June 19, 2018
FOCUS...on the South Carolina Chapter
 

By in-house counsel, for in-house counsel.®


Chapter News
President Luke Umstetter
President's Letter
Luke Umstetter, President

Being involved with the South Carolina Chapter of the Association of Corporate Counsel continues to be a great privilege for me. I am happy to report that we continue to evolve and grow, not only in numbers but also in the level of engagement around the state. Our events are full of interesting and engaged members and sponsors. Since our last newsletter, Jackson Lewis hosted an incredible event in Greenville and Willoughby & Hoefer treated us to an interesting tour of the Clemson ICAR facility followed by an entertaining social event. Our Midyear Meeting in Charleston was also a resounding success! This Wednesday, Ogletree Deakins will host it's annual joint event between ACC South Carolina and ACC Charlotte at Topgolf. If you haven't already signed up, it's definitely a must. Buses will leave from Charleston, Columbia and Greenville Wednesday morning. These aren't just any buses. To maximize efficency, you'll get mobile CLEs in style on your way there.

Also, don't forget about the ACC SC Annual Meeting, held at the Capital City Club in Columbia on September 28th and the ACC National Annual Meeting in Austin, Texas on October 21-24th. Both are sure to be great events.


Our chapter is all about our members and sponsors and we want to extend a deep thanks to both groups.


2018 Sponsors:

Adams & Reese LLP
Bowman and Brooke LLP
Constangy, Brooks, Smith & Prophete LLP
Haynsworth Sinkler Boyd, P.A.
Jackson Lewis, P.C.
K&L Gates LLP
McNair Law Firm, P.A.
Moore and Van Allen PLLC
Nelson Mullins Riley & Scarborough LLP
Nexsen Pruet, LLC
Ogletree, Deakins, Nash, Smoak & Stewart P.C.
Parker Poe Adams & Bernstein LLP
Turner Padget Graham and Laney, P.A.
Willoughby & Hoefer, P.A.
Womble Bond Dickinson LLP


Have a great summer!

Luke Umstetter

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Featured Articles
Annette Ebright, Sarah Ford, Elizabeth Gibbes, and Todd Rubin
The ICE-Man Cometh: How to Avoid Becoming the Next Immigration Raid Headline
Annette Ebright, Sarah Ford, Elizabeth Gibbes, and Todd Rubin, Parker Poe Adams & Bernstein LLP

There is no stronger evidence of the increased scrutiny U.S. Immigration and Customs Enforcement (ICE) is subjecting businesses to than this: Over the past six months, the agency has been on track to quadruple the number of worksite investigations it carried out in the prior 12 months.  

ICE announced last month that from October 2017 through early May 2018, it opened more than 3,500 worksite investigations. In fiscal year 2017, ICE conducted about 1,700 of those investigations in total. The agency also has more than quadrupled criminal arrests – from 139 in fiscal year 2017 to approximately 600 so far this year. This follows a directive issued in October by Thomas Homan, the acting director of ICE, in which he called for a significant increase in worksite investigations to ensure U.S. businesses are complying with the country’s immigration laws.

A few months later, in January 2018, ICE raided nearly 100 7-Eleven stores across the country, arresting at least 21 undocumented workers. In February, ICE conducted more operations in Los Angeles, arresting more than 200 individuals for immigration law violations. And in April, ICE conducted a workplace raid in Tennessee on an employer  suspected of illegally hiring undocumented workers. That raid led to approximately 100 arrests, one of the largest single workplace raids of the past decade.

In addition to arresting undocumented workers in each of these raids, ICE agents also served notices of inspection allowing them to review each employer’s Form I-9 files. During this kind of inspection, ICE typically works from a roster of all employees, first checking to see whether the company has a Form I-9 on file for each person, then reviewing those forms in detail for errors.   

Given the Trump administration’s focus on dramatic gestures calculated to reduce illegal immigration to the United States, employers should expect additional raids. But that is not the limit of ICE enforcement activities. Also in the first six months of this fiscal year, ICE significantly increased the number of Form I-9 audits it performs outside the context of a raid. ICE has already initiated nearly 2,300 of those audits, which puts it on pace to more than triple the number it performed last fiscal year.  

“Our worksite enforcement strategy continues to focus on the criminal prosecution of employers who knowingly break the law, and the use of I-9 audits and civil fines to encourage compliance with the law,” said Derek Benner, acting executive associate director for Homeland Security Investigations (HSI), in a press release accompanying the latest data. “HSI’s worksite enforcement investigators help combat worker exploitation, illegal wages, child labor and other illegal practices.”

