[Federal Register Volume 85, Number 66 (Monday, April 6, 2020)]
[Rules and Regulations]
[Pages 19082-19087]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-07013]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9889]
RIN 1545-BO4


Investing in Qualified Opportunity Funds; Correcting Amendments

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Correcting amendments.

-----------------------------------------------------------------------

SUMMARY: This document contains corrections to Treasury Decision 9889, 
which was published in the Federal Register on Monday, January 13, 
2020. Treasury Decision 9889 contained final regulations under the 
Internal Revenue Code (the ``Code) that govern the extent to which 
taxpayers may elect the Federal income tax benefits with respect to 
certain equity interests in a qualified opportunity fund (QOF).

DATES: These corrections are effective on April 1, 2020, and applicable 
as of January 13, 2020.

FOR FURTHER INFORMATION CONTACT: Concerning section 1400Z-2 and these 
regulations generally, Alfred H. Bae, (202) 317-7006, or Kyle C. 
Griffin, (202) 317-4718, of the Office of Associate Chief Counsel 
(Income Tax and Accounting); concerning issues related to C 
corporations and consolidated groups, Jeremy Aron-Dine, (202) 317-6848, 
or Sarah Hoyt, (202) 317-5024, of the Office of Associate Chief Counsel 
(Corporate); concerning issues related to gains from financial 
contracts, REITs, or RICs, Andrea Hoffenson or Pamela Lew, (202) 317-
7053, of the Office of Associate Chief Counsel (Financial Institutions 
and Products); concerning issues related to investments by foreign 
persons, Eric Florenz, (202) 317-6941, or Milton Cahn (202) 317-6937, 
of the Office of Associate Chief Counsel (International); concerning 
issues related to partnerships, S corporations or trusts, Marla 
Borkson, Sonia Kothari, or Vishal Amin, at (202) 317-6850, and 
concerning issues related to estates and gifts, Leslie Finlow or 
Lorraine Gardner, at (202) 317-6859, of the Office of Associate Chief 
Counsel (Passthroughs and Special Industries). These numbers are not 
toll-free numbers.

SUPPLEMENTARY INFORMATION:

Background

    The final regulations (TD 9889) that are the subject of this 
correction are under section 1400Z-2 of the Code.

Need for Correction

    As published on January 13, 2020 (85 FR 1866) contained errors that 
may prove to be misleading and need to be corrected.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Correction of Publication

    Accordingly, 26 CFR part 1 is corrected by making the following 
correcting amendments:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation continues to read in part as 
follows:

    Authority:  26 U.S.C. 7805 * * *


0
Par. 2. Section1.1400Z2-0 is amended:
0
a. By revising the entry for Sec.  1.1400Z2(a)-1(d)(2);
0
b. In the entry for Sec.  1.1400Z2(b)-1(h) introductory text, by 
removing the language ``S corporations''; and
0
c. By revising the entry for Sec.  1.1400Z2(d)-1(a)(4).
    The revisions read as follows:


Sec.  1.1400Z2-0   Table of Contents.

* * * * *
    Sec.  1.1400Z2(a)-1 Deferring tax on capital gains by investing in 
opportunity zones.
* * * * *
    (d) * * *
    (2) Annual reporting of qualifying investments.
* * * * *
    Sec.  1.1400Z2(d)-1 Qualified opportunity funds and qualified 
opportunity zone businesses.
    (a) * * *
    (4) [Reserved]
* * * * *

[[Page 19083]]


0
Par. 3. Section 1.1400Z2(a)-1 is amended:
0
a. In paragraph (b)(3) by adding the language ``described in Sec.  
1.1400Z2(d)-2(d)(4)(ii) that is'' after the words ``means the test'';
0
b. In the last sentence of paragraph (b)(11)(ix)(A)(2), by removing the 
language ``publications'' and adding in its place ``instructions'';
0
c. In paragraph (b)(32), by removing the word ``business'';
0
d. In the last sentence of paragraph (c)(1)(iii)(A), by removing the 
word ``only'' before ``apply''; and
0
e. By revising paragraphs (d)(2), (g)(2) introductory text, and 
(g)(2)(i).
    The revisions read as follows:


Sec.  1.1400Z2(a)-1   Deferring tax on capital gains by investing in 
opportunity zones.

