The latest Treasury guidelines say that transfers of OZ investments aren’t inclusion events if they're disregarded for Federal tax purposes. What kinds of transfers might this apply to?
The answer to this question requires a detailed analysis of the inclusion events rules and the transfer in question. For example, a transfer by gift is an inclusion event, but a transfer to an intentionally defective grantor trust, which is a tool often used to make gifts, is not an inclusion event. The issue gets complicated.
The following are not inclusion events: transfer on death; proportionate transfer from one entity to another (for example, LLC to tenant in common); re-titling from individual to a revocable trust; and transfer from a revocable trust to an irrevocable trust because of death.
I believe you are referring the transfer of an OZ investment to a “disregarded entity,” which is ignored for tax purposes and therefore no gain or loss is triggered. Dropping an asset from the OZ fund into an LLC with a single owner that elects the entity as a disregarded entity is one example. Another would be an OZ fund investor dropping his qualified fund investment into a grantor trust or a disregarded entity. No inclusion event. Inclusion events relate to situations where a fund investor is moving future taxability to another taxpayer.
Two primary events that are not inclusion events are those transfers done upon death of a taxpayer or to a grantor trust. The grantor trust is treated as a disregarded entity for income tax purposes thus all income and expense flows through to the taxpayer. A living trust would be an example of this. There are other transactions dealing with partnerships and S corporations, but their application are likely limited to special circumstances or to the extent you have basis in the investment.
A QOF or QZOB could make transfers into single-member LLCs that they own. This can be helpful in planning.
For example: The transfer by gift to a grantor trust or the transfer due to death of the investor.
Sales of business but not personal revenue associated with stock sales if capital gains and not ordinary income, which is fine. Sales of any of the “sin” businesses, but that’s an educated guess. Just a few. Check with your accountant.
Some examples of disregarded transfers include a contribution of a QOF interest to a disregarded entity or a grantor trust. These transactions are generally ignored for federal income tax purposes.
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