What are students learning in the nation’s first LLM-level tax course on Opportunity Zones?
Joseph “Jay” Darby is a partner in Sullivan & Worcester’s tax group in Boston and has been a member of the adjunct faculty at Boston University School of Law since 2003. This semester, he is teaching an LLM course at BU Law titled, “No Gain No Pain? Opportunity Zones, Like Kind Exchanges and QSBS Strategies.”
Click the play button below to listen to my conversation with Jay.
Note: This podcast interview was recorded on December 11, 2019, more than a week before the final regulations on Qualified Opportunity Funds were issued by the IRS.
- The curriculum for the Boston University School of Law Graduate Tax Program LLM-level course on Opportunity Zones.
- The July 9 IRS hearing, and issues raised in the regulations by the BU class, including treatment of Section 1231 gains, aggregator funds, leasing, vacancy, and unimproved land.
- How a QOF may be able to invest in an existing operating business that plans to move into an Opportunity Zone.
- Implications for a QOZB that fails the 70% asset test.
- Potential pitfalls of Qualified Opportunity Fund investing.
- Nuances of timing and calculating the 90% asset test at the QOF level, and the implications that this has on investing capital at the fund level.
- Opportunity Zone trends and insights.
Featured on This Episode
- Jay Darby on LinkedIn
- Jay Darby at Boston University School of Law
- Sullivan & Worcester
- Boston University Law Graduate Tax Programs
- Global Intangible Low Tax Income (GILTI)
- Qualified Business Income (QBI) Deduction
- The Real Estate Roundtable
- Novogradac Opportunity Zones Working Group
- Academia’s Role in Opportunity Zones (Podcast Episode #43)
- Christina Rice at Boston University School of Law
- Treasury/IRS Opportunity Zone hearing on July 9
- Public comment letter submitted by Boston University School of Law
- IRS Form 8996
Industry Spotlight: Boston University School of Law
The Boston University School of Law Graduate Tax Program was established in 1959 as one of the nation’s first graduate tax programs. Directed by Christina Rice and taught by Jay Darby, the BU Law tax course on Opportunity Zones — initially offered in summer 2018 — is the first LLM-level tax course in the country.
- Email Jay: [email protected]
- Call Jay: (617) 338-2985
About the Opportunity Zones Podcast
Hosted by OpportunityDb.com founder Jimmy Atkinson, the Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in opportunity zones.
Jimmy: Welcome to the Opportunity Zones Podcast. I’m your host, Jimmy Atkinson. My guest today is Jay Darby, tax partner at Sullivan & Worcester in Boston. Jay also teaches at Boston University School of Law, where he has put together the first graduate school LLM-level tax course on Opportunity Zones. Jay joins us today from his office in Boston. Jay, thanks for taking the time with me today. And welcome to the podcast.
Jay: Oh, hey, how you doing there Jimmy?
Jimmy: Doing well, Jay, hanging in there. So Jay, let’s start by talking about that law school class on Opportunity Zones that you teach at BU law. It’s a unique course. As I mentioned, it’s the first graduate-level LLM level tax course on Opportunity Zones. When did you first start teaching this class and how many students have passed through the program so far?
Jay: Well, yeah, around for the summer of last year, and we had a good turnout. It was impromptu, but we put it on the schedule and they had 11 people sign up and they all kinda raved about the experience. What we did was…it was in real-time, we actually had assignments that were, for example, one of the things that the class did is we submitted comments on the second set of proposed regulations that were due on July 1st, it was right in the middle of the semester. So I gave each of the 11 students a specific topic to write about or they selected from a menu and each picked one of the topics and we made 11 submissions, I made one as well for myself on behalf of the program and the school.
And we basically made recommendations on things that the IRS had specifically asked for comments on the proposed regulations. The other things we did were answering some questions that were posted online at actually the Opportunity Zone Expo website, and we did a variety of other things that were very, very pragmatic, real-time learning the law and actually responding and participating in the process of shaping the law. So it was a very successful summer, it was a very successful program, people learned a tremendous amount about it. And we all learned together kind of how to make the Opportunity Zone law functional and effective.
Jimmy: No, that’s excellent. I commend you on the work that you and your students did over that summer of earlier this year. And I want to ask you more about that public comment letter that you and your class prepared, in a few minutes. I wanted to get back to that and dive in a little bit more but first, I wanna get a sense of what is the curriculum exactly for that particular course? What are the students studying and beyond the comment letter, what are some of the other assignments?