* * * * *
    (d) * * *
    (2) Annual reporting of qualifying investments. An eligible 
taxpayer must report any qualifying investment held at any point during 
the taxable year in accordance with guidance published in the Internal 
Revenue Bulletin or in forms and instructions (see Sec. Sec.  
601.601(d)(2) and 601.602 of this chapter). A failure to make this 
report for any given taxable year will result in a rebuttable 
presumption that the taxpayer has had an inclusion event described in 
Sec.  1.1400Z2(b)-1(c) during that year. The presumption described in 
the previous sentence may be rebutted by the taxpayer making the report 
described in the first sentence of this paragraph (d)(2) or by the 
taxpayer establishing to the satisfaction of the Commissioner that an 
inclusion event described in Sec.  1.1400Z2(b)-1(c) did not occur 
during that taxable year.
* * * * *
    (g) * * *
    (2) Prior periods. With respect to eligible gains that would be 
recognized (absent the making of a deferral election) during the 
portion of a taxpayer's first taxable year ending after December 21, 
2017, and during taxable years beginning after December 21, 2017, and 
on or before March 13, 2020, a taxpayer may choose either--
    (i) To apply the section 1400Z-2 regulations, if applied in a 
consistent manner for all such taxable years (reliance by a taxpayer 
under paragraph (g)(2)(ii) of this section, Sec.  1.1400Z2(b)-
1(j)(2)(ii), Sec.  1.1400Z2(d)-1(e)(2)(ii), Sec.  1.1400Z2(d)-
2(e)(2)(ii), or Sec.  1.1400Z2(f)-1(d)(2)(ii), is disregarded solely 
for purposes of the consistency requirement under this paragraph 
(g)(2)(i)); or
* * * * *

0
Par. 4. Section 1.1400Z2(b)-1 is amended:
0
a. In the last sentence of paragraph (c)(6)(ii)(B), by removing ``Sec.  
1400Z2(c)-1(b)(1)(ii)'' and adding in its place ``Sec.  1.1400Z2(c)-
1(b)(1)(ii)''; and
0
b. By revising paragraphs (j)(2) introductory text and (j)(2)(i).
    The revisions read as follows:


Sec.  1.1400Z2(b)-1   Inclusion of gains that have been deferred under 
section 1400Z-2(a)

* * * * *
    (j) * * *
    (2) Prior periods. With respect to the portion of a taxpayer's 
first taxable year ending after December 21, 2017, and for taxable 
years beginning after December 21, 2017, and on or before March 13, 
2020, a taxpayer may choose either--
    To apply the section 1400Z-2 regulations, if applied in a 
consistent manner for all such taxable years (reliance by a taxpayer on 
paragraph (j)(2)(ii) of this section, Sec.  1.1400Z2(a)-1(g)(2)(ii), 
Sec.  1.1400Z2(d)-1(e)(2)(ii), Sec.  1.1400Z2(d)-2(e)(2)(ii), or Sec.  
1.1400Z2(f)-1(d)(2)(ii), is disregarded solely for purposes of the 
consistency requirement under this paragraph (j)(2)(i)); or
* * * * *


Sec.  1.1400Z2(c)-1   [Amended]

0
Par. 5. Section 1.1400Z2(c)-1 is amended:
0
a. In the first sentence of paragraph (b)(2)(ii)(A), by removing the 
language ``one of more partnerships'' and adding in its place ``one or 
more partnerships''; and
0
b. In the third sentence of paragraph (b)(2)(ii)(B)(1), by removing 
``Sec.  1400Z2(b)-1(c)(6)(iv)(B)'' and adding in its place ``Sec.  
1.1400Z2(b)-1(c)(6)(iv)(B)''.

