Qualified Opportunity Fund Investment Extension from IRS Doesn't Grant Full Relief

Qualified Opportunity Zones Update

Date: September 28, 2020

Publication: Thompson Hine

The following summarizes a recent discussion with the drafting attorney of IRS Notice 2020-39 on a mismatch of the IRS Opportunity Zones deferral election forms and the permitted extension of time until December 31, 2020 to make qualified investments in a Qualified Opportunity Fund (“QOF”) with 2019 capital gain. The issue arises in that the deferral election for 2019 must be made on IRS Forms 8949 and 8997 by October 15, 2020 (the extended due date for individual tax returns), but the extension of the investment in a QOF does not need to be made until the period after October 15 and by December 31, 2020.  The IRS agreed that although the extension for making the investment is through December 31, 2020, there is a mismatch with respect to the requirement to state the investment date on the IRS election forms for 2019.

At this time, for those who want to take advantage of the October 15, 2020 through December 31, 2020 extension, the only remedy seems to be the filing of the federal income tax return for 2019 and paying the capital gain tax for 2019, making the timely investment by December 31, 2020, and then filing an amended tax return with the proper deferral election showing the investment date.  In effect, this makes the deferral through December 31, very ineffective for practical purposes because taxpayers would be going out-of-pocket on their 2019 capital gain tax and then receiving such tax amount as a refund later after they invest the full capital gain amount in a QOF. Any deferral election made before the investment in the QOF may be ineffective because the IRS may take the position that a deferral election cannot be made until after the investment has been made.

Taxpayers have a few options:

  1. Make the investment before October 15, 2020 and file a valid deferral election with the taxpayer’s extended Form 1040 by October 15, 2020.
  2. File a 1040 without making the deferral election by October 15, 2020 and pay the capital gains tax if not previously paid with the extension, make the investment between October 15 and December 31, 2020, then file an amended return and request a refund.  Query whether the IRS system will apply penalties for not having paid the 2019 tax with the extension of tax return.
  3. While not discussed with the IRS, another approach would be to file the federal income tax return by Oct 15 with the IRS Forms 8949 and 8997 stating that the investment will be made by December 31 pursuant to Notice 2020-39, not pay the 2019 capital gain tax, and then, after the timely investment in a QOF is made, filing a 2019 amended tax return showing the investment date on the IRS Forms 8949 and 8997. While crazy, the concern is whether the IRS would impose a penalty for not paying the tax with the 2019 initial tax return.

We have not heard of any internal effort at the IRS to fix the mismatch in advance of October 15.

For more information contact Frank Ferrante or Alexis Kim, or any member of the firm's Qualified Opportunity Zones group.

Francesco A. Ferrante
Thompson Hine LLP
Austin Landing I, 10050 Innovation Drive, Suite 400
Dayton, OH 45342-4934
O: 937.443.6740
M: 937.470.0598

Alexis J. Kim
Thompson Hine LLP
3900 Key Center
127 Public Square
Cleveland, Ohio 44114-1291
O: 216.566.5732