Treasury Aims to Address Tribal Concerns in Second Batch of Proposed Regulations on Opportunity Zones

Earlier this week, the U.S. Department of Treasury released a second tranche of highly anticipated regulations on opportunity zones. The new regulations are meant to provide guidance and answers to the many questions that tribes, states, and investors have asked in order to fully take advantage of the new investment opportunities created by the Tax Cuts and Jobs Act of 2017.

“We are pleased to issue guidance that provides greater flexibility for communities and investors as we continue to encourage investment and development in Opportunity Zones,” said Treasury Secretary Steven T. Mnuchin.  “This incentive will foster economic revitalization, create jobs and spur economic growth that will move these communities forward and create a brighter future.”

An opportunity zone is an “economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment.” Essentially, the tax law allows investors and corporations to defer taxes on certain capital gains if they reinvest those proceeds into an Opportunity Zone Fund. If that investment is held long enough, there would be further tax benefits available, encouraging long-term investment.

Currently, more than 50 percent of tribal census tracts are eligible for opportunity zone designation, but early regulatory guidance and proposed rules were vague enough that it was unclear whether tribes and their economic arms would be excluded from reaping the full benefits of the 2017 tax law.

For example, a notice of proposed rulemaking by the IRS and the Department of Treasury issued in October 2018 stated that a qualified opportunity fund (QOF) must be an entity in “one of the 50 States, the District of Columbia, or a U.S. possession.” There was no mention of tribes or their economic development arms.

In its latest proposal, the Treasury Department clarified that “an entity ‘organized in’ one of the 50 states includes an entity organized under the law of a Federally recognized Indian tribe if the entity’s domicile is located in one of the 50 states,” ensuring that tribal businesses would not be entirely excluded. The latest regulatory proposal also states that any QOF would be subject to Federal income tax, regardless of whether the business is tribally-owned.

Treasury’s second batch of proposed rules also highlights the importance of tribal consultation and that the government would operate in accordance with Executive Order 13175, entitled “Consultation and Coordination with Indian Tribal Governments.” Prior to making a final rule on Opportunity Zones, the Treasury Department and the IRS will “schedule Tribal Consultation with Tribal Officials … to obtain additional input.”

Treasury also said they would seek “whether any additional guidance may be needed regarding QOFs leasing tribal government Federal trust lands or regarding leased real property located on such lands, as well as other Tribal implications of the proposed regulations.”

Interested parties can submit comments once the proposed rule is published in the Federal Register. Public comments will be accepted for 60 days after publication.