The National Law Forum

On June 28, 2018, the SEC issued a proposed new rule under the Investment Company of 1940 (the 1940 Act)— Rule 6c-11—that would permit exchange-traded funds (ETFs) that satisfy certain conditions to launch and operate without first obtaining an individualized exemptive order from the SEC. In connection with proposed Rule 6c-11, the SEC proposed to rescind certain exemptive orders that have been granted to ETFs that could rely on the proposed rule. The SEC also issued proposed amendments that would require additional prospectus and/or website disclosure of information concerning ETF trading costs, including as to bid-ask spreads and premiums and discounts from the ETF’s net asset value. At present, ETFs require specific exemptive relief from various provisions of the 1940 Act to operate. To date the SEC has granted more than 300 such orders, many with inconsistent terms and conditions. According to the proposing release, the proposed rule and amendments are “designed to create a consistent, transparent, and efficient regulatory framework for ETFs and to facilitate greater competition and innovation among ETFs.”

Highlights of the SEC’s ETF rule proposal and amendments are as follows:

• Custom baskets permitted. In order to facilitate efficient ETF operation and, in view of differences in exemptive order terms among ETF sponsors, to level the playing field, Rule 6c-11 would provide flexibility with respect to the use of “custom baskets,” i.e., baskets that are composed of a non-representative selection of the ETF’s portfolio holdings (e.g., baskets that do not reflect a pro rata representation or representative sampling of the ETF’s portfolio holdings), or different baskets used in transactions on the same business day. The proposed rule would provide an ETF with the option of using custom baskets if it has adopted and implemented policies and procedures that “(i) set forth detailed parameters for the construction and acceptance of custom baskets that are in the best interests of the ETF and its shareholders, including the process for any revisions to, or deviations from, those parameters; and (ii) specify the titles or roles of the employees of the ETF’s investment adviser who are required to review each custom basket for compliance with those parameters.”
• No distinction between index-based and actively managed ETFs. As part of the effort to simplify the regulatory framework governing ETFs, ETFs that are able to rely on Rule 6c-11 would be subject to the same conditions, regardless of whether the ETF is index-based or actively managed. The SEC stated that it believes index-based and actively managed ETFs that comply with the proposed rule’s conditions function similarly with respect to operational matters, despite different investment objectives or strategies, and do not present significantly different concerns under the provisions of the 1940 Act from which the proposed rule grants relief.
• Full portfolio transparency required. The proposed rule would require an ETF to disclose prominently on its website the portfolio holdings that will form the basis for the next calculation of its net asset value per share. This disclosure must be made each business day before the opening of regular trading on the primary listing exchange of the ETF’s shares and before the ETF starts accepting orders for the purchase or redemption of creation units. In this regard, the SEC is seeking comment on whether it should consider exemptions for ETFs with non-transparent or partially transparent portfolios in connection with the proposed rule.
• Additional disclosure requirements. In addition to the portfolio holdings information, the SEC is proposing to require ETFs to disclose on their websites information regarding a published basket that will apply to orders for the purchase or redemption of creation units each business day, the median bid-ask spread for the ETF’s most recent fiscal year and certain historical information about the extent and frequency of an ETF’s premiums and discounts. In addition, proposed form amendments would require additional specific disclosure regarding ETF trading information and related costs formatted as a series of questions and answers.
• No Intraday Indicative Value requirement. One of the standard conditions currently required for operation of an ETF is dissemination of Intraday Indicative Value (IIV).¹ However, the SEC is not proposing to require the dissemination of an ETF’s IIV as a condition of the proposed rule because, as stated in the proposing release, the SEC understands that IIV is no longer used by market participants when conducting arbitrage trading. Moreover, the proposing release notes that “IIV also may not reflect the actual value of an ETF that holds securities that do not trade frequently.” In view of the foregoing, as well as the condition under proposed Rule 6c-11 requiring daily disclosure of portfolio holdings, the SEC stated that it did not believe an IIV requirement would be necessary.
• Effect of proposed Rule 6c-11 on prior exemptive orders. The SEC is proposing to amend and rescind the exemptive relief issued to ETFs that would be permitted to rely on the proposed rule. The proposed rescission of orders would be limited to the portions of an ETF’s exemptive order granting relief with respect to an ETF’s formation and operation.
• Leveraged and inverse ETFs and ETFs organized as UITs or as a share class of an open-end fund not covered by proposed rule. ETFs that seek to provide returns that exceed the performance, or returns that have an inverse relationship to the performance, of a market index by a specified multiple over a fixed period—i.e., leveraged and inverse ETFs—would not be permitted to operate under the proposed rule. Similarly, ETFs organized as unit investment trusts (UIT ETFs) would not be able to rely on the proposed rule; rather, proposed Rule 6c-11 would be available only to ETFs that are organized as open-end funds.² In addition, ETFs that are structured as a share class of a multiple-class open-end fund would not be included in the scope of the proposed rule.