0
Par. 6. Section 1.1400Z2(d)-1 is amended:
0
a. In the first sentence of paragraph (b)(2)(i)(C)(2)(ii), by removing 
the language ``not later than'' and adding in its place ``not earlier 
than'';
0
b. By revising paragraph (b)(4)(ii);
0
c. In the first sentence of paragraph (c)(2)(i)(C)(2), by removing the 
language ``is made by'' and adding in its place ``may be made by'';
0
d. In paragraph (d)(3)(v)(D), by removing the language ``receive up 
to'' and adding in its place ``receive not more than'';
0
e. By removing paragraphs (d)(3)(v)(F) and (G);
0
f. By revising paragraphs (d)(3)(vi) and (vii);
0
g. By redesignating paragraphs (d)(3)(ix) and (x) as (d)(3)(viii) and 
(ix), respectively; and
0
h. By revising paragraphs (d)(6)(i) and (iii), (e)(2) introductory 
text, and (e)(2)(i).
    The revisions read as follows:


Sec.  1.1400Z2(d)-1  Qualified opportunity funds and qualified 
opportunity zone businesses.

* * * * *
    (b) * * *
    (4) * * *
    (ii) Property owned by an eligible entity--(A) Property purchased 
or constructed. The value of each property owned by an eligible entity 
that is acquired by purchase for fair market value or constructed for 
fair market value is the eligible entity's unadjusted cost basis of the 
asset under section 1012 or section 1013. Solely for purposes of this 
paragraph (b)(4)(ii)(A), the acquisition by a QOF of qualified 
opportunity zone stock or a qualified opportunity zone partnership 
interest is treated as a purchase of such interest by the QOF.
* * * * *
    (d) * * *
    (3) * * *
    (vi) Safe harbor for section 1397C requirements other than ``sin 
business'' prohibition--(A) Maximum 62-month safe harbor for start-up 
businesses. Property described in paragraphs (d)(3)(vi)(B), (C), and 
(D) of this section may benefit from one or more 31-month periods, for 
a total of 62 months, in the form of multiple overlapping or a 
sequential application of the working capital safe harbor if--
    (1) Each application independently satisfies all of the 
requirements in paragraphs (d)(3)(v)(A) through (C) of this section;
    (2) The working capital assets from an expiring 31-month period 
were expended in accordance with the requirements in paragraphs 
(d)(3)(v)(A) through (C) of this section;
    (3) The subsequent infusions of working capital assets form an 
integral part of the plan covered by the initial working capital safe 
harbor period; and
    (4) Each overlapping or sequential application of the working 
capital safe harbor includes a substantial amount of working capital 
assets (which may include debt instruments described in section 
1221(a)(4)).
    (B) Safe harbor for gross income derived from the active conduct of 
business. Solely for purposes of applying the 50-percent test in 
section 1397C(b)(2) to the definition of a qualified opportunity zone 
business in section 1400Z-2(d)(3), if any gross income is derived from 
property that paragraph (d)(3)(v) of this section treats as a 
reasonable amount of working

[[Page 19084]]