Jay: The first thing we did is we read the law. And then we read the first set of proposed regulations, then we read the second set of proposed regulations and then we had a… I tend to give multiple-choice exams that are easy to post and people have a chance to test their kind of progress as we go along. We had a number of industry writing assignments. One was drafting a qualifier pre-fund actual document. Another was to actually make the submission of the proposed commentary on the law.
Another was…I then asked them to answer some questions by the actors on Expo where I’ve been a…one of the recognized, professional experts. And we actually answered questions that people sent in and provided them answers to the questions that were posted online. So it was a lot of fun, a lot of very valuable things in real-time, really dealing with the law in the process of being shaped and developed and because here you learn a lot of stuff. My course begins again this semester in January next month.
And we have lots of other new students signed up and pretty excited about it. It’s a very dynamic, important area because it’s one of the most historic in tax incentives in U.S. tax history. And it’s got a lot of controversial discussion, both pro and con. But the pro is, it’s a tremendous benefit for taxpayers who want to go out and create wealth and opportunity and Opportunity Zones. And I’m busy helping people do that. And I’m very excited about it. And I’m very happy to share my expertise and my knowledge with the students in the class and bringing in a generation of people that are very knowledgeable and sophisticated in dealing with these issues.
Jimmy: That’s great. Let’s actually back up for a moment and get a little background on you, Jay, if you wouldn’t mind sharing with us what your level of expertise is and how you got involved in Opportunity Zones law.
Jay: I’ve been practicing law forever. I’ve been practicing law for 40 years and I was going through the 2017 Tax Act that was passed at the end of the year and looking at all the different new creative ideas, guilty taxes and internationally in the qualified business KPI deduction and other things, but the Opportunity Zones was sort of quiet. At first, it was kind of like a little bit like an iceberg. It didn’t have as much visibility as it had to have. And got really intrigued by it, began to spend time doing it, began to spend more time doing it, started giving seminars on it. And talks to different groups and people were clamoring eventually as they got more and more aware of what an incredible incentive this is and can be.
And so, I’ve been part of the real estate roundtables, core group of high-level practitioners for major firms and the kind of firms in the country who are represented on this really elite small group. I worked with the ABA. I worked with obviously the BU submission. I also worked in part of a Novogradac group. It’s put together by the Novogradac Accounting Firm. It’s one of the leaders, maybe one of the top leaders in the area of the Opportunity Zones. So lots of involvement, lots of people and having fun doing it. It’s very intriguing, very intellectually challenging and stimulating and lots of benefits that a lot of people are going to be enjoying over the next 10 or more years.
Jimmy: Well, that’s great. That’s great, Jay. I had two faculty members on from the University of New Orleans and Tulane University a few months back on the podcast and they had an Opportunity Zones… They were starting to do some Opportunity Zones work with some of their students at their respective universities as well, getting some courses off the ground. Have other schools reached out to you about what you’re doing? Are there are there any other schools doing this? Any other academic programs that you’re aware of?
Jay: Well, you know that we presented… Christina Rice is the director of the VU Program. It was the one that was given the original blessing saying, “Hey, that sounds like a great idea. Why not be at the cutting edge in the front of the line in terms of major law schools offering this as a part of the curriculum.” She and I were on the podium at the IRS, sorry, the Treasury’s hearing July 9th, providing commentary on all these venues that the Treasury had set up on the second set of proposed regulations.
And there were some people that are literally representatives of the Treasury Department and the IRS and the other groups that were representing the government who I also teach at Georgetown “Wash”, who were, “Jeez, we should have a class too.” So I think they’ve copied the idea. I know a lot of other people are talking about it because it’s obviously a major part of tax planning in 2019 and 2020 and beyond. And everybody’s a little bit slow, well, I won’t say slow. Everybody else is behind us. We’re the first and the best obviously to be in this area, but we welcome the competition, we welcome the recognition and it’s a major part of the American internal revenue code and the American tax plan at this point in time.
Jimmy: I’m sure a lot of other programs will be looking to you and the precedent that you’ve set on Opportunity Zones coursework at the university-level going forward. So let’s talk about that IRS hearing. You’ve been involved in a lot of advocacy for this program as you previously mentioned, and perhaps most notably, you testified at the most recent IRS hearing on qualified opportunity funds that you just referenced over last summer, last July. And you got your students involved, as we’ve mentioned earlier, as well, your class helped prepare the public comment letter that you submitted to the IRS. Can you summarize the key points from that public comment letter and your testimony, if you can drill into it a little bit more now than you did in your previous response?