The SEC requests comment on all aspects of the proposed rule and disclosure amendments, including with respect to, among other things, the scope of the proposed rule (e.g., whether leveraged or inverse ETFs should be covered by the rule) and whether the SEC should create a new registration form specifically designed for ETFs.

Members of Vedder Price’s Investment Services Group plan to publish a detailed analysis of the SEC’s ETF rule proposal and amendments in the near future.

Comments on the proposal and amendments will be due 60 days after the date of publication of the SEC’s proposing release in the Federal Register.

The SEC’s proposing release is available at: https://www.sec.gov/rules/proposed/2018/33-10515.pdf

_{1 As noted in the proposing release, exchanges, such as NYSE Arca, have their own requirements for dissemination of an ETF’s IIV.}

_{2 Under the SEC’s proposal, UIT ETFs would continue to be regulated pursuant to their exemptive orders, rather than a rule of general applicability. The proposing release noted that the “vast majority of ETFs currently in operation are organized as open-end funds.”}

With its decision in South Dakota v. Wayfair, the U.S. Supreme Court substantially eliminated the distinction between brick-and-mortar business and e-commerce, for purposes of state laws obligating sellers to collect and remit sales taxes. In response to that ruling, remote sellers into the 25 states (and counting) that have adopted laws requiring them to collect and remit sales taxes might be tempted to consider moving some of their operations into those states. After all, they might reason, if they have to collect sales taxes anyway, it might be more efficient to move parts of their supply chain closer to the customer, particularly in states with lots of customers.

Before making such a decision, however, businesses would be wise to look beyond sales taxes to the entire range of taxes they might have to pay. In particular, despite all of the recent focus on sales taxes, businesses should not lose sight of the potential state and local income tax bills they could face should they establish a physical presence in any particular state.

In 1959, Congress enacted a law that severely restricts the power of states to impose income taxes on businesses that make sales into a state, but lack a permanent presence there. Public Law 86-272 (codified in 15 U.S.C. §381) prohibits states or localities from imposing a net income tax on income derived from interstate commerce into that state if: (1) the only activity of the seller involves solicitation of orders for tangible personal property, (2) those orders are approved or rejected outside the state, and (3) the property is shipped from outside the state. The Supreme Court has ruled that this law prohibits states from imposing income taxes on sales made by a business’ salespeople who do not maintain an office in the state, and whose only role is soliciting orders. Wisconsin Dep’t of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214 (1992).

In considering how best to respond to Wayfair, businesses should consider whether any savings they might realize from moving operations to a state might be offset by their potential liability to pay state and local income taxes on sales made into that state. After all, it’s not just about the sales taxes.

Effective September 11, 2018, adjudicators for U.S. Citizenship and Immigration Services (USCIS) will have the authority to deny any application or petition that is incomplete or lacks sufficient evidence without first issuing a request for evidence (RFE) or notice of intent to deny (NOID). The new guidelines are a reversal of the current policy, which requires that an RFE be issued unless there is “no possibility” that the deficiency can be remedied. Depending on the vigor with which it is enforced, this policy shift may eliminate the opportunity for petitioners and applicants to correct simple errors, like missing documents, or to beef-up documentation in support of an applicant’s eligibility, before the case is denied.