Employers should be aware of ICE’s new enforcement strategy, which includes the following three prongs:

1. Incentivizing compliance through Form I-9 inspections, civil fines, and referrals for debarment.

2. Achieving enforcement through the prosecution of employers who knowingly employ undocumented workers, as well as the arrest of unauthorized workers.

3. Undertaking outreach to instill a culture of compliance and accountability.


What Does This Mean for Employers?

ICE has pledged that employers of all sizes and in all industries will be targeted for audits. An employer selected for audit first receives a “notice of inspection.” In the past, this notice of inspection was served in advance, much like a subpoena. Under ICE’s new enforcement strategy, however, the notice of inspection may be served in conjunction with workplace raids in which suspected unauthorized workers are arrested simultaneously.   

Regardless of whether a company’s workers are authorized to work in the United States, the employer must produce its Forms I-9 for ICE within three business days. ICE officers also watch for evidence of trafficking, smuggling, harboring, visa fraud, identification document fraud, money laundering, worker mistreatment, and other illegal conduct.


What If There Are Paperwork Errors on Employers’ Forms I-9?

While the steepest penalties are reserved for employers who knowingly hire unauthorized workers, errors on the Forms I-9 of legally authorized workers (including U.S. citizens or legal permanent residents) can subject an employer to serious fines.

“Employers need to understand that the integrity of their employment records is just as important to the federal government as the integrity of their tax files and banking records,” HSI’s Benner said in the press release about enforcement data. “All industries, regardless of size, location and type are expected to comply with the law.”

Form I-9 errors are divided into two categories: technical or substantive. Technical errors often may be corrected within 10 business days of notification by ICE. If those errors are not corrected, however, the technical errors turn into substantive errors. Substantive errors include missing Forms I-9, improper documents used to verify status, missing signatures, failure to reverify authorization after expiration, uncorrected technical errors, and a variety of other issues. Substantive errors can result in penalties that exceed $2,000 per form.

Additionally, these penalties can be increased depending on factors such as business size, lack of good faith, seriousness of violation, employment of unauthorized aliens, and employer history (think: compliance efforts and past enforcement).


What Are Common Mistakes That Employers Make on Forms I-9?

Many mistakes made on the Form I-9 stem from a lack of understanding about how the form works. The Form I-9 is required for all employees hired after November 6, 1986 – not just those who are or appear to be foreign workers. Mistakes we often see fall into the following categories:

  • Recordkeeping: Employers must maintain a Form I-9 for each current employee and for all former employees through the expiration of the retention period (calculated as the later of three years from the date of hire or one year from the date of termination of employment, whichever is longer). Failing to maintain the forms deprives the employer of the legal safety that is otherwise created by the employee’s attestation that he or she is authorized to work in the United States.
  • Timing: The employee must complete Section 1 of the Form I-9 on or before the first day of work for pay. The employer must complete Section 2 within three business days of that first day of work. In addition, the employer must enter the date work began so that it is clear on the face of the form whether it was completed within the deadlines.  
  • Attestation and Certification: The employee herself – not the employer representative – must check a box that indicates her immigration status (U.S. citizen, lawful permanent resident, etc.). We frequently see that confused employees have signed  multiple boxes, a legal impossibility. The employee herself must also sign and date Section 1. This step cannot be skipped or completed by the employer on the employee’s behalf.   
  • Documentation: The Form I-9 process requires employers to inspect identity documents (such as drivers’ licenses) and work authorization documents (such as social security cards). Set lists of acceptable documents are provided with the form. Employers should only accept the minimum number of documents required. That can mean either (1) one document from List A or (2) one document from List B and one document from List C. (Employers can find which documents are on each list here.) Often we see employers inspect too many documents and record too much information. Their intention may be only to assure that they have something that works, but over-documentation is a compliance failure that can lead to penalties, as well.

The bottom line: In addition to having all the required Forms I-9 on record, employers must complete the forms in strict accordance with the requirements as to which party completes which section, which documents are sufficient, and which sections need to be completed at what times.


What Can Employers Do to Avoid Problems?

First and foremost, employers must make sure that their employees who are in charge of hiring and onboarding have received up-to-date training in Form I-9 compliance. Form I-9 training is not a “one and done” venture. As the Form I-9 and its interpretation evolves, hiring managers and HR personnel will need updated training.

Second, employers should complete their own Form I-9 audit before ICE shows up at their door. Conducting regular, periodic audits allows employers to correct errors before ICE arrives, as well as to identify any systematic issues that might perpetuate them.   While good faith efforts to comply with current laws can help to mitigate fines and penalties, employers should make sure they don’t compound any compliance problem with faulty audit practices. Form I-9 audits should be conducted under the supervision of an attorney or other advisor with relevant experience. Strict preservation and nondiscrimination rules apply, and improperly correcting errors may lead to bigger fines and penalties.

