 months or less. See id.

If the QOF's plan to reinvest some or all of the above-described proceeds in

qualified opportunity zone property is delayed due to a Federally declared disaster (as

defined in section 165(i)(5)(A)), the QOF may receive not more than an additional 12

months to reinvest the proceeds, provided that the QOF invests the proceeds in the

manner originally intended before the disaster. See § 1.1400Z2(f)-1(b)(2).

F. Prior Grants of Relief

On April 9, 2020, the Department of the Treasury (Treasury Department) and the

Internal Revenue Service (IRS) issued Notice 2020-23 to provide relief under section

7508A(a) to taxpayers affected by the COVID-19 emergency by postponing due dates

with respect to certain taxpayer and government acts. See generally Part III of Notice

2020-23 (providing relief for certain time-sensitive actions due to be performed on or

after April 1, 2020, and before July 15, 2020), amplifying Notice 2020-20, 2020-16 I.R.B.

660 (April 13, 2020) and Notice 2020-18, 2020-15 I.R.B. 590 (April 6, 2020), and

modifying Rev. Proc. 2014-42, 2014-29 I.R.B. 192 (July 1, 2014).

On June 4, 2020, the Treasury Department and the IRS issued Notice 2020-39 to

provide relief under section 7508A(a) for QOFs and their investors in response to the

COVID-19 pandemic, and to address the application of certain relief provisions in the

section 1400Z-2 regulations. Specifically, Notice 2020-39 provided the following:

(1) 180-day investment requirement. If the last day of the 180-day investment

period within which a taxpayer must make an investment in a QOF in order to satisfy the

180-day investment requirement falls on or after April 1, 2020, and before December

31, 2020, the last day of that 180-day investment period is postponed to December 31,

2020.

(2) 30-month substantial improvement period. For purposes of the substantial

improvement requirement with respect to property held by a QOF or qualified

opportunity zone business, the period beginning on April 1, 2020, and ending on

December 31, 2020, is disregarded in determining any 30-month substantial

improvement period (that is, the 30-month substantial improvement period is tolled

during the period beginning on April 1, 2020, and ending on March 31, 2021).

In addition, Notice 2020-39 provided the following:

(1) 90-percent investment standard. In the case of a QOF whose (i) last day of

the first 6-month period of the taxable year or (ii) last day of the taxable year falls within

the period beginning on April 1, 2020, and ending on December 31, 2020, any failure by

that QOF to satisfy the 90-percent investment standard for that taxable year of the QOF

is (i) due to reasonable cause under section 1400Z-2(f)(3); and (ii) disregarded for

purposes of determining whether the QOF or any otherwise qualifying investments in

that QOF satisfy the requirements of section 1400Z-2 and the section 1400Z-2

regulations for any taxable year of the QOF.

(2) Working capital safe harbor for qualified opportunity zone businesses. As a

result of the Emergency Declaration

(that is, the declaration of a Federally declared

disaster for purposes of section 165(i)(5)(A)), all qualified opportunity zone businesses

holding working capital assets intended to be covered by the working capital safe harbor

before December 31, 2020, receive not more than an additional 24 months to expend

the working capital assets of the qualified opportunity zone business, as long as the

qualified opportunity zone business otherwise meets the requirements of § 1.1400Z2(d)-

1(d)(3)(v) (that is, the requirements to qualify for the working capital safe harbor).

(3) 12-Month Reinvestment Period for QOFs. If any QOF's 12-month

reinvestment period includes January 20, 2020 (that is, the date of the disaster

identified in the Major Disaster Declarations

), that QOF receives up to an additional 12

months to reinvest in qualified opportunity zone property some or all of the proceeds

received by the QOF from the return of capital or the sale or disposition of some or all of

the QOF's qualified opportunity zone property, provided that the QOF satisfies the

requirements of § 1.1400Z2(f)-1(b)(1) and invests the proceeds in the manner originally

intended before January 20, 2020.

The term “Emergency Declaration” means the March 13, 2020, issuance by the President of the United

States of an emergency declaration under the Robert T. Stafford Disaster Relief and Emergency

Assistance Act (Stafford Act) (42 U.S.C. 5121 et seq.) in response to the ongoing COVID-19 pandemic.

For a description of the Emergency Declaration and section 7508A, see generally Part II.A of Notice

2020-39.

The term “Major Disaster Declarations” means the major disaster declarations issued by the President,

subsequent to the Emergency Declaration, under the authority of the Stafford Act with respect to all 50

states, the District of Columbia, and 5 territories. See https://www.fema.gov/coronavirus/disaster-

declarations.