capital, then that gross income is counted toward satisfaction of the 
50-percent test.
    (C) Safe harbor for use of intangible property. Solely for purposes 
of applying the use requirement in section 1397C(b)(4) to the 
definition of a qualified opportunity zone business under section 
1400Z-2(d)(3), intangible property purchased or licensed by the trade 
or business, pursuant to the reasonable written plan with a written 
schedule for the expenditure of the working capital, satisfies the use 
requirement during any period in which the business is proceeding in a 
manner that is substantially consistent with paragraphs (d)(3)(v)(A) 
through (C) of this section.
    (D) Safe harbor for working capital and property on which working 
capital is being expended--(1) Working capital. If paragraph (d)(3)(v) 
of this section treats property of an entity that would otherwise be 
nonqualified financial property as being a reasonable amount of working 
capital because of compliance with the three requirements of paragraphs 
(d)(3)(v)(A) through (C) of this section, the entity satisfies the 
requirements of section 1400Z-2(d)(2)(D)(i) only during the working 
capital safe harbor period(s) for which the requirements of paragraphs 
(d)(3)(v)(A) through (C) of this section are satisfied; however such 
property is not qualified opportunity zone business property for any 
purpose.
    (2) Tangible property acquired with covered working capital. If 
tangible property referred to in paragraph (d)(3)(v)(A) of this section 
is expected to satisfy the requirements of section 1400Z-2(d)(2)(D)(i) 
as a result of the planned expenditure of working capital described in 
paragraph (d)(3)(v)(A), and is purchased, leased, or improved by the 
trade or business, pursuant to the written plan for the expenditure of 
the working capital, then the tangible property is treated as qualified 
opportunity zone business property satisfying the requirements of 
section 1400Z-2(d)(2)(D)(i), during that and subsequent working capital 
periods the property is subject to, for purposes of the 70-percent 
tangible property standard in section 1400Z-2(d)(3).
    (vii) Examples. The following examples illustrate the rules of 
paragraphs (d)(3)(v) and (vi) of this section.
    (A) Example 1. General application of working capital safe harbor--
(1) Facts. QOF F creates a domestic C corporation E to open a fast-food 
restaurant and acquires almost all of the equity of E in exchange for 
cash. E has a written plan and a 20-month schedule for the use of this 
cash to establish the restaurant. Among the planned uses for the cash 
are identification of favorable locations in the qualified opportunity 
zone, leasing a building suitable for such a restaurant, outfitting the 
building with appropriate equipment and furniture (both owned and 
leased), necessary security deposits, obtaining a franchise and local 
permits, and the hiring and training of kitchen and wait staff. Not-
yet-disbursed amounts were held in assets described in section 
1397C(e)(1), and these assets were eventually expended in a manner 
consistent with the plan and schedule.
    (2) Analysis. E's use of the cash qualifies for the working capital 
safe harbor described in paragraph (d)(3)(v) of this section.
    (B) Example 2. Multiple applications of working capital safe 
harbor--(1) Facts. QOF G creates a domestic C corporation H to start a 
new technology company and acquires equity of H in exchange for cash on 
Date 1. In addition to H's rapid deployment of capital received from 
other equity investors, H writes a plan with a 30-month schedule for 
the use of the Date 1 cash. The plan describes use of the cash to 
research and develop a new technology (Technology), including paying 
salaries for engineers and other scientists to conduct the research, 
purchasing, and leasing equipment to be used in research and furnishing 
office and laboratory space. Approximately 18 months after Date 1, on 
Date 2, G acquires additional equity in H for cash, and H writes a 
second plan. This new plan has a 25-month schedule for the development 
of a new application of existing software (Application), to be marketed 
to government agencies. Among the planned uses for the cash received on 
Date 2 are paying development costs, including salaries for software 
engineers, other employees, and third-party consultants to assist in 
developing and marketing the new application to the anticipated 
customers. Not-yet-disbursed amounts that were scheduled for 
development of the Technology and the Application were held in assets 
described in section 1397C(e)(1), and these assets were eventually 
expended in a manner substantially consistent with the plans and 
schedules for both the Technology and the Application.
    (2) Analysis. H's use of both the cash received on Date 1 and the 
cash received on Date 2 qualifies for the working capital safe harbor 
described in paragraph (d)(3)(v) of this section.
    (C) Example 3. General application of working capital safe harbor--
(1) Facts. In 2019, Taxpayer H realized $w million of capital gains and 
within the 180-day period invested $w million in QOF T, a qualified 
opportunity fund. QOF T immediately acquired from partnership P a 
partnership interest in P, solely in exchange for $w million of cash. P 
immediately placed the $w million in working capital assets, which 
remained in working capital assets until used. P had written plans to 
acquire land in a qualified opportunity zone on which it planned to 
construct a commercial building. Of the $w million, $x million was 
dedicated to the land purchase, $y million to the construction of the 
building, and $z million to ancillary but necessary expenditures for 
the project. The written plans provided for purchase of the land within 
a month of receipt of the cash from QOF T and for the remaining $y and 
$z million to be spent within the next 30 months on construction of the 
building and on the ancillary expenditures. All expenditures were made 
on schedule, consuming the $w million. During the taxable years that 
overlap with the first 31-month period, P had no gross income other 
than that derived from the amounts held in those working capital 
assets. Prior to completion of the building, P's only assets were the 
land it purchased, the unspent amounts in the working capital assets, 
and P's work in process as the building was constructed.
    (2) Analysis--P met the three requirements of the safe harbor 
provided in paragraphs (d)(3)(v)(A) through (C) of this section. P had 
a written plan to spend the $w received from QOF T for the acquisition, 
construction, and/or substantial improvement of tangible property in a 
qualified opportunity zone, as defined in section 1400Z-1(a). P had a 
written schedule consistent with the ordinary start-up for a business 
for the expenditure of the working capital assets. And, finally, P's 
working capital assets were actually used in a manner that was 
substantially consistent with its written plan and the ordinary start-
up of a business. First, the $x million, the $y million, and the $z 
million are treated as reasonable in amount for purposes of sections 
1397C(b)(2) and 1400Z-2(d)(3)(A)(ii). Second, because P had no other 
gross income during the 31 months at issue, 100 percent of P's gross 
income during that time is treated as derived from an active trade or 
business in the qualified opportunity zone for purposes of satisfying 
the 50-percent test of section 1397C(b)(2). Third, for purposes of 
satisfying the requirement of section 1397C(b)(4), during the period of 
land acquisition and building construction a substantial portion of P's 
intangible property is treated as being used in the active conduct of a 
trade or

