OPPORTUNITY WITHOUT REACH: THE PROBLEMS WITH THE OPPORTUNITY ZONE PROGRAM AND THE NEED FOR CLARIFICATION, OVERSIGHT, AND REGULATION.

• Author: Lee, Victoria

Introduction 118 I. The Conception of the Opportunity Zone Program: From Then to 120 Now A. Legislative History 120 B. The Framework of the Opportunity Zone Program 122 C. How Opportunity Zones Were Designated 127 II. The Current Issues Frustrating the Opportunity Zone Program 129 A. The Opportunity Zone Program Is Currently Disorganized 129 and Without Meaningful Monitoring Systems B. The Opportunity Zone Program Inaccurately Designated 131 Several Zones C. The Opportunity Zone Program Has Not Accounted for the 137 Failures of Similar Zoning Programs i. Enterprise Zones 137 ii. The New Markets Tax Credit 140 III. Moving Forward: What Needs to Be Done 143 A. What the IRS and the Treasury Department Can Do 143 i. The IRS and Treasury Department Should Continue to 143 Clarify the Existing Regulations ii. The IRS and Treasury Department Should Regulate 145 Opportunity Zones That May Not Be as Distressed as Others iii. The IRS and Treasury Department Should Implement 147 Data Collection and Monitoring Systems B. What the States Can Do 148 i. States Should Promote a Local Mindset 148 Conclusion 151 INTRODUCTION

A Google Street View car has not driven through Haasville Road in Bunkie, Louisiana recently. (1) A satellite view shows that this road is a long one--it winds to Highway 115 West on one end and meets with Catfish Kitchen Road on the other. (2) What is beyond Catfish Kitchen Road is simply "unnamed." (3) A mass of trees borders Haasville Road on its left, and near the 115 West, there are a few structures and a white truck. It is a house, perhaps, or a farm. Pull the map back far enough, and the patches of green become overwhelmed by plots of tan, unused land. This is Haasville Road. It also happens to be part of Census Tract No. 22009030600, tract type: low-income community. (4)

Census Tract No. 22009030600 is an Opportunity Zone, and it is one of 150 such zones in Louisiana. (5) It is also one of 8764 such zones in the 50 states, the District of Columbia, and the five U.S. territories. (6) These designated zones, classified by the IRS and nominated by the states, are part of an investment scheme intended to stimulate economic development and employment opportunities in low-income communities. (7) The Opportunity Zone Program requires investors to roll-over qualified capital gains into a Qualified Opportunity Fund ("qualified fund"), and in turn, investors receive tax benefits depending on how long the investment is held in the fund. (8) The qualified fund then invests in eligible real estate in these designated Opportunity Zones. (9) It is seemingly a win-win situation--investors are incentivized to channel their excess capital gains into qualified funds in exchange or favorable tax benefits, and the qualified funds lift up low-income communities and their residents by developing and investing in select real estate and business opportunities within them. (10)

However, not all Opportunity Zones walk and talk like Haasville Road. In New York City, for example, the neighborhood directly under and around the Williamsburg Bridge is also a designated Opportunity Zone. (11) The Google Street View car has clearly been through this neighborhood recently. (12) Unlike Haasville Road, however, rows of buildings line paved streets. Several restaurants and bars, including a well-known steakhouse, call this census tract home. (13) In the District of Columbia, Buzzard Point and NoMa--neighborhoods that have recently seen the rise of a new sports arena, office buildings, and luxury apartments--are also designated Opportunity Zones. (14) The Google Street View car has been through those areas recently, too.

This Note argues that the Opportunity Zone Program in implementation may not have the intended effect of bolstering low-income communities for three reasons. First, the Opportunity Zone Program's current state of disorganization has both halted monies flowing into low-income communities and left the Program without any meaningful way in which to collect and analyze data. Secondly, some of the designated tracts have already begun to show signs of gentrification and revitalization, and, thus, any investments poured into these areas may be unnecessarily and even recklessly channeled. Finally, past zoning programs with tax incentives carried out both overseas and domestically have demonstrated that such programs have failed at creating employment opportunities and displaced low-income residents due to rapid gentrification practices.

