You generally don’t want to hold an appreciating asset, including a QOF, through an S Corp. There can be an inclusion event triggered if there is too large a shift in the S Corp ownership.
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What happens if an S corporation that owns a share of a QOF changes ownership?
Does that have any impact on the other QOF shareholders?
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Potentially, but as long as their shares are kept separate you should be fine. That said, it would require a review of the documents of the S corp to ensure complete compliance.
No impact on the other QOF shareholders, but a greater than 25% change in ownership is an inclusion event triggering all deferred gain.
No, since the S corporation in question is one level above the QOF in your example, it would have no impact for QOF purposes. The only thing I will say is that you must be mindful of the general tax rules. So if the QOF itself is an S corporation, for example, it can't have a corporate tax owner, a foreign owner, or certain trusts.
It is not possible to provide any definitive answer to this question with review of and reference to the fund documents.
If the S corp share sales result in more than 25% of the s corp stock changing hands, the s corp that owns the Qualified Opportunity Fund interest loses all of its OZ benefits, and all of its deferred gain is subject to tax. Because of that, all S corp shareholders are going to have to pay their share of the tax, and none will get Opportunity Zone benefits from their ownership of the s corp. But that will have no negative effect on owners of interests in the OZ other than the s corp.
The second set of regs provides a list of triggering events. One of them is a taxable disposition (for example, a sale) of interests in an S corporation which itself is the direct investor in a QOF corporation or QOF partnership if, immediately after the disposition, the aggregate percentage of the S corporation interests owned by the S corporation shareholders at the time of its deferral election has changed by more than 25 percent. When the threshold is exceeded, any deferred gains recognized would be reported under the provisions of subchapter S of chapter 1 of subtitle A of the Code (subchapter S).
If there is a greater than 25 percent change in the ownership of an S corporation that is a partner of a QOF, then the S corporation is considered to have had an "inclusion event" with regard to its deferred capital gain, based on the percentage change, and all of its shareholders would be allocated their share of the deferred gain, which would now be accelerated. Importantly, the computation of the 25 percent change is done as to each partner and dates back to the original deferral. So, suppose A and B are the only stockholders of an S corporation and each owns 50 shares of an S corporation that has a gain in March 2019, and the S corp invests in a QOF to defer the gain. In June 2020, A sells 15 shares of the S corporation to C. This does not cause any acceleration of the deferred gain, because 15 out of 100 shares are no longer owned by their original owners, and this is only a 15 percent reduction. In May 2021, A sells 11 of his remaining shares to B. Note that together, the original holders still own 85 shares. However, the rule tells you to take each stockholders' transfers into account separately. As a result, the transfer of 26 of the original 100 shares is a more than 25 percent change, the S corporation has an inclusion event and accelerates 26 percent (this the percentage of the change) of the gain deferral to May 2021. It's not clear what this means for C, who was not an original investor, or whether you would get a different result by issuing new shares or taking some other action that admits new partners and reduces the percentage ownership of the original investors. However, since S corporations are structured with "each share representing an identical interest in the S corporation," and there are no "special allocations" like there are with partnerships, it would seem that C will be allocated his proportionate share of the deferred gain, based on the number of shares he holds at the time of the inclusion event. Other partners of the QOF who are unrelated to the S corporation would not be affected.
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