[[Page 19085]]

business in the qualified opportunity zone. Fourth, all of the facts 
described are consistent with QOF T's interest in P being a qualified 
opportunity zone partnership interest for purposes of satisfying the 
90-percent investment standard in section 1400Z-2(d)(1).
    (3) Analysis if P had purchased an existing building. The 
conclusions would also apply if P's plans had been to buy and 
substantially improve a pre-existing commercial building. In addition, 
the fact that P's basis in the building has not yet doubled would not 
cause the building to fail to satisfy section 1400Z-2(d)(2)(D)(i)(III).
    (D) Example 4. Multiple applications of working capital safe harbor 
to tangible property--(1) Facts. QOF A forms a domestic C corporation B 
to develop a large mixed-use real estate development that will consist 
of commercial and residential real property, owning almost all of the 
equity of B in exchange for cash. To raise additional working capital 
for the mixed-use real estate development, B also will borrow cash 
under a new revolving credit agreement with an unrelated lender. B has 
a master written plan for the completion of the commercial and 
residential real property over a 55-month period. The plan provides 
that the commercial real property will be completed over a 30 month 
schedule and subsequently, the residential real property will be 
completed over a 25 month schedule. The plan further provides that a 
portion of the commercial real property is unable to be used in a trade 
or business after the completion of the commercial real property since 
that portion of the commercial real property will be unusable during 
the residential construction phase. Pursuant to B's original master 
plan for the completion of the real estate development, QOF A acquires 
additional equity in B for cash after the completion of the commercial 
development phase, and B commences use of those working capital assets 
for residential development phase.
    (2) Analysis. B's use of the cash for the commercial and 
residential phase qualified for the working capital safe harbor 
described in paragraph (d)(3)(v) of this section. In addition, all of 
B's commercial real property developed pursuant to B's original master 
plan is treated as qualified opportunity zone business property under 
paragraph (d)(3)(vi)(D) of this section.
* * * * *
    (6) * * *
    (i) For purposes of the 90-percent qualified opportunity zone 
business holding period requirements set forth in sections 1400Z-
2(d)(2)(B)(i)(III), 1400Z-2(d)(2)(C)(iii), and 1400Z-
2(d)(2)(D)(i)(III), if a trade or business causes the QOF to fail the 
90-percent investment standard on a semiannual testing date, the QOF 
may treat the stock or partnership interest in that trade or business 
as qualified opportunity zone property for that semiannual testing date 
provided the trade or business corrects the failure within 6 months of 
the date on which the stock or partnership interest lost its 
qualification.
* * * * *
    (iii) Each QOF is permitted only one correction for a trade or 
business pursuant to this paragraph (d)(6). If the entity, at the end 
of the additional six-month cure period, fails to qualify as a 
qualified opportunity zone business, then the QOF becomes subject to 
the penalty under section 1400Z-2(f)(1) for each month the entity 
failed to qualify as a qualified opportunity zone business beginning 
with the first month following the last month that the QOF met the 90-
percent investment standard.
    (e) * * *
    (2) Prior periods. With respect to the portion of a taxpayer's 
first taxable year ending after December 21, 2017, and for taxable 
years beginning after December 21, 2017, and on or before March 13, 
2020, a taxpayer may choose either--
    (i) To apply the section 1400Z-2 regulations, if applied in a 
consistent manner for all such taxable years (reliance by a taxpayer on 
paragraph (e)(2)(ii) of this section, Sec.  1.1400Z2(a)-1(g)(2)(ii), 
Sec.  1.1400Z2(b)-1(j)(2)(ii), Sec.  1.1400Z2(d)-2(e)(2)(ii), or Sec.  
1.1400Z2(f)-1(d)(2)(ii), is disregarded solely for purposes of the 
consistency requirement under this paragraph (e)(2)(i)); or
* * * * *