 

Elizabeth Gibbes, Todd Rubin, Sarah Ford, and Annette Ebright are attorneys on Parker Poe’s immigration compliance team. They can be reached at elizabethgibbes@parkerpoe.com, toddrubin@parkerpoe.com, sarahford@parkerpoe.com, and annetteebright@parkerpoe.com.

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Ashley Wright, Kevin Klein, Mary Burke Baker, and Olivia Byrne
Opportunity Zones: A Powerful New Tool for Development in South Carolina
Ashley Wright, Kevin Klein, Mary Burke Baker, and Olivia Byrne, K&L Gates LLP

Last year’s Tax Cuts and Jobs Act (the “Act”) introduced an exciting federal program that promises deferred taxes on capital gains and the elimination of taxes on gains from certain commercial investments in designated areas. The Opportunity Zone Program is designed to encourage long-term investment in low-income communities. This new program was originally championed by Senator Tim Scott (SC) who explained, “Too many American communities have been left behind by widening geographic disparities and increasingly uneven economic growth…. [this program] will unlock new private investment for communities where millions of Americans face the crisis of closing businesses, lack of access to capital, and declining entrepreneurship.” Under the program, taxes on capital gains invested in Opportunity Zone Funds are deferred and taxes on earnings while the capital gains are invested in the fund may be forgiven entirely, making new investments in commercial real estate and businesses located in Opportunity Zones particularly attractive.  


WHAT IS AN OPPORTUNITY ZONE?

Opportunity Zones consist of low-income population census tracts that have been designated for inclusion in the program by each state’s governor and certified by the Secretary of the Treasury. Each state was allowed to designate up to 25 percent of its qualifying low-income communities as an Opportunity Zone. On March 23, 2018, Governor McMaster designated 135 of South Carolina’s 538 low-income population census tracts as Opportunity Zones.  The selection process focused on promoting areas of South Carolina that have not shared in the general prosperity of recent years, that require more workforce development and affordable housing, and that are ripe for investing in startup businesses, as well as leveraging existing underutilized assets. Further, at least one Opportunity Zone was designated in every county in the state.


WHAT IS A QUALIFIED OPPORTUNITY ZONE FUND?

In order to take advantage of the program, all such investments must move through qualified Opportunity Zone Funds. These funds are investment vehicles organized as a corporation or a partnership for the purpose of investing in and holding at least 90 percent of their assets in qualified Opportunity Zone property, as defined below. Opportunity Zone Funds may be established for individual projects or as free-standing funds that invest in several Opportunity Zone businesses.

To register with the IRS, Opportunity Zone Funds can self-certify their compliance with the Opportunity Zone Program. The certification must be accomplished with a form that the taxpayer completes and attaches to its federal income tax return. The IRS has indicated that the certification form will be released later this summer.


WHAT ARE THE BENEFITS OF OPPORTUNITY ZONE INVESTMENTS?

The program incentivizes investment into Opportunity Zones by offering three major benefits to investors: capital gains deferral, partial forgiveness of capital gains taxes, and forgiveness of capital gains on investment appreciation.

            A.) Capital Gain Deferral

            Any taxpayer possessing capital gains from the sale or exchange of any property with an unrelated person may invest in an Opportunity Zone Fund within 180 days of the transaction and receive a deferral on the taxes due on that capital gain.  The period of capital gain tax deferral ends upon the earlier of i) the date on which the investment is sold; or ii) December 31, 2026.

            B.) Partial Forgiveness of Capital Gains Taxes

            If the taxpayer holds the investment for five years, the basis is increased by 10 percent and 90 percent of the deferred gain is taxed, resulting in a potential 10 percent reduction in the amount of tax that would eventually be owed on the deferred capital gain. If the taxpayer holds its investment for seven years, the basis would be increased by a total of 15 percent and only 85 percent of the deferred gain would be taxed, meaning that taxes owed on the deferred gain can be reduced by a potential total of 15 percent. Because this tax would be owed on December 31, 2026, regardless of when the investment is initially made, this benefit will decrease after December 31, 2019, because the full 15 percent increase in basis will not be achievable.

            C.) Forgiveness of Capital Gains on Investment Appreciation.

            While taxes due on deferred capital gains can be reduced under the program, they will eventually have to be paid. The same is not true for any capital gain realized due to appreciation on the investment, which can be eliminated entirely.   Under the Opportunity Zone Program, if the investment is held in a qualifying Opportunity Zone Fund for at least 10 years, the basis of the investment is increased to fair market value upon election of the taxpayer, and no capital gains tax will be owed on the appreciation. Therefore, if an Opportunity Zone business or property experiences significant growth or appreciation over a decade, this benefit could yield a substantial permanent exclusion from taxation for an investor, which makes the program attractive for start-up companies and commercial real estate investments that often see an appreciation in value over time.