USCIS provided the following examples of cases that may be denied after September 11, 2018:

• A waiver application that is submitted without enough supporting evidence
• A filing submitted without the required forms, such as an application for adjustment of status that is filed without the requisite affidavit of support

Key Takeaway

According to USCIS, the new guidelines are not intended to penalize individuals for “innocent mistakes or misunderstandings” of the requirements but rather to discourage people from submitting “frivolous or substantially incomplete filings,” which it calls “placeholder” applications. The policy language suggests that adjudicators have some discretion to determine when to deny an application or issue an RFE, but it is not yet clear how often they will exercise that discretion or whether they will err on the side of denials.

The potential for increased denials by USCIS is especially concerning given the recent implementation of another USCIS policy that requires adjudicators to issue notices to appear (NTAs), thus commencing removal proceedings, for individuals they deem unlawfully present after their immigration applications have been denied. It is not yet known how either policy will play out in practice, though it seems likely that the two policies will work together to compound the negative consequences of an application denial by placing applicants at a greater risk of removal.

Given the increased consequences of a denial, every petition or application sent to USCIS should be checked and double checked to ensure accuracy, eligibility, and that sufficient documentation has been provided to support the immigration benefit requested. Employers may want to verify that all of their sponsored positions and sponsored employees meet the requirements for their visa categories. They may also want to consider what level of involvement they will have if one of their sponsored employees is placed in removal proceedings.

Tariffs are not the only weapon of retaliation countries may wield in a trade war.  Governments can pressure trade adversaries at the bargaining table by opening other fronts, such as limiting foreign investment, halting drug enforcement cooperation, or, of particular concern to the corporate world, scrutinizing companies doing business within their jurisdictions.  What does this mean?

Enforcement actions in the anti-corruption arena may increase as the United States, China, the European Union, Canada, Mexico, and others attempt to win the economic showdown.  Companies, particularly those doing business abroad, should ensure their domestic and foreign operations will survive regulatory scrutiny by reviewing compliance programs and conducting internal investigations into potential issues.

The Workplace Enforcement Front

U.S. and foreign regulators, such as China’s Ministry of Justice or the United Kingdom’s Serious Fraud Office, may initiate investigations into companies operating within their jurisdictions.  According to an article in the Wall Street Journal, “investigations into workplace safety and labor issues, tax payments and compliance with business codes” are a real fear of companies in the current trade landscape.

The Anti-Corruption Front

Yet anti-corruption may be an even greater focus.  In 2017, the United States characterized “sanctions, anti-money laundering and anti-corruption measures, and enforcement actions” as “economic tools” that “can be important parts of broader strategies to deter, coerce and constrain adversaries.”  While referring to a national security strategy, this policy statement reveals the administration’s view of alternative, effective trade war weapons.

Trade wars increase the utility of enforcement actions by pressuring trade adversaries.  The longer trade wars last, the more likely governments are to implement non-trade tools.  For example, anti-corruption scrutiny in China is already an important concern for foreign companies given China’s increase in foreign investment and recent anti-corruption efforts.  If China does not scale tariffsat the pace of the United States, it may turn to enforcement actions as an effective alternative.  China has said it will “fight to the end … with all necessary measures.”

A Call for Compliance

Accordingly, companies in all countries should closely examine both domestic operations and foreign subsidiaries to ensure compliance with domestic and international laws.  Compliance officers should be supported with the necessary staff and budget.  Compliance policies and procedures should be reviewed and revised as necessary.  External resources, such as auditors or even an investigative team, should be engaged where appropriate to ensure the company will withstand scrutiny.  With such steps, companies can tune up their compliance efforts and avoid becoming casualties of trade wars.