Jay: Well, I think we covered about 11 or 12 different specific topics. I wrote at great length on the specific topic of code section 1231 in the gain recognition from sales of depreciable property primarily, obviously real estate that’s being used in the business and is subject to depreciation. And the fact that the second set of regulations have very different rule for code 1231 gain than they did for capital gain. They were deferred until you couldn’t invest it until the end of the year. And then you had to net it against the other gains and it wasn’t…you had very, very different rules, which, frankly aren’t justified either by anything in the law, for sure.
But even by policy perspective analysis, you’d still say, “It doesn’t make any sense.” People think of capital gain and 1231 gain as pretty much interchangeable. They do have some nuanced differences in terms of how the 1231 gain and loss are creating 1231 losses. In ordinary law, there are various tracking rules about back and forth between 1231 gain and loss, they’re big into the 1231 rules. And I just said, there’s nothing that justifies the distinction and it’s really messing up the marketplace because lots of people have 1231 gain they want to invest within 180 days of selling it.
The IRS is saying, “No, you got to wait till December 31st.” Especially if it’s a year-end…beginning of the year transaction. People had sold businesses. They had 1231 gain, and they had capital gain from the same transaction, same date, they wanted to reinvest both the capital gain and the 1231 gain, and literally, the 180 days ran out later in the year before you even got to 1231. So it was just to underscore the practical as well as the intellectual shortcomings of the IRS’s position. Hopefully, they’ll respond to my commentary and other peoples’ commentary and modify the law accordingly.
Jimmy: And were there any other points beyond the 1231 issues that you brought up?
Jay: Oh, yeah, we did a wide range of topics for the year. We talked about issues related to aggregator funds. How do you create a holding vehicle that can invest in multiple QOFs? The IRS had provided kind of a way to contribute them upstream. We thought that’s somewhat helpful, but it’d be much better if they basically let us treat all of the…allow an aggregator fund to make investments into a QOF. They have concerns that the law really doesn’t allow that. And so they’re maybe not gonna respond to that. But it certainly would make a lot of sense to make the law more flexible. It’s hard to make the “O Zone” law work with what we call an aggregator fund or a…you know, a hedge fund that’s within a large investment fund because it requires gain to come in and go out as they move down at a fairly brisk pace. It just doesn’t lend itself particularly to having large funds that bring in money and aggregate it and invest in various other things. So that was one of the biggest issues. We thought that the IRS did a great job on leasing issues and basically identified a few tweaks that were of some consequence but basically more or less they did a great job with it. Let’s stay with what you got here that was basically allowing leased property that you considered to be in a qualified Opportunity Zone property was eligible for qualified Opportunity Zone business property regarding the lease at the…at discounted lease payments.
All very pragmatic, good stuff that make it very, very possible to put options on businesses into the Opportunity Zone. Before they gave that guidance it was very, very uncertain whether you could ever qualify with a substantial lease if the lease was gonna go into the numerator as well as the denominator of the 70% test that’s baked into the rules and in fact, it came out very, very favorably. We talked about vacancy periods. The IRS had proposed a five-year vacancy period, and we said that doesn’t make any sense for stuff that was vacant the day the law was enacted.
Nobody’s gonna… You know, they have an issue about somebody intentionally becoming vacant for a period of time and they don’t wanna encourage people to intentionally make property vacant, so it qualifies for special treatment as original use or placed in service for the first time. But by the same token something that was already vacant, was not being abused and so we just said a one-year vacancy prior to enactment of the Act would be evidence of it being original use if you bought it and took it over. These are all fairly esoteric and technical issues that were brought up. The treatment of unimproved land was again a thing. I thought they did a great job of mapping out some very practical rules.
They’re trying to prevent land banking. There was an issue about whether if you bought land for the exact same purpose that it was being used in previously. For example, if you had raw land that was being used as farmland you bought it and continued to use it as farmland doing nothing other than just buy it, that might not be a qualifying and so we proposed maybe a 20% improvement to avoid just pure land banking but a lot of different practical proposals or ideas related to a variety of nuanced issues all in a… the very lengthy several hundred pages second set of regulations that were issued in April of 2019.
