By: James Mann , Partner
What happened?
Yesterday there was a hearing on the President’s 2020 Budget Request for the Treasury Department before the Subcommittee on Financial Services and General Government of the United States Senate Committee on Appropriations. During that hearing, there was an exchange about opportunity zones between Senator James Lankford (R-OK) and Secretary of Treasury Steven Mnuchin. Some mistakenly reacted to the Secretary’s comment as signaling a change in policy on opportunity zones for cannabis companies.
The exchange is worth reading – the entirety is as follows:
Sen. Lankford: “There is still an unanswered question that is hanging out there that we’ve talked about before and that is if an activity is illegal in federal law, can you apply and get an opportunity zone credit for economic activity in a state? Specifically, this would apply in many states to marijuana businesses—so the question is, if a marijuana business tries to say they want to get an opportunity zone tax credit it’s illegal in federal law, but maybe it’s legal in a particular state, has that been clarified yet in federal policy, and my suggestion is what is illegal in the federal government we should not give a federal tax credit for. If you want my personal opinion on that, but that is an area that has not yet been clarified by Treasury.”
Sec. Mnuchin: “First, let me comment we obviously have a conflict in certain states, more broadly between federal law and state law, and that creates significant problems for us at Treasury, particularly in the IRS and other areas where we need to collect taxes, and we have to build cash rooms and everything else, and this has become a cash business. So without making a policy view on this, I would encourage Congress that this is an issue that needs to be addressed because it has created issues. Specifically, in regards to your question, and we have not yet put out guidance so I will defer to my team, but my recommendation to them would be that it is not the intent of the opportunity zones that if there is this conflict that has not yet been cleared, that for now we should not have those businesses in the opportunity zones, but I defer to my group to put out guidance on this, but again I would just emphasize the broader issue is an issue that impacts us in many ways that is an issue for Congress to look at.”
What does that mean?
Absolutely nothing, because:
Both Lankford and Mnuchin agree that future legislative or regulatory action is necessary to deny opportunity zone benefits to cannabis projects.
Mnuchin clearly defers to the regulation writers at Treasury (not once, but twice in the same sentence).
Mnuchin emphasizes the need for Congressional action in the cannabis area (twice) – to him this is an issue that needs to be addressed by Congress, not Treasury. Note that Mnuchin says that the conflict between state and federal law generally creates problems, such as “cash rooms” and encourages Congress to fix this.
The Treasury Department announced in its March 5, 2019 Policy Statement on the Tax Regulatory Process a series of general limits on issuing regulations. This reflects the Trump Treasury Department’s belief that the previous administration exceeded the proper bounds of its regulatory authority in the tax area.
There is no specific statutory authority in the opportunity zone law (Sections 1400Z-1 and 1400Z-2) for issuing regulations other than for certification rules, reinvestment timing rules and anti-abuse rules. Issuing regulations regarding additional activities that are ineligible for the opportunity zone tax benefits, particularly when there is a specific list of ineligible activities in the statute, would exceed Treasury’s regulatory authority. It is improbable that any such regulations would be issued, especially in light of Treasury’s emphasis on its regulatory limits and the administration’s clearly stated preference for Congressional resolution of cannabis-related issues.
Conclusion
No one should confuse exchanging political pleasantries for substantive policy pronouncements.
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