# Prop. Treas. Reg. § 1.1400Z2(g)-1: Application of opportunity zone rules to members of a consolidated group. Proposed regulation, not in force. REG-115420-18, 84 FR 18652, published 2019-05-01 . Interprets 26 U.S.C. § 1400Z-2. Par. 7. Section 1.1400Z2(g)-1 is added to read as follows: (a) Scope and definitions —(1) Scope. This section provides rules regarding the Federal income tax treatment of QOFs owned by members of consolidated groups. (2) Definitions. The definitions provided in § 1.1400Z2(b)-1(a)(2) apply for purposes of this section. (b) QOF stock not stock for purposes of affiliation —(1) In general. Stock in a QOF corporation (whether qualifying QOF stock or otherwise) is not treated as stock for purposes of determining whether the issuer is a member of an affiliated group within the meaning of section 1504. Therefore, a QOF corporation can be the common parent of a consolidated group, but a QOF corporation cannot be a subsidiary member of a consolidated group. (2) Example. The following example illustrates the rules of this paragraph (b). (i) Facts. Corporation P wholly owns corporation S, which wholly owns corporation Q. P, S, and Q are members of a U.S. consolidated group (P group). In 2018, S sells an asset to an unrelated party and realizes $500 of capital gain. S contributes $500 to Q and properly elects to defer recognition of the gain under section 1400Z-2. At such time, Q qualifies and elects to be treated as a QOF. (ii) Analysis. Under paragraph (b) of this section, stock of a QOF (qualifying or otherwise) is not treated as stock for purposes of affiliation under section 1504. Thus, once Q becomes a QOF, Q ceases to be affiliated with the P group members under section 1504(a), and it deconsolidates from the P group. (c) Qualifying investments by members of a consolidated group. Except as otherwise provided in this section or in § 1.1400Z2(b)-1, section 1400Z-2 applies separately to each member of a consolidated group. Therefore, for example, the same member of the group must both engage in the sale of a capital asset giving rise to gain and timely invest an amount equal to some or all of such gain in a QOF (as provided in section 1400Z-2(a)(1)) in order to qualify for deferral of such gain under section 1400Z-2. (d) Tiering up of investment adjustments provided by section 1400Z-2. Basis increases in a qualifying investment in a QOF under sections 1400Z-2(b)(2)(B)(iii), 1400Z-2(b)(2)(B)(iv), and 1400Z-2(c) are treated as satisfying the requirements of § 1.1502-32(b)(3)(ii)(A), and thus qualify as tax-exempt income to the QOF owner. Therefore, if the QOF owner is a member of a consolidated group and is owned by other members of the same group (upper-tier members), the group members increase their bases in the shares of the QOF owner under § 1.1502-32(b)(2)(ii). However, there is no basis increase under § 1.1502-32(b)(2)(ii) in shares of upper-tier members with regard to basis increases under section 1400Z-2(c) and the regulations at § 1.1400Z2(c)-1 unless and until the basis of the qualifying investment is increased to its fair market value, as provided in section 1400Z-2(c) and the regulations at § 1.1400Z2(c)-1. (e) Application of § 1.1502-36(d). This paragraph (e) clarifies how § 1.1502-36(d) applies if a member (M) transfers a loss share of another member (S) and S is a QOF owner that owns a qualifying investment in a QOF. To determine S's attribute reduction amount under § 1.1502-36(d)(3), S's basis in its qualifying investment is included in S's net inside attribute amount to compute S's aggregate inside loss under § 1.1502-36(d)(3)(iii)(A). However, S's basis in the qualifying investment is not included in S's category D attributes available for attribute reduction under § 1.1502-36(d)(4). Thus, S's basis in the qualifying investment cannot be reduced under § 1.1502-36(d). If S's attribute reduction amount exceeds S's attributes available for reduction, then to the extent of S's basis in the qualifying investment (limited by the remaining attribute reduction amount), the common parent is treated as making the election under § 1.1502-36(d)(6) to reduce M's basis in the transferred loss S shares. (f) Examples. The following examples illustrate the rules of this section. (1) Example 1: Basis adjustment when member owns qualifying QOF stock —(i) Facts. Corporation P is the common parent of a consolidated group (P group), and P wholly owns Corporation S, a member of the P group. In 2018, S sells an asset to an unrelated party and realizes $500 of capital gain. S contributes $500 to Q (a QOF corporation) and properly elects to defer the gain under section 1400Z-2(a) and § 1.1400Z2(a)-1. S does not otherwise own stock in Q. In 2029, when S still owns its qualifying investment in Q, P sells all of the stock of S to an unrelated party. (ii) Analysis —(A) 5-year and 7-year basis increase and § 1.1502-32 tier-up. In 2023, when S has held the stock of Q for five years, under section 1400Z-2(b)(2)(B)(iii), S increases its basis in its Q stock by $50 (10 percent of $500, the amount of gain deferred by reason of section 1400Z-2(a)(1)(A)). The 10-percent basis increase qualifies as tax-exempt income to S under paragraph (d) of this section. Thus, P (an upper-tier member) increases its basis in S's stock by $50 under § 1.1502-32(b)(2)(ii). Similarly, in 