Jimmy: Right and, yeah, your comment letter is 49 pages in length. I’m looking at it now on my computer screen so I won’t ask you to go into any more detail on that but for our listeners out there if you wanna give Jay Darby’s comment letter a more thorough reading you can do so by checking out the show notes page for today’s episode and I’ll have those show notes on the Opportunity Zones database website at opportunitydb.com/podcast and you can dive into the entire letter there. I’ll make sure I post it up there.
Okay, Jay, I wanna shift gears now and play a game of stump the tax attorney. So I want to ask you a few tough technical questions now and with the caveat, of course, that we are recording this episode on December 11th, 2019. And we haven’t been issued final regs yet at least as of the date of this interview. And so some of this stuff is still left open to some interpretation and has not been totally clarified by the IRS yet.
So with that said, I want to get to some technical questions that I’ve received from my readers and listeners over the past few weeks. So first question I have for you, Jay, if you could help me out here is, can a qualified opportunity fund invest in a qualified Opportunity Zone business that is not yet located in an Opportunity Zone but is planning to move into an Opportunity Zone? Is there some flexibility there for that to be included in a 31-month business plan perhaps?
Jay: You’re talking about somebody that already owns a business outside the zone and they wanna move it into the zone?
Jimmy: That’s correct. Yeah. In this particular example, yes.
Jay: All right, I mean, I’ve had people that do it. I’d say if you move it in and spend a heck of a lot of money you gotta spend enough to…so that your existing tangible property base is exceeded by a ratio of 70 to 30 for the existing property base or more, so you have a huge expend to expand it into the zone. You start off with bad property and you gotta make…you know, put in a lot of good property. I’ve looked at the issue and you can buy stuff that’s been used outside of the zone, even used property, you can actually buy anything new that goes into the zone.
But I’ve had misgivings about people that already own property outside of the zone and they’re moving to wherever the tangible property is so I’ve got some I think you can probably do it. You just gotta be prepared to spend a heck of a lot to dramatically expand the business. This isn’t just… call Mayflower and move again. You gotta spend a lot of money to make sure you’ve got the tangible property base covered.
Jimmy: Sure, of course, and then following up on that 70% test that you referenced. At the QOF level, now, the asset test is relatively straightforward, and IRS Form 8996 even helps you calculate the penalty that the fund would owe if you fall short of the fund level 90% asset test but what about at the QOZB level? At the Qualified Opportunity Zone Business level? If a Qualified Opportunity Zone Business falls short of the 70% asset test requirement in any given test period, what happens? What’s the penalty exactly? Is that spec’d out anywhere and could you potentially completely blow the deal for that entire time period?
Jay: Yeah. They only talk about first of all the 90% asset taxes is by no means straightforward. They have a series of kinda testing levels under the 8996 where, consistent with the the facially clear language of the legislation, if your percentage in the first six months on the testing day which would be typically on our calendar yeah June 30th. And then December 31st is the end of the second testing date, you take two percentages, you average it together by dividing by two and it then comes out to be at 90% or above and it actually lets you round it up for 89.5% to 90%, then you’re okay. But the reality is that those can be very weird numbers.
If you have $10 invested on June 30th in your QOF and all $10 are put into a valid investment. And then you have $100 million on December 31st. And $90 million is invested properly, you get a number of 100% for $10 and 90% for $100 million and you average them together, it’s mathematically very weird. They do weight it very clearly when you get into the…if you don’t make the…meet the safe harbor test, which frankly is pretty favorable, because the first six months’ cash you put in doesn’t count as numerator or denominator, a lot of times you get zero over zero. And we sort of think that means it shouldn’t be taken into account. You know, if it’s either a zero or 100, it should be sort of disregarded.
But the fact is, there’s some very nuanced complicated strategies about how to deal with the penalty management, the QOF, while you’re waiting to decide whether or not to invest at the QOZB level. At the QOZB level, I wouldn’t deny it’s the 30% test as a threshold requirement. It’s the same as if you have more than 5% non-qualified financial property or you fail to meet any of the other, you know, requirements. I think you just don’t have a Qualified Opportunity Zone Business and then, therefore, the investment in that partnership wherever the QOZB entity is isn’t a valid investment.
