Innovation zone project would qualify for federal tax write-offs

Storey County Commissioners voted last week to “oppose separatist governing control” and the carving up of the county. It was the first official statement from the commission in response to Gov. Steve Sisolak’s proposed legislation creating “Innovation Zones”—cities built and governed, at least initially, by tech companies. County Commissioner Lance Gilman, from whom land in a proposed innovation zone adjacent to the Tahoe-Reno Industrial Center (TRIC) was purchased, was not present for the vote.

In news reports and social media posts, many people have referred to the proposal—and yet to be introduced legislation—for innovation zones as Sisolak’s idea.

But the push for innovation zones—and the one that is likeliest to come to fruition first through an effort led by the company Blockchains, LLC—predate the governor’s term in office. In fact, it was former Gov. Brian Sandoval who first called Blockchains “one of the next big chapters” in Nevada history during a roundtable held at the TRIC back in October 2018.

Blockchains is one of a handful of big tech companies to make its home at the TRIC in Storey County east of Reno—joining Google, Switch and Tesla. But what has set Blockchains apart is its purchase of an additional 67,000 acres of land adjacent to TRIC, land that Sandoval dubbed “Innovation Park.”

A zone within a zone 

It was also Sandoval, in conjunction with then-Nevada U.S. Senator Dean Heller, who lobbied the U.S. Treasury Department to designate Storey County as an “opportunity zone.”

Opportunity zones, created through the Tax Cuts and Jobs Act of 2017, are defined by the Internal Revenue Service as “economically-distressed communities where new investments, under certain conditions, may be eligible for preferential tax treatment.” Opportunity zone plans are now in place for communities in all 50 states.

Storey County, initially, didn’t qualify for the designation because its average household income was too high.

Governors in each state were able to nominate areas to be designated as opportunity zones. Sandoval had to remove his request for a part of Lyon County, including Dayton, to be designated an opportunity zone in order for Storey County to be considered.

Which brings us back to “Innovation Park.” This is where Blockchains intends to build a “smart city” organized around blockchain technology—capitalizing on the independence of an innovation zone and exploiting the tax write-offs that come with being a development inside an opportunity zone. The smart city idea, too, was announced in 2018 by Blockchains founder and CEO Jeffrey Berns.

During the announcement of the planned legislation for innovation zones, Sisolak said they wouldn’t come at the cost of a huge tax handout from the state, of the variety that was given to Tesla to lure it to Nevada. In fact, he said the legislation would include provisions requiring companies to put forth proposals for industry-specific taxes to be levied upon them—though no specifics regarding rates were discussed.

Sisolak made no mention of the fact that the first—and maybe only—innovation zone lies within an opportunity zone, qualifying it for a tax break from the federal government.

Right now, Blockchains will receive at least a temporary tax deferral from the feds on its capital gains. According to the opportunity zones rules, this could become a permanent exclusion of taxable income on new gains. Per the Tax Policy Center, “For investments held for at least 10 years, investors pay no taxes on any capital gains produced through their investment in Opportunity Funds (the investment vehicle that invests in Opportunity Zones).”

Opportunity for whom? 

Blockchains and its smart city may become the only innovation zone within an opportunity zone within Nevada. But it’s not the only development within an opportunity zone to draw criticism and scrutiny. Federal legislators have been questioning how opportunity zones are being used to line the pockets of the wealthy since their inception under the Trump administration.

In 2019, House Ways and Means Committee Chairman Richard Neal and Senate Finance Committee Ranking Member Ron Wyden launched an investigation into the Treasury Department’s Opportunity Zone designation of Storey County, exploring whether political appointees interfered in the process to potentially steer millions in tax breaks to longtime associates.

In their request to then-Treasury Secretary Steven Mnuchin, the lawmakers wrote:

“The New York Times also released an internal memorandum from a career IRS official, which warned about the negative impact that this designation would have on the Opportunity Zone program. Among other things, the memorandum stated that the decision to allow Nevada to ‘deviate from’ the established eligibility criteria ‘creates serious potential risks to both the IRS and the opportunity zone program,’ is ‘demonstrably unfair to every other state (and the taxpayers and investors in those states),’ and ‘call[s] into question the legitimacy of the process by which designations were made.’  Despite these objections, Treasury allowed for the designation of Storey County.”

This and other investigations done at the behest of Democrats have yielded no changes to the opportunity zone program.

So, it appears likely for now that if innovation zones are approved in Nevada, Blockchains’ smart city will be ushered into reality in such a way as to guarantee it meets the requirements to take full advantage of the opportunity zone tax breaks.

Pete Ernaut of lobbying and marketing firm R&R Partners, who works with Blockchains and who had previously served as a senior advisor to both Gov. Sandoval and Sen. Heller, has said that it will likely take a decade for Blockchains to finish securing the water rights to meet the number of acre-feet needed for a city the size of the one proposed.

Until the city’s infrastructure is built, and things like water rights are squared away and the company is ready to take over providing governmental services—from schools to law enforcement—Blockchains needs only invest another $1 billion into the innovation zone over the course of a decade to satisfy the state’s requirements, according to the proposed legislation.

If it does so through an opportunity fund, it will also meet the federal requirement for a permanent exclusion from taxes on its new gains going forward.