In an unprecedented election process with the participation of more than 63 percent of the eligible voters, Andres Manuel Lopez-Obrador, better known by his initials, AMLO, won the Mexican presidency with an astonishing 53 percent of the votes. His party, the National Regeneration Movement, also won a majority of seats in the Senate and the House of Representatives, as well as a majority of the eight governorships up for election.

Prior to founding the National Regeneration Movement in 2014, Lopez-Obrador, a 64-year old political scientist from the National Autonomous University of Mexico, chaired the Democratic Revolution Party (PRD) – a left wing political party – from 1996 to 1999, and served as mayor of Mexico City from 2000 to 2006.

Mexico has a lengthy presidential transition period; however, while it may be too soon to determine the manner in which Lopez-Obrador will govern and exercise his presidential authority, this client alert intends to provide an overview of his background, his campaign proposals and his team. Additional client alerts addressing specific subject matter that may impact investments and businesses in Mexico, such as energy, infrastructure, public safety and security, anti-bribery and trade, will follow.

Lopez-Obrador is the first socialist president democratically elected in Mexico. His 18-year campaign platform (he has run for president in the past three elections) has ranged from an open conflict against the establishment to a more moderate approach to certain topics, such as energy reform and economic policies. He has continuously supported a strong fight against corruption and a strong application of the rule of law.

In the first few days following the election, Lopez-Obrador met with Mexican President Enrique Peña-Nieto, representatives of industry and commerce, and others, including the U.S. secretaries of State, Treasury and Homeland Security, as well as with Jared Kushner, White House senior advisor and son-in-law of President Trump. AMLO has also supported the autonomy of the Mexican Central Bank and the application of current macroeconomic policies, which have resulted in a 20-year long stable economic environment in the country. These statements, along with his anticorruption and government reduction promises, have resulted in moderate support from businesses and industries, as well as from other groups originally adverse to Lopez-Obrador’s candidacy.

His campaign proposals can be summarized in eight major topics:

1. Policy and Government: (i) having a government that promotes political, economic and social development for the country; (ii) government austerity complementing a fierce fight against corruption; (iii) open and efficient government; (iv) government downsizing.

2. Education and Science: (i) review Peña-Nieto´s educational structural reform; (ii) generalize public education at all levels; (iii) guarantee college acceptance for young students; (iv) organize a comprehensive educational plan with parents, teachers and specialized educators.

3. Economy and Development: (i) zero debt; (ii) reduce income tax to 20 percent in border areas; (iii) support the autonomy of the Central Bank; (iv) reorient public expenditures; (v) avoid increasing or creating new taxes.

4. Security: (i) create a Ministry of Public Safety at the federal level; (ii) professionalize public prosecutors and investigators; (iii) establish a central police command with 32 state offices, one for each state in the country.

5. Health: (i) strengthen the public health system; (ii) provide for free medicine and healthcare services for people without social security services; (iii) develop and implement public policies for the national production and acquisition of medicine, mainly active ingredients and biotechnologies.

6. Sustainability: (i) establish a general water law as a human right; (ii) develop a national plan to adapt to climate change; (iii) provide for a sustainable use of biodiversity; (iv) develop sources of renewable energy; (v) support underprivileged populations maintaining their natural heritage.

7. Foreign Affairs: (i) maintain a multilateral foreign policy with a new dialog with North America to foster cooperation for development; (ii) work with the international community to prevent the use of tax havens; (iii) comprehensive development in areas with high immigration indexes; (iv) enter into an alliance with the United States, Canada, and Central America to promote employment.

8. Social Development: (i) state social policy addressing attending poverty through income supplements and continue with the development of skills; (ii) address vulnerable youth; (iii) incorporate sports and exercise into the population; (iv) provide scholarships for youngsters who are neither studying nor working.

The team and likely cabinet members during Lopez Obrador’s presidency will be mostly scientists and college professors specializing in their corresponding fields, which in turn will fit the ministries that they may hold. These individuals come from a wide range of backgrounds and are supported by a wide range of groups. This combination may result in a cabinet that is well supported by various influential groups in the country.