So yeah, I think it means obviously your QOS is gonna have a zero for the investment in that activity, and the penalty will be at the QOF level for the short term but it isn’t so clear that if you’ve blown off a reserve business status, that you just automatically get it back. I think that ought to be the right answer if you are qualified for Opportunity Zone business and you fail the 70% test because you’re under 65%, then you go back up above 70% to meet the qualifications. Again, I think there ought to be kind of an ability to refresh or rehabilitate the status of it. But that isn’t really addressed or anything in the regulations or the guidance we’ve had so far. So the short answer is, if you can avoid blowing the 70% test and never raise this question, you’re much better off just always qualifying and it’s not an issue.
Jimmy: Oh, of course, yeah if you can stay in compliance the whole time, that’s obviously the ideal situation. But I think if I understood you correctly, so if in year one you’re at 75%, you’re good, in year two you’re at 75%, you’re good. Year three something happens, and you dip under 70% and you hit 65% let’s say, so then you’re just… The QOZB is just completely out of compliance at that point. And there’s not a penalty at the QOZB level that trickles up to the QOF level?
Jay: Yeah, well, the penalty is your QOZB, isn’t it? The QOZB doesn’t meet the requirement.
Jay: So if you gotta invest in something that’s not a QOZB that’s a non-qualified…
Jimmy: Then your QOF has a bad asset there.
Jay: Well, if it’s the only asset which is particularly putting one QOF over it being in standard, as I say, opportunity land is owned for two stories, you have a QOF on top of a QOZB is the typical stretch almost every time. Well, it’s a two-story suburban house. So you typically have a QOF on top of a QOZB. If your QOZB fails the test, you have zero invested in qualifying property, you won’t have any Qualified Opportunity Zone Property, QOZP. And so you’ll end up with 100%… 90% penalty on your 90% asset test. So that’s zero good investment. And 90% of the value of your total investment is gonna be bearing interest at a 6% rate. That’s a gigantic amount of penalty compared to the relative tax you’re saving, your tax benefit you’re garnering. So short answer is, don’t do that.
Jimmy: Yeah, if you can avoid it. That’s understandable of course. That’s one potential pitfall you wanna make sure that your QOZB can definitely pass that 70% test in every period that it’s measured. Are there any other pitfalls for investors or fund managers to be aware of and that they definitely want to avoid it… anything you’ve seen in your experience that gives you pause or that you have to really caution any of your potential clients about?
Jay: I think the starting point is you’ve gotta have gain. You’ve gotta treat it…I call it the fresh produce issue. Once you have gain and you harvest your gain by selling stock, business, whatever it is, you’re on this time you got the stopwatch running. You gotta move. It’s like I call it fresh produce. It’s like you picked it in the field and you gotta get to market and you gotta refrigerate it along the way. You got 180 days to get into a QOF. And the QOF has got specific limited time to get into the QOZB and now it’s in the QOZB and you’ve got written planning, you’ve got 31 months to spend it.
It’s all being pushed along. We’re finding you’ve gotta have a place to land. There is no point in harvesting a gain that’s in a QOF and then looking around and trying to figure out what to do with that. I’ve got a lot of people who’ve done that, and it’s a scramble. The pitfall that’s happened is people put a bunch of gain into a QOF thing and they find lots of good things to invest in or businesses to start, and they’re not finding it. So what we’re doing is…because I’ve got one situation where they put a lot of gain into QOFs. And they’ve got…have one investment that’s gonna be leveraged.
They’re gonna put $10 million in and leverage it with 20 or something like that. The answer is we don’t have any. We’re gonna put a full zero leverage and all the gain goes into the QOZB because at least it’s a qualifying investment, and essentially the economically rational leveraging relationship, it gets pushed aside by the need of we’ve got to get money invested by a certain deadline into a Qualified Opportunity Zone Business, or else we’re in the penalty regime.
The penalty regime is something…you know, I’ve been playing very complicated analytical games with how exactly the 8996 works and what it means if we invest in QOZB and then once the QOZB ends up not being able to develop into the business we anticipate, all kinds of very interesting issues come out of this and it’s pretty cutting edge because nobody’s really gotten a heck of a lot of guidance beyond the fairly simple mathematics that are set forth in the form. So it alludes to the fact that you’ve gotta really have a pretty clear plan to make it successfully go from the field to the…let me say the harvest to gains, put into the QOF, put into the QOZB and then have the whole thing work out timing-wise and structure-wise.
Jimmy: Right, I gotcha. So I may have sugar-coated it a little bit too much when I said earlier that the asset test is relatively straightforward as you quickly corrected me on, so thank you for that. I can see now that there are a lot of nuances to it and there’s a lot of finessing that needs to be done with paying attention to those penalties potentially.