0
Par. 7. Section 1.1400Z2(d)-2 is amended by revising paragraphs 
(d)(4)(i) and (ii), (e)(2) introductory text, and (e)(2)(i) to read as 
follows:


Sec.  1.1400Z2(d)-2  Qualified opportunity zone business property.

* * * * *
    (d) * * *
    (4) * * *
    (i) Qualified tangible property. Tangible property used in a trade 
or business of an eligible entity satisfies the substantially all 
requirement of paragraph (d)(1) of this section if and only if the 
tangible property is qualified tangible property. Qualified tangible 
property is tangible property that satisfies the requirements of 
paragraph (d)(4)(ii), (iii) (subject to the limitation in paragraph 
(d)(4)(iv) of this section), or (v) of this section.
    (ii) 70-percent use test. Tangible property held by a trade or 
business is qualified tangible property to the extent, based on the 
number of days between two consecutive semiannual testing dates, not 
less than 70 percent of the total utilization of the tangible property 
by the trade or business occurs at a location within the geographic 
borders of a qualified opportunity zone (that is, the 70-percent use 
test).
* * * * *
    (e) * * *
    (2) Prior periods. With respect to the portion of a taxpayer's 
first taxable year ending after December 21, 2017, and for taxable 
years beginning after December 21, 2017, and on or before March 13, 
2020, a taxpayer may choose either--
    (i) To apply the section 1400Z-2 regulations, if applied in a 
consistent manner for all such taxable years (reliance by a taxpayer on 
paragraph (e)(2)(ii) of this section, Sec.  1.1400Z2(a)-1(g)(2)(ii), 
Sec.  1.1400Z2(b)-1(j)(2)(ii), Sec.  1.1400Z2(d)-1(e)(2)(ii), or Sec.  
1.1400Z2(f)-1(d)(2)(ii), is disregarded solely for purposes of the 
consistency requirement under this paragraph (e)(2)(i)); or
* * * * *

0
Par. 9. Section 1.1400Z2(f)-1 is amended:
0
a. In paragraph (b)(2), by removing the language ``up to'' and adding 
in its place ``not more than'';
0
b. By revising paragraph (c)(3)(iii);
0
c. In the first sentence of paragraph (c)(3)(v)(B), by adding a comma 
after ``hog and pig farming'' and removing the word ``is'' and adding 
in its place ``comprise''; and
0
d. By revising paragraphs (d)(2) introductory text and (d)(2)(i).
    The revisions read as follows:


Sec.  1.1400Z2(f)-1  Administrative rules- penalties, anti-abuse, etc.