WHAT IS QUALIFYING OPPORTUNITY ZONE PROPERTY?

In order to qualify as an Opportunity Zone Fund, the fund must maintain 90 percent of its assets in qualified Opportunity Zone property. Opportunity Zone property may consist of Opportunity Zone stock or a partnership interest in a qualifying Opportunity Zone business, but it may also include ownership of qualifying Opportunity Zone business property. Qualified Opportunity Zone business property is tangible property (including real estate) acquired after December 31, 2017, and i) the original use of the property commences with the qualified Opportunity Zone Fund, or ii) the qualified Opportunity Zone business substantially improves the property.  Further, substantially all of the use of such property must be in an Opportunity Zone. As such, commercial real estate investments are prime targets for the use of the Opportunity Zone benefit.

The range of potential qualifying investments allows for variety in investment structures, including using an Opportunity Fund as an intermediary investment vehicle that owns a partnership interest in the project owner, or using an Opportunity Fund as the developer of a project that owns the project’s tangible property, including real property.

Businesses qualify as Opportunity Zone businesses when at least 50 percent of their gross income is derived from the active conduct of a trade or business in an Opportunity Zone, a substantial portion of their intangible property is used in the active conduct of the business in an Opportunity Zone, no more than 5 percent of the average unadjusted basis of the assets consist of “non-qualified financial property,” and substantially all of the tangible property of the business (whether owned or leased) is qualified Opportunity Zone business property. Certain disfavored businesses, including golf courses, country clubs, massage parlors, hot tub facilities, suntan facilities, gambling facilities, and liquor stores, cannot qualify as Opportunity Zone businesses.


WHAT ARE THE
UNSETTLED ISSUES?

Several issues will hopefully be resolved with more guidance from Treasury. Some of the unanswered questions that many are contemplating are:

  • With respect to qualified Opportunity Zone business property, and the requirement that the original use of such property commence with the qualified Opportunity Zone Fund, what constitutes “original use”?

  • Can the Opportunity Zone program be used successfully with new market tax credits in order to achieve the maximum benefit for the taxpayer?

  • How will taxpayers extract cash from the Opportunity Zone Fund over the ten year period?

  • While the Act provides that Opportunity Zone Funds must be organized as either a corporation or a partnership, can the Opportunity Zone fund be formed as a limited liability company?

 
The Treasury Department has indicated that it will issue additional guidance clarifying these issues in the coming months.  Clearly, the Opportunity Zone Fund must be structured carefully in order to achieve the taxpayer’s goals and comply with the Act.

On the whole, the Opportunity Zone program is a significant tool in economic and real estate development with the potential to facilitate an influx of capital into low-income communities in South Carolina and elsewhere. This program is already generating great interest from investors looking to receive tax benefits and put money into underserved communities, as well as fund managers looking to assist with these arrangements. K&L Gates has a team of lawyers in both South Carolina and Washington, D.C. that is dedicated to leveraging this tool to grow investment in South Carolina.

 

 

Authors:

Ashley Dantzler Wright – Ashley is of counsel in the Charleston office. She concentrates her practice on commercial real estate, representing owners and lenders in real estate acquisition, development and financing transactions. Ashley is a member of the K&L Gates Opportunity Zone team.

Kevin Klein - Kevin is an associate in the Charleston office. He focuses his practice in the areas of economic development incentives, government relations and commercial real estate development. Kevin has considerable experience representing clients before city, county, and state government in securing economic development incentive packages and is a member of the K&L Gates Opportunity Zone team.

Mary Burke Baker – Mary Burke Baker is a government affairs counselor in the Washington, D.C. office. Mary advocates on behalf of clients and consults with and advises Congressional, U.S. Treasury, and Internal Revenue Service (IRS) staff on numerous domestic and international tax and tax policy issues, including Opportunity Zones impacting community development programs following the Tax Cuts and Jobs Act of 2017 (TCJA). Mary is a team lead on the K&L Gates Opportunity Zone team.

Olivia Byrne – Olivia S. Byrne is a partner in the Washington D.C. office. She spearheads the firm's U.S. Economic Incentives practice and is active across the Opportunity Zones community development program. She is a team lead on the K&L Gates Opportunity Zone team.

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In This Issue
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Chapter News
President's Letter
Featured Articles
The ICE-Man Cometh: How to Avoid Becoming the Next Immigration Raid Headline
Opportunity Zones: A Powerful New Tool for Development in South Carolina
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Annie Wilson, Administrator
PO Box 1763
Columbia, SC 29202
(803) 252-1087