An Opportunity Zone is an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. These investments are Qualified Opportunity Funds (“QOF”s). ACTEC suggests that the proposed regulations be revised to provide relief for successors-in-interest to a QOF investment after a taypayer’s death.
ACTEC provides the following example:
Suppose that D has a $2,000,000 capital gain on April 1, 2019 and timely reinvests it in a QOF on July 1, 2019. D then dies four years later — on July 1, 2023. At the time of D’s death, D’s interest in the QOF is worth only $100,000. D’s Will gives his interest in the QOF to his child, C, as part of the residue of the estate. On December 31, 2026, the interest in the QOF is worth $1,000,000.
Here, the gain is income in respect of a decedent under Code § 691 (“IRD”). Section 1014(c) denies a step-up in basis at death to items of IRD.
It appears that on December 31, 2026, C will be required to recognize all that deferred gain, reduced by basic adjustments applicable to the 5 and 7-year holding periods. C, however, might not have the liquidity to pay the tax, which will be particularly problematic for C if the QOF does not have redemption provisions, or if there is not a secondary market for the QOF interest.
ACTEC suggests that the proper remedy for C’s potential illiquidity is to allow C to defer the IRD until C disposes of his interest in the QOF, thereby protecting C from inheriting a potentially significant tax liability without having the liquidity to pay for it.
ACTEC letter to the IRS re: Treasury Notice 84 Fed. Reg. 18652 (5/1/19): Comments on Proposed Regulations on Qualified Opportunity Funds Under Code Section 1400Z-S. June 27, 2019.