Some of the high-profile individuals are:

Alfonso Romo, a well-regarded wealthy businessman with interests in the biotechnology sector, who may be Lopez-Obrador´s chief of staff.

Olga Sanchez-Cordero, a former Supreme Court justice and highly regarded attorney who is expected to head the Ministry of Interior.

Alfonso Durazo, who will likely head the Ministry of Public Safety, has a longstanding career in the Mexican government, holding various positions in past administrations.

Carlos Urzua, who may head the Ministry of Finance, is a research professor at the Colegio de Mexico – a Mexican think tank – and was the Secretary of Finance when Lopez-Obrador was mayor of Mexico City.

Graciela Marquez will probably head the Ministry of Economy. She is a research professor and has academic experience in universities such as the University of Chicago and Harvard.

Esteban Moctezuma has also held high-level positions in prior administrations and is expected to head the Ministry of Education.

Miguel Angel Torruco is a well-regarded expert in tourism policies. He was the Secretary of Tourism for Mexico City (2012-2017) and is expected to head the federal Ministry of Tourism.

Marcelo Ebrard will head the Ministry of Foreign Affairs. A longstanding politician, former undersecretary of Foreign Affairs (1993-1994), and mayor of Mexico City (2006-2012), he has been close to AMLO for a long time.

Having a majority of seats in the Senate and the House of Representatives, Lopez-Obrador will have only the Mexican Supreme Court, the media and the general public/citizens as a balance to his exercise of authority. We will have to see how long his administration swings the pendulum and how much support/acceptance he will continue to gain or not during his administration. One thing for sure is that he now carries the substantial and diverse expectations of over 50 percent of the Mexican voters who gave him an unprecedented vote of confidence.

The next relevant dates related to this process will be:

1. September 1, 2018: Newly elected legislature is sworn in.

2. September 6, 2018: (As expected) Elections Tribunal validates the presidential election.

3. December 1, 2018: President-elect takes office.

4. December 15, 2018: 2019 budget is presented to Congress.

5. December 31, 2018: 2019 budget is approved by Congress.

6. February 1, 2019: President presents to the Senate the Public Safety National Strategy.

7. February 28, 2019: President sends the National Development Plan to the House of Representative for approval.

Within this process, the approvals of both the 2019 budget and the National Development Plan will be instrumental to the new administration, as they will be indicative of the manner in which the new administration intends to reorient the budget and its plans for its term.

As mentioned above, additional client alerts addressing specific subject matter that may impact investments and businesses in Mexico, such as energy, infrastructure, public safety and security, anti-bribery and trade, will follow.

Within one week, the CFTC issued two awards to whistleblowers, one in the amount of $30M and another in the amount of $70,000.  Although the orders are fairly sparse, they provide some important clues as to how the CFTC determines the amount of a CFTC whistleblower award (the percentage of the monetary sanctions collected in the covered judicial or administrative action that the CFTC awards the whistleblower).

CFTC Has Broad Discretion to Increase Award Percentage

The Order determining the awardthat the CFTC issued to a foreign national on July 16, 2018 reveals that the CFTC has broad discretion to increase an award and a whistleblower can obtain the maximum 30% award even if the whistleblower does not meet all of the positive criteria for increasing an award.  Those criteria for increasing an award (from the minimum 10% to the maximum 30%) include:

• Significance of the information provided by the whistleblower, e., whether the reliability and completeness of the information provided by the whistleblower resulted in the conservation of CFTC resources and the degree to which the information provided by the whistleblower supported one or more successful claims brought by the CFTC.
• Assistance provided by the whistleblower and their attorney, including (i) whether the whistleblower and their legal representative provided ongoing, extensive, and timely cooperation and assistance; (ii) the timeliness of the whistleblower’s initial report; (iii) the efforts undertaken by the whistleblower to remediate the harm caused by the violation; and (iv) any unique hardships experienced by the whistleblower as a result of reporting the violations.
• Law enforcement interest, e., the degree to which an award enhances the CFTC’s ability to enforce the commodity laws.
• Participation in internal compliance systems, e.,the extent to which the whistleblower participated in internal compliance systems, such as reporting the possible securities violations internally before, or at the same time as, reporting them to the SEC and assisting in an internal investigation or inquiry.