* * * * *
    (c) * * *
    (3) * * *
    (iii) Example 3--(A) Facts. Entity C is a QOF that meets the 
requirements of section 1400Z-2(d)(1). Entity C owns qualified 
opportunity zone stock in a domestic corporation described in section 
1400Z-2(d)(2)(B) (Corporation C), which operates a qualified 
opportunity zone business. Entity C also owns Corporation D stock, 
which is not qualified opportunity zone stock, which stock is less than 
10% of the assets of Entity C. Under section 1400Z-2(e)(2), these stock 
holdings cause Entity C to be related to both Corporation C and 
Corporation D. On date 1, under section 1400Z-2(e)(2), Individual S is 
not a related person with respect to Entity C,

[[Page 19086]]

Corporation C, or Corporation D. On that date, Individual S sells 
tangible property to Corporation C (Asset 1) for use in Corporation C's 
qualified opportunity zone business and sells a second asset to 
Corporation D (Asset 2). Both items sold were capital assets (as 
defined in section 1221), and had an adjusted basis of $0. As a result, 
Individual S realizes gain of $100 from the sale to Corporation C and 
$75 from the sale to Corporation D. At the time of the sale Individual 
S has a plan or intent to invest $175 in Entity C and to make deferral 
elections under section 1400Z-2(a)(1) with respect to the gain from the 
two sales. On date 2, for $175 Individual S acquired an eligible 
interest in Entity C, an acquisition that causes Individual S to become 
a related person with respect to Entity C within the meaning of section 
1400Z-2(e)(2). Analysis. Under paragraph (c)(1) of this section, 
Individual S's $175 gain is not an eligible gain and cannot be the 
subject a deferral election under section 1400Z-2(a)(1). The gain fails 
to satisfy Sec.  1.1400Z2a-1(b)(11)(i)(C) because of Individual S's 
plan to acquire sufficient equity in Entity C to become related to 
Corporations C and D. Moreover, for the same reason, the tangible 
property that Corporation C purchased from Individual S fails to 
satisfy the requirement that a purchase of qualified opportunity zone 
business property must be from an unrelated person. See sections 1400Z-
2(d)(2)(D)(i)(I) and 179(d)(2)(A).
    (B) Circular movement of consideration. The facts are the same as 
in paragraph (c)(3)(iii)(A) of this section (this Example 3), except 
that Entity C contributes the $100 and $75 (received from Individual S) 
to Corporations C and D, respectively, as part of a plan that includes 
each transaction described in paragraph (c)(3)(iii)(A) (collectively, 
the transaction series). Under the step transaction doctrine and 
circular cash flow principles, this circular movement of consideration 
is disregarded for Federal income tax purposes, including for purposes 
of section 1400Z-2 and the section 1400Z-2 regulations. Therefore, the 
transaction series is treated for Federal income tax purposes as a 
contribution by Individual S of Assets 1 and 2 to Entity C in exchange 
for an eligible interest in Entity C, followed by a contribution by 
Entity C of Assets 1 and 2 to Corporations C and D, respectively. This 
result also would obtain if Individual S were not related to Entity C 
immediately following Individual S's acquisition of its eligible 
interest from Entity C. See Rev. Rul. 83-142, 1983-2 C.B. 68; Rev. Rul. 
78-397, 1978-2 C.B. 150.
* * * * *
    (d) * * *
    (2) Prior periods. With respect to the portion of a taxpayer's 
first taxable year ending after December 21, 2017, that began on March 
13, 2020, a taxpayer may choose either--
    (i) To apply the section 1400Z-2 regulations, if applied in a 
consistent manner for all such taxable years (reliance by a taxpayer on 
paragraph (d)(2)(ii) of this section, Sec.  1.1400Z2(a)-1(g)(2)(ii), 
Sec.  1.1400Z2(b)-1(j)(2)(ii), Sec.  1.1400Z2(d)-1(e)(2)(ii), or Sec.  
1.1400Z2(d)-2(e)(2)(ii), is disregarded for purposes of the consistency 
requirement under this paragraph (d)(2)(i)); or
* * * * *

