The IRS and Treasury Department have no plan for a third tranche of proposed regulations for the 2017 tax overhaul’s opportunity zone tax breaks, three officials said.

Officials indicated that they are instead leaning toward issuing sub-regulatory guidance to address remaining uncertainties and are figuring out how to address the fact that the second batch of proposed rules altered the first.

“I don’t know what would even be in a third reg,” said Treasury Tax Legislative Counsel Krishna Vallabhaneni.

He added that Treasury likely won’t finish the first set as-is, and then change those in a second set of final rules for the tax breaks, which are meant to fuel economic development in low-income areas.

Under tax code Section 1400Z-2, investors can defer—and, depending on the longevity of the investment, potentially reduce—tax on their profits from stocks and other assets by plugging them into so-called opportunity funds. The main draw of the incentives is the ability to shield any growth in value of the investment from capital gains tax if investors wait a decade to sell their interests.

The capital gains tax break has drawn a lot of attention since its creation in the 2017 tax law, with investors setting up more than 120 funds harboring a collective $27 billion in investment capacity. Still, plenty of investors have been waiting to see how Treasury would land on a possible third set of regulations, something officials have hinted at in the past.

But officials don’t want them to keep waiting on the sidelines—they want them to invest.

Plan for Guidance

Julie Hanlon-Bolton, special counsel in the Internal Revenue Service’s Associate Chief Counsel, Income Tax & Accounting division, said that the government is still working out how it will complete the proposals—including whether that will entail a fusion of the two packages.

“When you talk about guidance, there’s all sorts of guidance. It can be subregulatory, it could be forms and publications,” she said. “As I’m telling everybody, if there’s a need for it, we’ll do something, but there’s no plan right now.”

Michael Novey, associate tax legislative counsel at Treasury, offered an abbreviated version of those remarks when responding to panelists’ questions about a third tranche during a Washington conference.

“No plan,” he said.

The IRS issued the two rounds of proposed regulations for the tax incentives—which allow investors to delay and reduce tax on their stock profits if they put the money in designated areas—in October (REG-115420-18) and April (REG-120186-18).

The first package mainly proposed guardrails for investors in real estate projects, while the second laid out how the tax incentives would apply to operating businesses.

The second batch included language indicating that the government planned to issue guidance dealing with penalties for opportunity funds that fail the law’s compliance tests. The proposal also solicited comments on the information the IRS and Treasury should gather from the funds and report to Congress—a requirement lawmakers removed from the tax overhaul ahead of its passage.

De-Certification, Penalties

The original authors of the legislation creating the tax incentives, Sens. Cory Booker (D-N.J.) and Tim Scott (R-S.C.), along with two other senators, introduced a bill (S. 1344) May 8 to codify reporting requirements. There are already plenty of public comments urging Treasury and the IRS to take action on that front.

There are also a litany of questions related to what happens when a fund de-certifies itself, violates any anti-abuse rules, or fails various tests based on the location of assets, deployment of capital, and sources of income, among others.

“We expect there to be more guidance on anti-abuse,” Michael Novogradac, managing partner of the accounting and advisory firm Novogradac & Co. LLP, during a webcast hosted by the Economic Innovation Group, a think tank that lobbies on and helped develop the tax incentives. “What are the consequences of losing your qualified opportunity fund status, what do you have to do to lose your status, and what are the consequences of losing your status?”

Lisa Zarlenga, a partner at Steptoe & Johnson LLP in Washington and a former Treasury tax legislative counsel, said on that webcast that whether a fund can lose its tax-preferred opportunity fund status to begin with remains an open question as well.

“Really, the statute only provides for penalty,” she said. “The preamble to the proposed regulations asked for comments on that, and indicates that they’ll provide guidance in the future. But it’s interesting because the statute doesn’t actually set up a de-certification process.”

The government still needs to lay out how it plans to handle funds that have been operating for years as if they are in compliance with the tax breaks’ guardrails, only to be deemed not truly a qualified opportunity fund well into the development of the projects they are financing, said Lisa Starczewski, shareholder of Buchanan, Ingersoll & Rooney PC.

“Are you going to go back and put the deferred gain on the original return and pay interest and penalties?” she said. “There’s just a question as to how they’re really going to unwind transactions in abusive situations or if they audit and find that the requirements weren’t met.”

‘Waiting for the Regs’

Dan Kowalski, counsel to Treasury Secretary Steven Mnuchin and a former deputy policy director on President Donald Trump’s 2016 campaign, previously said that whether there is a third round of rules will depend on the types of comments the government receives.

Still, he said, officials don’t want people to wait around for regulations rather than actually using the incentives.

Ahead of the second round of proposed rules, investors signaled that they were waiting for the package’s release before diving into the market, Kowalski said.

“So to say that there’s going to be more regulatory guidance, people might wait, and that may not be necessarily the right outcome for folks we’re trying to help.”

Although Treasury released a statement in early March signaling its general preference for full regulations, and the associated proposal-and-comment process, Kowalski said plenty of the remaining regulatory questions surrounding opportunity zone tax breaks could be handled with new forms and instructions.

“We’ve revised forms every year, put them out on the website, they received comments, and then we consider them, and make the revisions,” he said. “I think that’s the way some of these issues could get settled.”