88 OPPORTUNITY ZONE MAGAZINE | ISSUE 2 • VOLUME 2
viable investment or business activity . It could be that a true “ bad faith ” investment would not even qualify as an eligible investment of gain triggering deferral but note that the 90 % Test takes effect so quickly that there is really no need to spend too much time on those situations – the penalty is expensive and will kick in no later than the second year , so bad faith investments will either terminate quickly or bear painful penalties .
Taxpayers acting in good faith should probably be allowed either to redirect the decertification gain into a new QOF or argue for additional time , under the “ reasonable cause ” standard , to make eligible investments without incurring penalties .
Jill Homan is President of Javelin 19 Investments , an Opportunity Zone focused real estate development , investment , and advisory firm . She has more than 15 years ' experience in real estate development totaling almost $ 500 million in capitalization . Homan is co-developing projects in Opportunity Zones and has successfully raised and closed OZ capital . She has applied her knowledge of emerging communities and expertise in policy and real estate to advise investors and family offices on the OZ incentive . She earned MBA and MPP degrees from Duke University , focusing on finance and authoring a thesis on urban revitalization .
An interesting thought exercise is to look at what the IRS pulled back in the First Correction and try and figure out what they think they did wrong the first time . The excised language generally provided binding mechanisms for decertifying QOFs , and a plausible explanation is that the IRS was trying to provide the Service greater flexibility in addressing the decertification process . The IRS may have been concerned about unintended consequences from allowing taxpayers to decertify themselves without formal decertification action by the IRS .
All of this points to the fact that some QOFs are holding funds , or holding investments in QOZBs , that may not be successful , and the question facing taxpayers with an impending testing date under the 90 % Test is whether to stand pat or throw in the towel . For the reasons articulated above , taxpayers acting in good faith should probably be allowed either to redirect the decertification gain into a new QOF or argue for additional time , under the “ reasonable cause ” standard , to make eligible investments without incurring penalties .
Joseph B . “ Jay ” Darby III is a tax attorney and founder of the Boston-based Joseph Darby Law PC , a firm that concentrates on helping people with tax matters , from the common to the most complex . Darby was one of the early proponents of Opportunity Zones , and has been at the leading edge of the legislation since first enacted . The attorney and tax advisor for more than 100 successful QOFs to date , Darby has been recognized for 13 straight years as one of the best tax lawyers in the U . S . by Best Lawyers ®. He is also Adjunct Professor at Boston University Law School , where he teaches the only full semester law-school course in the U . S . that concentrates solely on Opportunity Zones .
On the other hand , we anticipate that the IRS will have little or no sympathy for projects that never got implemented and where invested funds simply sat in a bank account . In those cases , it may make sense to throw in the towel and recognize the gain – before the IRS throws the book at you .
Arguably this should be simultaneous rather than with a new 180-day window for investment . If the investor knew the QOF was going to fail and found a way to resolve before the inclusion event , then the low-income community ( LIC ) was not harmed . Money was invested timely , just not in the manner expected . No harm no foul . When the new 180-day window is granted , the LIC is harmed to the extent that the investment in the community is delayed for an additional 6 months . That would be the policy reason to prohibit the transaction if a new 180-day window is allowed .
Dan Kowalski is the owner of Wizard of OZ , a bespoke consultancy focused on helping people use the Opportunity Zone incentive . Kowalski was Counselor to the Secretary at the US Department of the Treasury from 2017 until January of 2021 . He was the Treasury official responsible for policy development of the regulations , forms , and instructions required to implement Opportunity Zones . Prior to Treasury , Kowalski worked for Congress for two decades on both the House and Senate Budget Committees .
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