Qualified opportunity zone funds (QOFs) structured as C corporations that filed tax returns for the 2018 tax year may need to undertake various actions by April 13, 2020, and also may need to make various elections by April 13, 2020, or May 12, 2020, as to whether or not they will file their tax return as part of a consolidated group.

Background

The IRS issued proposed regulations on investing in QOFs in October 2018 (see Tax Alert 2018-2119), a second set of proposed regulations in May 2019 (see Tax Alert 2019-0823), and final regulations in January 2020 (see Tax Alert 2020-0056).

In a reversal of the May 2019 proposed regulations, the final regulations allow, but do not require, subsidiary QOF C corporations to join in filing consolidated returns with one or more investor parent corporations, provided certain conditions are met. To accommodate the reversed position, the final regulations give transition relief for subsidiary QOF C corporations that (1) may not want or be able to follow the final regulations for consolidated group membership, and (2) may have followed the proposed regulations and not joined in filing a consolidated return despite the desire to do so. Moreover, even for subsidiary QOF C corporations that joined in filing a consolidated return, additional steps are required.

Under this relief, a pre-existing QOF subsidiary may elect to prevent consolidation by reclassifying itself as a QOF partnership, a QOF C corporation that is not a member of the consolidated group, or a member of the consolidated group that is not a QOF. For subsidiary QOF C corporations that want to be part of the consolidated group (e.g., to allow for the use of the QOF C corporation's deductions by the consolidated group), certain elections and potential adjustments must be made to their returns that are not otherwise required for regular consolidated group members.

Electing or not electing consolidation return status

Many corporate taxpayers set up captive or semi-captive subsidiary QOF C corporations prior to the release of the May 2019 proposed regulations. Those taxpayers often followed established practices and contemplated including the subsidiary QOF C corporation in their consolidated return when the 80% stock ownership requirement of IRC Section 1504 was satisfied. The May 2019 proposed regulations, however, did not treat stock in a QOF C corporation as "stock" for purposes of IRC Section 1504, meaning the subsidiary QOF C corporation could not join the consolidated group. As a result, taxpayers filed their 2018 returns either (1) excluding the subsidiary QOF C corporation from the consolidated group based on the May 2019 proposed regulations or (2) including the subsidiary QOF C corporation in the consolidated group pending the final regulations.

As noted, the January 2020 final regulations reversed course by permitting (but not requiring) the consolidation of subsidiary QOF C corporations with their corporate investor parent, subject to the following conditions set forth in Treas. Reg. Section 1.1504-3(b):

• The common parent of the consolidated group must directly or indirectly hold 100% of QOF investor members' stock
• In general, each QOF investor consolidated group member must maintain direct ownership of its QOF stock (subject to certain exceptions for intergroup transactions)

In addition, special consolidated return regulations were issued that treat the subsidiary QOF C corporation member very differently from other members.

QOF C corporations that want to consolidate for 2018 (regardless of how they already filed in 2018), need to:

• Qualify under Treas. Reg. Section 1.1504-3(b) by April 13 (i.e., satisfy the 100% stock ownership requirements by 90 days from the final regulations)
• File an amended 2018 return that includes the Treas. Reg. Section 1.1502-14Z(f) and Treas. Reg. Section 1.1504-3(c) elections by May 12 (i.e., by 120 days from the final regulations)

In the event the QOF C corporation filed a consolidated return in 2018 but fails to meet these two requirements, it will be treated as deconsolidating from the consolidated group on March 13, 2020. Taxpayers that already included the QOF C corporation in their 2018 consolidated returns may be able to argue successfully that an amended 2018 return is not required; to avoid deconsolidation risk, however, they may want to consider filing one.

QOF C corporations that do not want to consolidate for 2018 but have already filed a consolidated return must make an election under Treas. Reg. Section 1.1502-14Z(f) to be a partnership, a non-consolidated QOF C corporation or a consolidated corporation that is not a QOF (e.g., because the rules under Treas. Reg. Section 1.1502-14Z are too burdensome). To do so, all actions necessary to make the election must be completed by April 13, 2020. Although the election for partnership status is due on May 12, the election for non-consolidated QOF or consolidated non-QOF status is due April 13.

QOF C corporations that do not want to consolidate for 2018 and did not file consolidated in 2018 do not need to take any action.

Implications

QOF C corporations that filed a return for the 2018 tax year have a rapidly approaching deadline to decide whether to elect to join in the corporate investor(s)'s consolidated group. In certain instances, failure to make the election will result in a deconsolidation of the QOF C corporation, potentially resulting in adverse tax consequences. Similarly, those filing for the first time for tax year 2019 must make the appropriate elections if they want to be part of the consolidated group, although the deadlines for electing to do so are outside the timing provisions of the transition rules previously described.

———————————————

———————————————
ENDNOTES

¹ Although Notice 2020-18 extended certain filing deadlines in response to the COVID-19 pandemic, the April 13 and May 12, 2020 deadlines discussed herein are unaffected (see Tax Alert 2020-0728).