Jay: Well, I mean, the IRS said that if you put money into a Qualified Opportunity Fund, they won’t test that money as bad. You know, counting against you during the first six-monthly period. Usually, your first six-monthly period is January to June 30th. You put in $10 million. They’re saying it doesn’t count. It isn’t a good asset or a bad asset. It doesn’t count.
So it’s… your QOF has zero over zero. We kinda view zero over zero as a nullity, as opposed to either zero or 100 because you average by… But if you disregard the only money that’s been put into the QOF so far, you don’t have any fraction. And on December 31st, you’ve got to have that invested by a 90% level. Just to give you some ideas. If we are gonna have gain that we harvest in April, we decide when to put it into the QOF, we might put it in July and then it sort of kicks your testing date down to next year because it’ll be zero for all of 2019. Another idea…
Jimmy: Yeah basically it gives you a full 364 days I guess, to get into compliance.
Jay: Yeah, another idea that’s… I got $100 million in a QOF that goes in in June and I’ve invested $100 in a Qualified Opportunity Zone Business just because it’s got an offering available. I throw $1,000 into it. The cash doesn’t count but my $1000 invested personally does. So I got $1000 over $1000, I have 100%, right? Okay, it doesn’t have to weighted. I got $100 million in the fund, I got 100 bucks in a QOF invested in a QOZB.
And so my fraction is probably 100 over 100 according to what the rules are in the form. That means that on December 31st, I have $100 million, only valued at $80 million invested because I got $80 million invested I got 80% and 100% for the first period and 80% for the second, averages out to be 90% so I meet the safe harbor on the first page of form 8996. I don’t have to get to the second page. All weird stuff that’s really how it’s intended to be. The actual penalty amount does get weighted by what’s your invested amount at the end of each month, literally very sophisticated, but they did that on their own.
The law itself is very, very sort of simplistic. It takes the average of the six months and then takes the average of 12 months and average the two together mathematically, doesn’t weight it. It doesn’t say how much is invested and we weight it based on how much is invested. So you have these very blunt opportunities to play some games. It ends quickly, unfortunately. You know, once you start to count the money as an asset that’s got to be invested, you got to get yourself up to the 90% threshold pretty quickly.
You sure as heck wanna meet the safe harbor for 2019 because otherwise, you start running the penalties over month to month into 2020. Whereas if you meet the 2019 90% threshold you’ve got at least until June 30th before you get even to a testing date. And the second date and we really push it off to the full next year probably. Now if you put money into an operating fund in the latter half of a year or you’ve met the 90% test, you’ve got the next full year before you have an average to decide if you’re in the safe harbor and if you don’t obviously then you go back and pay the interest penalty on a month by month basis.
But it has a lot of interesting and nuanced mathematical consequences. I’ve been doing some very, very careful thinking about it. The other issue is, let’s say you got four QOFs. All right. Do you wanna have…and you’ve got three investments for four QOFs, and you got three of them invested at the 90% level, but the fourth isn’t going to be, what is the better alternative? Should you make three qualify and one fail? Or do you wanna have them all fail by a little bit? You get a very interesting mathematical analysis on those issues as well.
Jimmy: Well, that’s interesting. Yeah, that’s a lot to think about. That’s kind of an interesting concept that the 8996 doesn’t really take the denominator into account. The way you word it was it doesn’t really weight the investment amounts in each period, it’s just an average of the two percentages over the years. So that does give you a little bit of flexibility to…
Jay: Safe harbor. Yes, the safe harbor, as I call it, Jimmy, lets you use completely unweighted amounts. So what I’d probably do is put money into the… they have to put money in the first part of the year. Many people, for example had to put money in by June 27th because 180 days from December 31st, the prior year was the deadline.
Jimmy: Yeah, that was the deadline to get in your gains from the previous tax year.
Jay: Yeah. That’s right. And they say, “Well, I put the money in, but it doesn’t hurt me because it doesn’t count for this quarter or this half year.” And the answer is, yeah, but what if you invest $100 into somebody else’s Qualified Opportunity Zone Business eligible business, go off and find some deal where it’s… you throw a few bucks into it? You have 100 divided by 100 and your percentage is 100%, as opposed to zero over zero, which we again think is probably a nullity. So that would have been the smart thing. That means that by the end of 2019, you’ve only gotta get 80% of your cash invested not 90%.
