As part of its continuing response to the COVID-19 pandemic, on June 4, 2020, the Internal Revenue Service issued Notice 2020–39 (the “Notice”). The Notice provides welcome relief to Qualified Opportunity Funds (“QOFs”) and their investors with respect to five critical time-sensitive actions that need to be taken under Internal Revenue Code (“Code”) Section 1400Z–2 (the “OZ Act”).

Invoking its authority under Code Section 7508A(a), the IRS has provided what many may perceive as strikingly generous relief, extending the time periods to perform certain acts and/or granting penalty relief for those QOFs that fail to satisfy the 90-percent investment standard. The Notice augments relief provided in earlier IRS notices, including most notably Notice 2020–23, which was covered by our Alert entitled “IRS Updates Guidance on Filing and Payment Deadlines and Provides New Guidance Relating to Other Taxpayer Actions” dated April 10, 2020.

A brief summary of these five relief provisions is set forth below.

180-Day Investment Requirement for QOF Investors

Time-Sensitive Provision. Code Section 1400Z-2(a)(1)(A) provides that if a taxpayer has eligible gain from a sale or exchange of property, the taxpayer can exclude all or a portion of that gain from current income recognition by contributing money or property to a QOF during the 180-day period beginning on the date of the sale or exchange. The final regulations under Code Section 1400Z-2 (the “Final Regulations”) provide a relatively complex set of rules on how the 180-day investment requirement can be satisfied in various situations.

Relief. Under the Notice, if the last day of the 180-day investment period falls on or after April 1, 2020 and before December 31, 2020, then the last day of that 180-day investment period is automatically postponed to December 31, 2020. The Notice goes on to instruct taxpayers that they still need to make a valid deferral election in accordance with the instructions to Form 8949, complete Form 8997, and file the completed Forms 8949 and 8997 with a timely filed Federal income tax return (including extensions) or amended Federal income tax return for the taxable year in which the gain would be recognized if Code Section 1400Z-2(a)(1) did not apply to defer recognition of the gain.

90-Percent Investment Standard for QOFs

Time-Sensitive Provision. Under Code Section 1400Z-2(d)(1), a QOF must hold at least 90 percent of its assets in Qualified Opportunity Zone Property (“QOZP”), determined by the average of the percentage of Qualified Opportunity Zone Property held by that QOF as measured (i) on the last day of the first six-month period of the taxable year of the QOF and (ii) on the last day of the taxable year of the QOF.

Relief. Pursuant to the Notice, Code Section 1400Z-2(d)(1) will now be interpreted such that, if the applicable compliance testing date for the 90-perent investment standard falls within the period beginning on April 1, 2020 and ending on December 31, 2020, then any failure of the QOF to satisfy the 90-percent investment standard is automatically excused based on the “reasonable cause” exception. A QOF must still accurately complete all lines on a Form 8996 filed with respect to each affected taxable year EXCEPT that the QOF should place a “0” in Part IV, Line 8 (Penalty). The accurately completed Form 8996 must be filed with the QOF’s timely filed Federal income tax return (including extensions) for the affected taxable year(s).

30–Month Substantial Improvement Period for QOFs and QOZBs

Time-Sensitive Provision. Code Section 1400Z-2(d)(2)(D)(i) provides that tangible property is treated as Qualified Opportunity Zone Business Property (“QOZBP”) if the tangible property is used in the trade or business of the QOF (or QOZB) and satisfies three general requirements. One of these requirements can be satisfied if the applicable entity “substantially improves” the tangible property. Substantial improvement occurs if during any 30-month period selected by the taxpayer, there are additions to the basis of acquired property that reach certain thresholds.

Relief. The Notice provides that, in applying the “substantial improvement” requirement, the 30-month substantial improvement period is tolled for the nine-month period from April 1, 2020 through December 31, 2020. This effectively turns the substantial improvement period for projects underway prior to April 1, 2020 into a 39-month period.

Although the Notice does not say so explicitly, this tolling appears to be automatic.

Working Capital Safe Harbor for QOZBs

Time-Sensitive Provision. The Final Regulations provide QOZBs with a so-called “31-month safe harbor” for treating investment proceeds as working capital and not as prohibited Nonqualified Financial Property (“NQFP”). One of the requirements of the safe harbor is that the QOZB comply with a written schedule that is consistent with ordinary startup of a trade or business for the expenditure of the working capital assets within the applicable 31-month period. The Final Regulations also contain what appears to be an automatic 24-month extension of this 31-month period for QOZBs located in an opportunity zone within a federally declared disaster. See Treas. Reg. Sec. 1.1400Z2(d)-1(d)(3)(v)(D).

Relief. The Notice makes it clear that the President’s Emergency Declaration meets the “federally declared disaster” requirement and applies to all QOZBs throughout the country. As a result, the Notice provides that the time period to expend working capital assets under the safe harbor is extended by “not more than an additional 24 months” (for a total period of up to 55 months) if a QOZB held working capital assets intended to be covered by the working capital safe harbor before December 31, 2020 and all other requirements to qualify for the safe harbor are met.

12–Month Reinvestment Period for QOFs

Time-Sensitive Provision. The Final Regulations provide that if a QOF receives proceeds from the return of capital or the sale or disposition of some or all of its QOZP, then the QOF has a 12-month period, beginning on the date of the distribution, sale or disposition, within which to reinvest the proceeds and avoid being subject to the 90-percent investment standard. This treatment is conditioned on the reinvested proceeds being held continuously in cash, cash equivalents or debt instruments for a term of 18 months or less. The Final Regulations also provide that if a QOF's plan to reinvest some or all of the proceeds in QOZP is delayed due to a federally declared disaster, then the QOF may receive up to an additional 12 months to reinvest such proceeds, provided that the QOF invests such proceeds in the manner originally intended before the disaster. See Treas. Reg. Sec. 1.1400Z2(f)-1(b).

Relief. Because the Notice concludes that the “federally declared disaster” requirement has been satisfied, the reinvestment period for any QOF is extended by up to an additional 12 months if the QOF’s original 12-month period included January 20, 2020, the date of FEMA’s major disaster declaration, and if the other requirements are met. Note the unusual January 20, 2020 date for this specific relief.


Notice 2020–23 had previously extended a large number of tax-compliance deadlines falling between April 1, 2020 and July 14, 2020 to July 15, 2020. By comparison, Notice 2020-39 addresses only five specific Opportunity Zone-related deadlines, but extends the relief period for significantly longer periods of time, as described above.

This Notice grants QOFs and QOZBs a significant amount of additional time to invest in opportunity zones and thereby hopefully include these communities in the country’s economic recovery. The relief set forth in the Notice, it should be noted, was very responsive to recommendations made by Senator Tim Scott and eight other Senators in a letter to Treasury and the IRS dated May 4, 2020. Meanwhile, other recommendations for regulatory or statutory relief are still being advocated to the Treasury Department and Congress.

The IRS has provided clear and specific guidance on five critical deadlines under the OZ Act. That is welcome news to all. However, even clear answers sometimes beget further questions – for example, how does the 24-month extension to the working capital safe harbor period affect the requirement that a QOZB adhere to the schedule in its written plan? Does the written plan have a suspension period? Can a QOZB stop work and start-up and then stop again?