III. EXTENSION OF RELIEF FOR QOF INVESTORS AND QOFS PROVIDED

PURSUANT TO SECTION 7508A OF THE CODE

A. 180-Day Investment Requirement for QOF Investors

If the last day of the 180-day investment period within which a taxpayer must

make an investment in a QOF in order to satisfy the 180-day investment requirement

falls on or after April 1, 2020, and before March 31, 2021, the last day of that 180-day

investment period is postponed to March 31, 2021. This relief is automatic; taxpayers

do not have to call the IRS or send letters or other documents to the IRS to receive this

relief. However, a taxpayer will still need to make a valid deferral election in accordance

with the instructions to Form 8949, complete Form 8997, and file the completed Form

8949 and Form 8997 with a timely filed Federal income tax return (including extensions)

or amended Federal income tax return for the taxable year in which the gain would be

recognized if section 1400Z-2(a)(1) did not apply to defer recognition of the gain. For

additional information, see https://www.irs.gov/form8949 and

https://www.irs.gov/form8997.

B. 30-Month Substantial Improvement Period for QOFs and Qualified

Opportunity Zone Businesses

For purposes of the substantial improvement requirement with respect to

property held by a QOF or qualified opportunity zone business, the period beginning on

April 1, 2020, and ending on March 31, 2021, is disregarded in determining any 30-

month substantial improvement period (that is, the 30-month substantial improvement

period is tolled during the period beginning on April 1, 2020, and ending on March 31,

2021).

IV. EXTENSION OF RELIEF FOR QOFS AND QUALIFIED OPPORTUNITY ZONE

BUSINESSES PURSUANT TO SECTION 1400Z-2(f)(3) OF THE CODE AND SECTION

1400Z-2 REGULATIONS

A. 90-Percent Investment Standard for QOFs

In the case of a QOF whose (i) last day of the first 6-month period of a taxable

year or (ii) last day of a taxable year falls within the period beginning on April 1, 2020,

and ending on June 30, 2021, any failure by that QOF to satisfy the 90-percent

investment standard for that taxable year of the QOF is due to reasonable cause under

section 1400Z-2(f)(3). Thus, any failure by that QOF to satisfy the 90-percent

investment standard for that taxable year is not taken into account for purposes of

determining whether the QOF or any otherwise qualifying investments in that QOF

satisfy the requirements of section 1400Z-2 and the section 1400Z-2 regulations for any

taxable year of the QOF.

This relief is granted under section 1400Z-2(f)(3) and is automatic; QOFs do not

have to call the IRS or send letters or other documents to the IRS to receive this relief.

However, a QOF must accurately complete all lines on Form 8996 filed with respect to

each affected taxable year EXCEPT that the QOF should place a “0” in Part IV, Line 8

(Penalty). The accurately completed Form 8996 must be filed with the QOF’s timely

filed Federal income tax return (including extensions) for the affected taxable year(s).

For additional information, see https://www.irs.gov/form8996.

B. Working Capital Safe Harbor for Qualified Opportunity Zone Businesses

As a result of the Emergency Declaration (that is, the declaration of a Federally

declared disaster for purposes of section 165(i)(5)(A)), all qualified opportunity zone

businesses holding working capital assets intended to be covered by the working capital

safe harbor before June 30, 2021, receive not more than an additional 24 months,

including any relief provided under Notice 2020-39, for a maximum safe harbor period of

not more than 55 months total (not more than 86 months total for start-up businesses),

to expend the working capital assets of the qualified opportunity zone business, as long

as the qualified opportunity zone business otherwise meets the requirements of

§ 1.1400Z2(d)-1(d)(3)(v) (that is, the requirements to qualify for the working capital safe

harbor). See § 1.1400Z2(d)-1(d)(3)(v)(D) (providing such 24-month extension due to a

Federally declared disaster).

C. 12-Month Reinvestment Period for QOFs

If any QOF’s 12-month reinvestment period includes June 30, 2020, that QOF

receives not more than an additional 12 months, including any relief provided under

Notice 2020-39, for a maximum reinvestment period of not more than 24 months total,

to reinvest in qualified opportunity zone property some or all of the proceeds received

by the QOF from the return of capital or the sale or disposition of some or all of the

QOF’s qualified opportunity zone property, provided that the QOF satisfies the

requirements of § 1.1400Z2(f)-1(b)(1) and invests the proceeds in the manner originally

intended before June 30, 2020. See § 1.1400Z2(f)-1(b)(2) (providing such 12-month

extension due to a Federally declared disaster).

V. EFFECT ON OTHER DOCUMENTS

Notice 2020-23 is modified. Notice 2020-39 is amplified.

VI. DRAFTING INFORMATION

The principal author of this notice is Kyle C. Griffin of the Office of Associate

Chief Counsel (Income Tax and Accounting). For further information regarding this

notice, you may call the COVID-19 Disaster Relief Hotline at (202) 317-5436 (not a toll-

free number). For further information regarding the application of this notice to

section 1400Z-2 and the section 1400Z-2 regulations, please contact Mr. Griffin at

(202) 317-4718 (not a toll-free call).