LINE 4 ON FORM 8996 – EFFECTIVE DATE ISSUES

It is the first tax filing season for Opportunity Funds. Sponsors, accountants and lawyers are working through the IRS forms for the first time and some issues are popping up.

A corporation or partnership (including an LLC) elects become an Opportunity Fund by filing IRS Form 8996. Form 8996 and the Instructions for Form 8996 were finalized in December 2018 with few changes from the drafts made available a few months earlier. The Form 8996 election is effective as of a certain month that the entity identifies on Line 4 of Form 8996. Form 8996 must be filed no later than the due date (as extended) for the tax return of the electing entity.

The month that an entity elects to become an Opportunity Fund (line 4 of Form 8996) is important. Because a Fund is subject to penalties if it does not timely deploy its assets into Qualified Opportunity Zone Businesses or Qualified Opportunity Zone Business Property, a Fund may be inclined to enter a later effective month on Form 8996. However, the effective month on Form 8996 must first take into account the expectations of investors intending to defer tax on their invested gains. Investors are only entitled to defer tax on gains invested in an entity if the entity is in fact an Opportunity Fund on the date the gains are invested. If an entity accepts investor money on a date that precedes the effective month that the entity enters on line 4 of Form 8996, then the investor failed to make an Opportunity Fund investment.

The takeaway? When completing Form 8996, use care and be aware that there are competing interests in play at Line 4. The month entered on Line 4 of Form 8996 must be prior to (or coincident with) the dates on all investor-checks and subscription agreements. And of course the date on Line 4 must be subsequent to (or coincident with) the formation date of the Opportunity Fund entity.

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