The July 16 Order notes that the whistleblower voluntarily provided significant original information and assistance to the CFTC and significantly contributed to the CFTC’s action by helping CFTC staff successfully settle the action and thereby avoid a costly trial.  Significantly, the Order clarified that the CFTC has broad discretion to pay a high award percentage even where the whistleblower does not satisfy all the criteria warranting the maximum award payment:

The Rules do not specify how much any factor in Rule 165.9(b) or (c) should increase or decrease the award percentage. Not satisfying any one of the positive factors does not mean that the award percentage must be less than 30%, and the converse is true. Not having any one of the negative factors does not mean the award percentage must be greater than 10%. These principles serve to prevent a vital whistleblower from being penalized for not satisfying the positive factors. For example, a whistleblower who provides the Commission with significant information and substantial assistance such as testifying at trial and producing smoking gun documents could receive 30% even if the whistleblower did not participate in any internal compliance systems.

By eschewing a rigid application of the award criteria, the CFTC incentivizes persons with knowledge of misconduct to come forward and share their information with the CFTC knowing that they can potentially obtain the maximum award percentage for providing timely, specific and credible information that leads to a successful enforcement action.

Minimal Participation in a Commodities Fraud Scheme Does Not Disqualify a Whistleblower from Recovering an Award

One of the whistleblowers who received an award this week was involved in the Commodity Exchange Act (CEA) violations at issue in the covered action, but the whistleblower’s participation in the scheme did not disqualify the whistleblower from receiving an award for two reasons:

1. There was no evidence indicating that the whistleblower acted with scienter, as the whistleblower “was a junior-level employee in a foreign nation given instruction by his/her employer.”
2. The whistleblower did not financially benefit from the violations.

In assessing the amount of a whistleblower award, the CFTC can decrease an award if the whistleblower was culpable in the violation.  In particular, the CFTC assesses the following facts concerning culpability:

(i) The whistleblower’s role in the CEA violations;

(ii) The whistleblower’s education, training, experience, and position of responsibility at the time the violations occurred;

(iii) Whether the whistleblower acted with scienter, both generally and in relation to others who participated in the violations;

(iv) Whether the whistleblower financially benefitted from the violations;

(v) Whether the whistleblower is a recidivist;

(vi) The egregiousness of any wrongdoing committed by the whistleblower; and

(vii) Whether the whistleblower knowingly interfered with the Commission’s investigation of the violations or related enforcement actions.

17 C.F.R. § 165.9(c)(1).  Although monetary sanctions awarded against a whistleblower will be excluded from the amount of collected proceeds from which an award is paid, minimal participation in the conduct giving rise to a CFTC enforcement action is not a bar to eligibility for a whistleblower award.

The recent increase in CFTC whistleblower awards will likely spur additional whistleblowers to come forward to assist the CFTC in rooting out commodities fraud. In fact, James McDonald, Director of the Division of Enforcement, stated that he “expects the Whistleblower Program to contribute even more substantially to our enforcement efforts going forward.”

If you or your companies or clients are holding appreciated property of any kind, whether in the form of investments like stock, bonds, or a passive investment in a pass-through entity, or in the form of vacant land or a commercial or residential building, or other capital assets, there is a new opportunity to sell the property and defer and reduce the capital gain, while investing in a new business or property that could potentially be sold tax-free.

The Federal tax reform bill enacted earlier this year contains a new tax incentive aimed at directing capital and investment into America’s distressed areas. The new program is called the Opportunity Zone program.

The Opportunity Zone program affords any taxpayer who has or will have capital gains from the sale or disposition of any property, the ability to defer and reduce the gain from the sale if the gain is reinvested in a Qualified Opportunity Fundwithin 180 days of the sale. The deferral lasts until the earlier of the following two dates: the date on which the Qualified Opportunity Fund investment is sold; or December 31, 2026. Importantly, this deferral mechanism can be used to transform short-term gains, which would be taxed as ordinary income, into long-term capital gains taxed at preferential rates.

