The 90-Percent Test is applied by taking the average of the percentage of qualified opportunity zone property held by the QOF (1) on the last day of the first six-month period of the taxable year of the QOF and (2) on the last day of the taxable year of the QOF.
If a QOF fails to meet the 90-Percent Test, the QOF will be subject to a penalty for each month that it fails to meet the requirement. The amount of the penalty for each month will be equal to the product of (1) the excess of (a) the amount equal to 90 percent of the QOF’s gross assets over (b) the aggregate gross value of qualified opportunity zone property held by the QOF, multiplied by (2) the underpayment rate under Code Section 6621(a)(2) for such month. If the QOF is a partnership, the penalty is taken into account proportionately as part of the distributive share of each partner of the partnership. This means that even investors who have little control over the QOF’s investments would share in the penalty. There is no penalty, however, if the QOF’s failure to meet the 90-Percent Test can be shown to be due to reasonable cause. It is not yet clear which of the investor-level tax benefits described above may be lost as a result of a QOF’s failure to meet the 90-Percent Test, and we expect that Treasury will provide guidance to address this issue.
Source Shearman & Sterling
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