I would recommend reviewing the impact of a change in entity and whether any of the investment safe harbors may cover you.
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How can we change to a single tier structure after Form 8996 has been filed without creating a inclusion event?
We have a client who has a single tier structure but has recently been contacted by an investment company who has their own QOF and wants to invest in the single tier QOF/QOZB. However, since you can not invest fund to fund, we are trying to figure out a way to revise the single tier structure without causing any issues to current investors and their deferrals while also allowing the new investment company to invest. The single tier QOF/QOZB entity is renovating a mill building and has already began the process. From what we read, it seems like changing the structure is not possible at this point without causing issues and possible lost deferrals. Any thoughts?
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There are a couple of possible scenarios you can go with, but none of them are great. First, if your client will invest all of the QOF's capital into the other QOF, you can attempt to merge them. The inclusion event regulations are rather generous about the treatment of mergers, even if both QOFs are partnerships. The other QOF can be the one to survive. Second, I’m confused by what you mean by "single-tier QOF/QOZB", given that the QOZB is always a second tier. If there is an existing QOZB, your client can keep its QOF and invest in the QOZB without any issues. Third, if physical development has not yet begun, the two QOFs can form a new JV as a QOZB, and the land can be contributed to the QOZB ahead of physical development. Based on the way the working capital safe harbor treats the development process, this one should work as well.
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