There are anti-abuse rules throughout the code. These rules are primarily intended to stop investments that could arguably be included but clearly do not meet the intent of the provision.
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What does the “anti-abuse rule” mean in practice?
The "anti-abuse rule” seems to give regulators the power to effectively cancel or suspend OZ benefits for transactions they don’t like. Is that right, and do we have any idea how or in what situations this rule might actually be applied? Have there been any instances of the anti-abuse rule actually being used?
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As the statute is new and the IRS hasn’t written any guidance at all, it is not easy to predict. I would expect the IRS to use the anti-abuse rules in abusive cases for the most part. In other words, those situations where the taxpayer knew or should have easily know, that they weren’t complying with the rules, but felt that because the IRS’s wording left some uncertainty, they thought that they should try to get away with it. Taxpayers who rely on experts who base their advice on similar provisions of law, and even common sense, should generally be OK. Of course, I’m not blessing the advisor who says, "The IRS’ rule leaves some uncertainty, and you might get away with it!" I’m talking about the tax advisor who says, "There’s another provision in the tax code with similar wording, and there, the rule is X, so we should be able to do X here as well."
Many commentators during the OZ regulation public hearings asked Treasury to add some guidance so taxpayers know what constitutes situations that would trigger their anti-abuse jurisdiction. Since the purpose of the OZ statute is pretty broad and flexible, many commentators believe the anti-abuse threat may be hard to apply in cases where the primary purpose was to complete a project or start a business in an OZ. Still, care should be exercised and the taxpayer/fund's purpose for the investment and structuring should be fully documented. This placeholder was put in to give the IRS latitude to attack all or part of a transaction that was designed to circumvent the intent of the law. I expect we will get more guidance soon.
A broad anti-abuse rule allows the IRS to recast any transaction intended to achieve a tax result inconsistent with the purpose of the statute. In this case, the purpose of the statute is to encourage economic growth and investment in designated distressed communities. The regulations specifically address the desire to prevent “land banking” (hoarding land). I would argue that investors pursuing this practice might want to hoard for the purpose of selling to a QOF and not even hold the land long enough to qualify for benefits. The QOZ program was designed to foster new investment; thus, any machinations directed at obtaining QOF designation for pre-existing investments may be frowned upon and subject to challenge. Given the arbitrariness of provisions within the statue, abuse may be difficult to prove. I am not aware of any anti-abuse enforcement actions thus far in this new area of the tax law.
No formal guidance on what would constitute abuse or what would be in the anti-abuse rules exists yet.
Stay tuned. This should be covered in a third tranche of guidance. They've made clear that they don't want land banking. Beyond that, we'll have to see. I'm not aware of whether/where anti-abuse might have been pursued. You might want to chat with a tax attorney.
More clarity on the anti-abuse rules is expected in the next round of regulations. I'm not aware of any instances where the IRS has used its anti-abuse authority to date.
No instances yet. There are some regulatory examples of stuff the IRS does not like, but in general, they have said any transaction that does not actually bring new economics to the QOZ will be at risk for disallowance. Don't try to get too cute with circumventing statutory requirements.
It is expected IRS will address the anti-abuse issues on a third set of regulations. It is to early to have any practical experience on the application of this by authorities.
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