0
Par. 10. Section 1.1502-14Z is amended:
0
a. In paragraph (b)(1)(iv)(A), by removing the language ``the QOF SAG'' 
and adding in its place ``a QOF SAG'';
0
b. In the first sentence of paragraph (b)(1)(iv)(B), by removing the 
language ``the QOF SAG'' and adding in its place ``a QOF SAG'' and 
removing the language ``such QOF SAG'' and adding in its place ``a 
single QOF SAG'';
0
c. In paragraph (b)(1)(iv)(C), by removing the language ``the QOF SAG'' 
and adding in its place ``a QOF SAG'' and removing the language ``such 
QOF SAG'' and adding in its place ``that QOF SAG'';
0
d. In the first sentence of paragraph (b)(1)(v), by removing the 
language ``; instead, the rules in this paragraph (b)(1)(v) apply'' and 
adding in its place ``. Instead, those investment standard rules 
apply'';
0
e. In the first sentence of paragraph (c)(2)(i), by removing the 
language ``the investment'' and adding in its place ``an investment'';
0
f. In the fourth sentence of paragraph (c)(3) introductory text, by 
removing the language ``Sec.  1.1400Z2(b)-1(b)'' and adding in its 
place ``Sec.  1.1400Z2(a)-1(a)(1)'';
0
g. By revising the first sentence of paragraph (f)(2)(i);
0
h. In the first sentence of paragraph (f)(2)(ii)(A), by removing the 
language ``certain pre-existing QOF subs as QOF partnerships'' and 
adding in its place ``a pre-existing QOF sub as a QOF partnership'';
0
i. In the first sentence of paragraph (f)(2)(ii)(D)(3)(i), by removing 
the language ``same as paragraph'' and adding in its place ``same as in 
paragraph'';
0
j. In paragraph (f)(2)(iii)(A), by removing the language ``the pre-
existing'' and adding in its place ``a pre-existing'';
0
k. In the last sentence of paragraph (g)(3)(ii), by removing the 
language ``includable amount'' and adding in its place ``amount 
includable'';
0
l. In the last sentence of paragraph (h)(3)(iii)(A), by removing the 
closing bracket at the end;
0
m. In the last sentence of paragraph (j)(1)(i), by removing the 
language ``that results in'' and adding in its place ``that result 
in'';
0
n. In the fourth sentence of paragraph (j)(3)(ii)(A), by removing the 
language ``taken into under'' and adding in its place ``taken into 
account under''; and
0
o. By revising paragraph (k)(2) introductory text.
    The revisions read as follows:


Sec.  1.1502-14Z  Application of opportunity zone rules to members of a 
consolidated group.

* * * * *
    (f) * * *
    (2) * * *
    (i) * * * For each pre-existing QOF sub of a consolidated group, 
the consolidated group may make one of the alternative, irrevocable 
elections provided in paragraphs (f)(2)(ii) through (iv) of this 
section. * * *
* * * * *
    (k) * * *
    (2) Prior periods. With respect to the portion of a consolidated 
group's first taxable year ending after December 21, 2017, and for 
taxable years beginning after December 21, 2017, and on or before March 
13, 2020, a consolidated group may choose either--
* * * * *

0
Par. 11. Section 1.1504-3 is amended:
0
a. In the paragraph (b) subject heading, by removing ``affiliation'' 
and adding in its place ``consolidation'';
0
b. In the first sentence of paragraph (b)(1), by removing ``the 
issuer'' and adding in its place ``any corporation'';
0
c. In the last sentence of paragraph (d)(1)(ii), by removing ``-1.1502-
100'' and adding in its place ``1.1502-100''; and
0
d. By revising paragraph (e)(2) introductory text.
    The revision reads as follows:


Sec.  1.1504-3  Treatment of stock in a QOF C corporation for purposes 
of consolidation.

* * * * *
    (e) * * *
    (2) Prior periods. With respect to the portion of a consolidated 
group's first taxable year ending after December 21, 2017, and for 
taxable years beginning after December 21, 2017, and on or

[[Page 19087]]

before March 13, 2020, a consolidated group may choose either--
* * * * *

Martin V. Franks,
Chief, Publications and Regulations Branch, Legal Processing Division, 
Associate Chief Counsel (Procedure and Administration).
[FR Doc. 2020-07013 Filed 4-1-20; 4:15 pm]
BILLING CODE 4830-01-P