Readers of The Lane Report may recall the new Qualified Opportunity Zones program (discussed in the June 2018 Lane Report), which was established under the Tax Cuts and Jobs Act of 2017. Under this program, investors can defer paying capital gains tax by re-investing their capital gain in “qualified opportunity funds” within 180 days of realizing the gain. Qualified opportunity funds are created to invest in “qualified opportunity zones,” which are low-income communities which have been designated by state governors and approved by the Secretary of the Treasury.
A qualified opportunity fund must be a corporation or partnership which holds at least 90% of its assets in stock or partnership interests in businesses which have substantially all of their tangible property located in a qualified opportunity zone, or business property which is used by the fund itself in a trade or business located in a qualified opportunity zone.
The Internal Revenue Service has since issued proposed rules regarding qualified opportunity funds; these rules should guide both funds and their investors in taking advantage of the new program. The IRS plans to hold a public hearing on the rules on January 10, 2019; the final rules will be issued at a later date. Although the rules will only become effective when the final rules are published in the Federal Register, a taxpayer may rely on the proposed rules with regard to capital gains that would be recognized before that date, as long as the taxpayer applies the rules in their entirety and consistently.
These are some of the highlights of the proposed rules:
If you have realized a capital gain on which you would like to defer the capital gains tax, you may wish to take advantage of this opportunity. Or you may wish to offer others that opportunity. If you’re interested in pursuing such an investment or organizing a Qualified Opportunity Fund of your own, please contact Marc J. Lane in confidence via email at mlane@MarcJLane.com or phone at (312) 372-1040/ (800) 372-1040.
Joshua S. Kreitzer is a Senior Associate Attorney with The Law Offices of Marc J. Lane, a Professional Corporation. Mr. Kreitzer is a graduate of Northwestern University (J.D.), the University of South Florida (M.A.), and Harvard University (B.A.)
The world's first social impact bond, or SIB, was introduced in 2010 to fund innovative social programs that realistically might reduce recidivism by ex-offenders in Peterborough, England, and, with it, the public costs of housing and feeding repeat offenders. Prudently building on the strengths of that initiative, Illinois Gov. Pat Quinn is rolling out SIBs to help solve some of the state's most vexing social problems.
A SIB isn't a traditional bond where investors are guaranteed a fixed return but a contract among a government agency that agrees to pay for improved social outcomes, a private financing intermediary and private investors. SIBs shift the risk of experimenting with promising but untested intervention strategies from government to private capital markets, with public funds expended only after targeted social benefits have been achieved.
Peterborough's problem was daunting: Sixty percent of prisoners serving short-term sentences historically had gone on to re-offend within a year after their release. But policymakers were confident that a solution was within their reach. They attracted private investment to pay experienced social service agencies to provide intensive, multidisciplinary support to short-term prisoners, preparing them to re-enter society and succeed outside the penal system.
The government decided which goals would be supported, but exactly how those goals would be achieved was left to the private sector. It was the investors, through a bond-issuing organization, who ultimately endorsed the allocation of investment proceeds — how much would be invested in job training, drug rehabilitation and other interventions.
If the Peterborough plan eventually shrinks recidivism rates by 7.5 percent or more, the government will repay the investors' capital and share the taxpayers' savings with them, delivering up to a 13 percent return. If the target isn't hit, the investment will have failed and the government will owe the investors nothing.
Illinois' SIB effort was spearheaded by the state's Task Force on Social Innovation, Entrepreneurship and Enterprise — the governor's think tank on social issues, which I am privileged to chair — with support from Harvard University's John F. Kennedy School of Government, the Rockefeller Foundation and the Aurora-based Dunham Fund. A request for information issued by the Office of Management and Budget on May 13 yielded responses from service providers eager not only to reduce recidivism here but also to create jobs, revitalize communities, improve public health outcomes, curb youth violence, cut high school dropout rates and alleviate poverty.
Now the governor has issued a request for proposals intended to spur better outcomes for Illinois' most at-risk youth — by increasing placement stability and reducing re-arrests for youth in the state's Department of Children and Family Services, and by improving educational achievement and living-wage employment opportunities justice-involved youth most likely to re-offend upon returning to their communities.
Kudos to Mr. Quinn for bringing SIBs to Illinois. May they soon start delivering on their promise.- See more at: http://www.chicagobusiness.com/article/20131007/OPINION/131009850/a-new-kind-of-futures-contract-for-illinois#sthash.ThgxeiFt.dpuf
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