Part I of this Note provides background on the Opportunity Zone Program, its legislative history, and the current state of the Program. Part II questions whether the Opportunity Zone Program can achieve the intended effect of bolstering low-income communities and their residents, and argues that in its current state, it may not be able to. This Note argues that the Opportunity Zone Program may be unsuccessful because of its current disorganization, as evidenced by the fact that some Zones have been wrongfully designated, and the fact that past land zoning initiatives and tax incentives have been previously unsuccessful in creating meaningful employment opportunities and community developments and initiatives. Finally, Part III suggests measures for the IRS and participating agencies to address and adopt moving forward regarding the implementation of the Opportunity Zone Program to better serve the communities and individuals the legislature intended.

1. THE CONCEPTION OF THE OPPORTUNITY ZONE PROGRAM: FROM THEN TO Now

   1. Legislative History

      Although the Investing in Opportunity Act (IIOA) was pushed through in the Tax Cuts and Jobs Act of 2017, (15) the genesis of attaching tax incentives to capital gains investment into the nation's low-income neighborhoods was first promulgated in a white paper by Jared Bernstein and Kevin A. Hassett for the Economic Innovation Group. (16) The white paper recognized the disparity between certain areas of the country faring "remarkably well and nearing or exceeding their pre-recession economic states" and others "facing chronic rates of long-term unemployment and historically low levels of new investment." (17) Bernstein and Hassett based their model, in part, off of failures of previous incentive structures designed to spur economic development in distressed zones. (18) Their model proposed tapping into the "power of intermediaries"--that is, private equity firms, banks, mutual funds, and other small businesses--to pool assets and incentive investments in distressed regions via tax benefits. (19) By February 2017, Bernstein and Hassett's suggestion had found its way into Congress in the form of a bipartisan bill authored by Senators Corey Booker and Tim Scott and Congressmen Pat Tiberi and Ron Kind. (20) Similarly recognizing the vast amount of untapped capital gains "just sitting there" (21) to the tune of nearly $6.1 trillion, the legislation devised a way to channel those funds into distressed communities by incentivizing long-term private investment through tax reform, essentially adopting the model promulgated in Bernstein and Hassett's white paper. (22)

      The IIOA was designed with the 52 million Americans living in the nation's low-income, distressed communities in mind. (23) In theory, by financially empowering these communities in need and lifting them out of their distress, businesses and new opportunities would be drawn to these now-viable zones for investment, development, and more. (24) In turn, the residents of these low-income communities would have the chance to showcase "their creativity, their intelligence, and their work ethic" through the employment opportunities and more that would arise from financial stimulation and revitalization of these neighborhoods. (25)

   2. The Framework of the Opportunity Zone Program

      The Opportunity Zone Program is in part premised on longevity. The longer capital gains are held in a qualified fund, the more attractive the tax incentives are to investors. (26) There are few restrictions on the capital gains that can be invested into a qualified fund, namely that the property producing the capital gains need only be sold or exchanged with a person "unrelated" to the property itself. (27) The language of the statute in regards to eligible capital gains reads "any property," (28) which investors have interpreted to mean that gains from the sale of "business, stocks, bonds, cryptocurrencies or any other type of investment" (29) may all be transferred into a qualified fund.

      A qualified fund is an investment vehicle established as either a partnership or a corporation for federal taxation purposes. (30) Establishing a fund is an endeavor in paperwork above all else--a partnership, corporation, or limited liability company treated as a partnership or corporation for federal taxation purposes files Form 8996 with its income tax return to declare that the fund is organized for purposes of investing in qualified Opportunity Zone property. (31) If the taxpayer is certifying as a qualified fund for the first time, it must submit a statement by the end of its first year detailing the fund's purpose of investing in qualified Opportunity Zone property and a description of the property's business. (32) Beyond the entity's self-certification as a qualified fund, the taxpayer need only roll over its qualified capital gains into the qualified fund within 180 days of the sale of the property and hold 90% (33) of its assets in qualified Opportunity Zone property from between the last day of the first six-month period of the fund's taxable year to the last day of the fund's taxable year. (34) No further approval process by the IRS is required. (35)

      Once an investor rolls over capital gains into a qualified fund, the fund itself must invest the monies into qualified Opportunity Zone property within 31 months. (36) Except for investment into so-called sin establishments, (37) the definition of what constitutes qualified property...