Jimmy: Right. That’s interesting. That’s an interesting thought there. I hadn’t considered that before. I can tell you’ve thought carefully about this, as you say.
Jay: Yeah. But it’s high stakes issues for a lot of people. Real money in QOFs and it makes a big difference. But unfortunately, beat to death the 8996 issues and I got done literally a penalty now, about whether, if we don’t have enough QOZB to invest in Qualified Opportunity Zone Business property or QOZP, yeah, either you need to qualify your Opportunity Zone businesses or directly invest in tangible property. Where and how is the best way to fail? And there are some very interesting and complicated insights on that.
Jimmy: This is why it’s really important to get professional insight before you dive into this Opportunity Zones world, get insight from a tax attorney such as Jay or other professionals out there. Jay are there any other trends or insights that you’ve found interesting or that are worth keeping an eye on in the Opportunity Zones world?
Jay: I mean, the area is very dynamic. I am finding that there’s lots of opportunities in Opportunity Zones. There’s lots of businesses where the location of business doesn’t matter that much. I’ve got guys with high tech or sophisticated businesses and their view is, “Hey, I can put it wherever I want and I wanna put it in the Opportunity Zone so I’m just gonna tell the employees they gotta show up there.” There is all kinds of rules to try and make sure that the tangible property stays in the zone even if they’re using technology businesses.
I’ve told a computer software company, “Don’t buy laptops for the employees.” A software company does not have a heck of a lot of tangible property. Now fortunately, to rent the property in the Opportunity Zone and the ability to use the rented property as good property and the rent stream is discounted at a low rate, the AFR rate, it tends to make it pretty hard to screw up the tangible property test but, pending that being locked into these final regulations and locked in permanently I tell people I worry about where the tangible property isn’t a software company if you don’t count the lease from a related party. It doesn’t have got a heck of a lot of tangible property.
And I don’t want the laptops going home with the…being used outside the zone at the nearest Starbucks which is where the programmers typically wanna go to do their programming during the day. So I’ll want the programmers to come to the office and do their work at the office. I got one software company that said, “You know, hey that’s actually a really good thing. We were fine with having our programmers all over in this diaspora of coffee shops around America or Boston area. It doesn’t work that well. It’s much better when they’re in the same place, in the same room, interacting with each other anyhow. So we actually like this kinda discipline that the Opportunity Zone seems to reinforce and require.” So I think those are all good things.
Jimmy: That was an interesting concept to steer clear of the laptops and get some old fashioned desktop computers and bolt them to the floor, don’t let them leave the Opportunity Zone, right?
Jay: I was saying, “Just buy them desktops.” If the guys go ballistic I’d say, “Okay, just buy your own laptop.” And they went, “No, I want the company’s laptop.” At the Starbucks you log on with your own computer, that’s your business but, and the other is I want everybody down in the Opportunity Zone at least four days out of five. Don’t be working at the Starbucks around the corner in the non- Opportunity Zone area every day because you can tell where people work from. It’s not that hard to be able to demonstrate where people are actually performing their services in that kind of industry and environment. So I’d say, treat it seriously. Don’t blow it because your employees are lazy.
Jimmy: Right. You wanna make sure you stay in compliance with the services perform test within the zone. Well, this has been great, Jay, you’ve given us a lot of good insight here during this conversation. Thanks so much for being my guest today.
Jay: All right, excellent. So much fun, Jimmy. Thanks for getting me involved. I love your organization and your interviews are fantastic. Very helpful. Hope people in America are enjoying the good work you’re doing in informing the world and promoting the Opportunity Zone area. Obviously, if they would like to reach me they can. You have information about where I am, I assume. On the website, I’m Joseph Darby at Sullivan & Worcester in Boston, [email protected] is my email address. Great way to reach me. Phone number is 617-338-2985. Happy to help people and consult with people initially and see if I can help them if I can help you, I’d like to help you help rebuild America and make some money at the same time.
Jimmy: That’s perfect, Jay. Thanks a lot. And for our listeners out there today, I’ll have show notes on the Opportunity Zones Database website, as I mentioned previously, and you can find those show notes at opportunitydb.com/podcast. And there you’ll find links to all of the resources that Jay and I discussed on today’s show and I’ll be sure to link his email address and put the phone number he listed on there as well and as well as the public comment letter that we referenced earlier. Jay, thanks again. This has been great.