Submitted by Colleen Campbell, ERCGP Intern

Part 2

An inclusion event is an occurrence which breaks the chain of deferment and the benefit of investing in a Qualified Opportunity Fund (QOF). Once an inclusion event has occurred, capital gains that were once deferred as an investment in a QOF must then be included as the investing individual or entity’s taxable income. These occurrences may be as simple as an investor choosing to reduce the amount of their investment in a fund, however, the U.S. Treasury Department and Internal Revenue Service enumerated a number of specific events in their recent release of final regulations that will terminate an investor’s deferment of capital gains. The updates also clarify occurrences that do not qualify as inclusion events.

The update describes a number of circumstances which qualified as inclusion events in the proposed legislation, including “a transfer of a qualifying investment, to the extent the transfer reduces the taxpayer’s direct equity interest, the receipt of a distribution on or with respect to a qualifying investment, which constitutes an impermissible ‘‘cashing out’’ of the taxpayer’s qualifying investment, or the claim of a worthlessness deduction…in respect of a qualifying investment.”

Forbes lists occurrences that are not inclusion events, which include “liquidation of a corporate owner of a QOF if the liquidation is into a parent who owns 80 [percent] of the taxpayer, …transfer of an investment in a QOF at death, contribution of a QOF interest to a grantor trust, provided the taxpayer is the deemed owner of the trust, [and] …the making or revocation of an S election.”

The final regulations respond to a number of comments that were made on the proposed legislation pertaining to a number of specific inclusion events based on the kind of entity investing in the QOF and the nuances in numerous possible situations. The update also clarifies the U.S. Treasury Department and Internal Revenue’s positions on the following general provisions:

• Gains from inclusion events are eligible for deferment if the inclusion event is only related to a portion of the taxpayer’s investment and the gains are invested in a different QOF.
• The general rule for inclusion events is clarified; the rule was not meant to suggest that a taxpayer may avoid an inclusion event by maintaining an indirect interest in a QOF.
• Decertification of a QOF is an inclusion event that will terminate deferment of a taxpayer’s invested gains.
• A reduction in an investor’s shareholder interest in a QOF does not qualify as an exclusion event. In other words, if a QOF should choose to issue additional stock, an inclusion event does not occur simply because an investor’s proportionate share of the fund decreases.
• The gift of an interest in a QOF is an inclusion event. Transfers between spouses and transfers arising from divorce are also inclusion events.