In addition to deferring the gain from the sale of property, the Opportunity Zone program also provides a reduction of the gain if the Qualified Opportunity Fund investment is held by the investor for a minimum of 5 years. If the investor holds the Qualified Opportunity Fund investment for at least 5 years, its original deferred gain is reduced by 10 percent. If the Qualified Opportunity Fund investment is held for at least 7 years, the original deferred gain is reduced by 15 percent. (The reductions to gain are accomplished by increasing the basis of the Qualified Opportunity Fund investment which begins at zero and is used for computing both the original gain that is deferred and recognized, as well as the new gain on the sale of the Qualified Opportunity Fund investment.)

Accordingly, taxpayers investing in Qualified Opportunity Funds can defer and potentially reduce capital gains from the sale of any property or assets by rolling those original capital gains into a Qualified Opportunity Fund.

Finally, there is one last, but very significant tax benefit for investing capital gains in a Qualified Opportunity Fund. If a taxpayer holds the Qualified Opportunity Fund investment for at least 10 years, the taxpayer’s basis in the Qualified Opportunity Fund investment is increased to fair market value. The result is no recognition of gain from the sale of a Qualified Opportunity Fund investment held for at least 10 years.

At this point you may be thinking this is too good to be true. You may also be wondering what in the world a Qualified Opportunity Fund is and whether you could even form or identify one for investment to take advantage of this new tax benefit.

First, in order to take advantage of this program, the sale of any property giving rise to the gain to be invested in a Qualified Opportunity Fund must take place on or before December 31, 2026. Furthermore, a Qualified Opportunity Fund can be any corporation or partnership organized for the purpose of investing in Qualified Opportunity Zone Property, which is defined to include: stock or partnership interests in businesses based in an Opportunity Zone and acquired after Dec. 31, 2017; or tangible property and buildings used in a trade or business of the Qualified Opportunity Fund if acquired after Dec. 31, 2017 and the original use of the property is in the Opportunity Zone or it has been substantially improved. Substantial improvement is defined to mean if during any 30-month period following acquisition, the additions to basis via improvements made to the property equal the adjusted basis of property at the beginning of the 30-month period.

According to recent Internal Revenue Service (“IRS”) guidance, the creation of a Qualified Opportunity Fund is expected to be via a self-certification processthrough a form expected to be available later this summer. Additionally, funds may be created by any taxpayer for single or multiple investments.

A Qualified Opportunity Fund must maintain at least 90 percent of its assets in Qualified Opportunity Zone Property, which may include stock, partnership interests, business property and buildings, as discussed above. The IRS is expected to issue regulations which would afford a Qualified Opportunity Fund the ability to sell or transfer Qualified Opportunity Zone Property if the proceeds are reinvested in other Qualified Opportunity Zone Property without triggering a taxable event. In addition, an asset test is employed at the end of the first 6 month-period and at the end of the taxable year to ensure the fund meets the 90 percent limitation. If a fund fails the asset test without reasonable cause, penalties may be imposed.

Now that you have an understanding of what a Qualified Opportunity Fund is and how to properly invest in one to secure the tax benefits outlined above, the next and final piece for understanding the new program is identifying where the Opportunity Zones are based across the country.

• Click here for a list of opportunity zones.
• Click here for an interactive map for identifying the zones.
  (After you click the link taking you to the interactive map, click the layers tab on the right and unselect the entry for “2011-2015 LIC Census Tracts.” Then if you use the map’s zooming tool, the Opportunity Zones are shaded in each state.)

The Opportunity Zone program has the potential to unlock billions in gains and capital for investment in the zones. It has often been described as a “Super 1031” with a tax reduction bonus and ability to avoid any tax on the appreciation of a real estate project or business based in the zone. Don’t miss out on the opportunity to take advantage of this amazing opportunity.