2025, when S has held the stock of Q for seven years, under section 1400Z-2(b)(2)(B)(iv), S increases its basis in its Q stock by an additional $25 (5 percent of $500). The 5 percent basis increase also qualifies as tax-exempt income to S under paragraph (d) of this section, and P increases its basis in S's stock by an additional $25 under § 1.1502-32(b)(2)(ii). (B) S's recognition of deferred capital gain in 2026. S did not dispose of its Q stock prior to December 31, 2026. Therefore, under section 1400Z-2(b)(1)(B) and § 1.1400Z2(b)-1(b)(2), S's deferred capital gain is included in S's income on December 31, 2026. The amount of gain included under section 1400Z-2(b)(2)(A) is $425 ($500 of deferred gain less S's $75 basis in Q). S's basis in Q is increased by $425 to $500, and P's basis in S also is increased by $425. (C) P's disposition of S. P's sale of S stock in 2029 results in the deconsolidation of S. Q remains a non-consolidated subsidiary of S, and S is not treated as selling or exchanging its Q stock for purposes of section 1400Z-2(c). Therefore, no basis adjustments under section 1400Z-2 are made as a result of P's sale of S stock. (iii) S sells the stock of Q after 10 years. The facts are the same as in this Example 1 in paragraph (f)(1)(i) of this section, except that in 2029, instead of P selling all of the stock of S, S sells all of the stock of Q to an unrelated party for its fair market value of $800. At the time of the sale, S has owned the Q stock for over 10 years, and S elects under section 1400Z-2(c) to increase its stock basis in Q from $500 ( see the analysis in this Example 1 in paragraph (f)(1)(ii)(B) of this section) to the fair market value of Q on the date of the sale, $800. As a result of the election, S's basis in Q is $800 and S has no gain on the sale of Q stock. Additionally, the $300 basis increase in Q is treated as tax-exempt income to S pursuant to paragraph (d) of this section. Thus, P increases its basis in P's S stock by $300 under § 1.1502-32(b)(2)(ii). (2) Example 2: Computation and application of the attribute reduction amount under § 1.1502-36(d) when S owns a QOF —(i) Facts. Corporation P (the common parent of a consolidated group) wholly owns corporation M, which wholly owns corporation S, which wholly owns Q (a QOF corporation). In 2018, S sells an asset to an unrelated party and realizes $5,000 of capital gain. S contributes $5,000 to Q and properly elects to defer the gain under section 1400Z-2. In 2024, M sells all of its S stock to an unrelated party for fair market value of $100, and M's basis in the stock of S is $300. At the time of sale, S owns the stock of Q with a basis of $500 (S's basis in Q was increased under section 1400Z-2(b)(2)(B)(iii) to $500 in 2023), and S has a net operating loss carryover of $50. M's transfer of the S shares is a transfer of loss shares under § 1.1502-36. Assume that no basis redetermination is required under § 1.1502-36(b) and no basis reduction is required under § 1.1502-36(c). (ii) Attribute reduction under § 1.1502-36(d). Under § 1.1502-36(d), S's attributes are reduced by S's attribute reduction amount. Section 1.1502-36(d)(3) provides that S's attribute reduction amount is the lesser of the net stock loss and S's aggregate inside loss. The net stock loss is the excess of the $300 aggregate basis of the transferred S shares over the $100 aggregate value of those shares, or $200. S's aggregate inside loss, which includes the basis of the stock of Q as provided by paragraph (e) of this section, is the excess of S's net inside attribute amount over the value of the S share. S's net inside attribute amount is $550, computed as the sum of S's $50 loss carryover and its $500 basis in Q. S's aggregate inside loss is therefore $450 ($550 net inside attribute amount over the $100 value of the S share). Accordingly, S's attribute reduction amount is the lesser of the $200 net stock loss and the $450 aggregate inside loss, or $200. Under § 1.1502-36(d)(4), S's $200 attribute reduction is first allocated and applied to reduce S's $50 loss carryover to $0. Under § 1.1502-36(d)(4)(i)(D), S generally would be able to reduce the basis of its category D assets (including stock in other corporations) by the remaining attribute reduction amount ($150). However, paragraph (e) of this section provides that S's basis in the QOF (Q) shares is not included in S's category D attributes that are available for reduction under § 1.1502-36(d)(4), and the remaining $150 of attribute reduction amount cannot be used to reduce the basis of Q shares under § 1.1502-36(d). Rather, under paragraph (e) of this section, P is treated as making the election under § 1.1502-36(d)(6) to reduce M's basis in the transferred loss S shares by $150. As a result, P's basis in its M stock will also be reduced by $150. (g) Applicability date. Except as otherwise provided in this paragraph (g), this section applies for taxable years that begin on or after the date of publication in the Federal Register of a Treasury decision adopting these proposed rules as final regulations. However, a QOF may rely on the proposed rules in this section with respect to taxable years that begin before the applicability date of this section, but only if the QOF applies the rules in their entirety and in a consistent manner.