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Client Alert

CARES Act Provides Significant Payroll Tax Relief and Relief for Business Taxpayers and Individuals

April 3, 2020

by Katina M. Peterson and Kendall R. Fisher

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The federal Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act” or the “Act”), signed into law on March 27, 2020, contains significant (and mostly temporary) changes to federal tax law that provide immediate and short-term economic relief to both individual and business taxpayers.  This briefing provides general summaries of these provisions in three categories: (1) payroll tax relief, (2) relief for business taxpayers, and (3) relief for individuals.  For more specific information relating to any of these provisions, please reach out to any of the authors.

PAYROLL TAX RELIEF

Employee Retention Credit for Employers Adversely Affected by COVID-19

Section 2301 of the Act provides certain employers adversely affected by the COVID-19 pandemic with payroll tax credits for wages paid to employees in 2020, including related health insurance costs, under specified circumstances.  These credits operate similarly to the sick leave and family leave credits provided for under the Families First Coronavirus Response Act (“FFCRA”) enacted on March 18, 2020, although they do not result in credits for the entire amount of wages paid.  Under the circumstances that qualify employers for credits, employers may be incentivized by the credits to retain employees for longer than they might otherwise and in any case will be compensated in the form of a payroll tax reduction or refund for up to $5,000 per employee for all qualified wages paid, mitigating some of the financial strain on employers caused by the emergency.

More specifically, the Act provides “eligible employers” for any calendar quarter in 2020 with credits against FICA tax liability for such quarter in an amount equal to 50 percent of the “qualified wages” paid to employees for the quarter.  The aggregate amount of qualified wages that can be taken into account with respect to any employee in 2020 shall not exceed $10,000, and thus the credit for each employee cannot exceed $5,000 for the year.

“Eligible employers” are employers carrying on a trade or business during calendar year 2020 (including, for this purpose, tax-exempt organizations) with respect to any calendar quarter in 2020 for which either of the following eligibility thresholds is satisfied:

  1. The operation of the employer’s trade or business is fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19 (the “Suspension Circumstances”); or
  2. The calendar quarter is within the period beginning with the first calendar quarter in 2020 for which the employer’s gross receipts for the quarter are less than 50 percent of the employer’s gross receipts for the same calendar quarter in the prior year and ending at the end of 2020 (the “Gross Receipts Circumstances”).  The Secretary of the Treasury is directed to issue guidance regarding the application of this provision to any employer who was not carrying on a trade or business for all or part of the same calendar quarter in the prior year.

“Qualified wages” is defined differently depending on whether the employer’s average number of full-time employees (as determined under rules set forth in Section 4980H of the Internal Revenue Code of 1986, as amended (the “Code”)) during 2019 was (1) greater than 100, or (2) 100 or fewer, as follows:

  1. For employers whose average number of full-time employees during 2019 was greater than 100, “qualified wages” are wages paid only with respect to which an employee is not providing services due to the Suspension Circumstances or the Gross Receipts Circumstances.  Aggregation rules borrowed from Sections 52 and 414 of the Code apply to treat certain persons as a single employer for purposes of this provision.
  2. For employers whose average number of full-time employees during 2019 was 100 or fewer, “qualified wages” are (a) wages paid to any employee during any period in which the Suspension Circumstances are present, even if they are providing services; and (b) if not taken into account pursuant the foregoing clause, wages paid to any employee during any quarter in 2020 from and after the first quarter in which the Gross Receipts Circumstances are present, even if they are providing services.

The Act further provides that “qualified wages” shall include so much of the eligible employer’s qualified health plan expenses as are properly allocable to the wages described above, but only to the extent that these expenses are excluded from employees’ gross income.

Among other limitations set forth in the Act, “qualified wages” does not include any sick leave or family leave wages for which dollar for dollar tax credits already are provided under the FFCRA or wages paid to specified family members of the employer or controlling owner.  Additionally, employers who receive a Paycheck Protection Program loan provided for in Section 1102 of the Act are not eligible for the credits.

Refundable Nature of Credits:  The credits are available for the calendar quarter for which the qualified wages are paid, and are refundable to the employer to the extent they exceed the employer’s tax liability for such quarter.  The Act provides that the Secretary shall waive any failure to deposit penalty for applicable payroll taxes if the Secretary of the Treasury determines that such failure was due to the reasonable anticipation of the credits allowed under this section of the Act.

Credits for Amounts Paid to Employees Covered by Railroad Retirement System:  The Act provides similar credits and penalty relief for qualified wages paid by eligible employers to employees who are covered under the Railroad Retirement Act system rather than under the FICA tax system.

Effective Date: The credit applies with respect to wages paid after March 12, 2020, and before January 1, 2021.

Delay of Payment of Employer Payroll Taxes

Section 2302 of the CARES Act treats any employer as having timely deposited all “applicable employment taxes” accrued during the period beginning on the date of enactment of the CARES Act and ending on January 1, 2021 (effectively, “applicable employment taxes” due for the remainder of 2020) if 50 percent of such taxes are deposited no later than December 31, 2021 and the remainder is deposited no later than December 31, 2022.  For most employers, the “applicable employment taxes” consist of the employer portion of Social Security taxes, which are currently imposed at a rate of 6.2 percent of wages paid to employees (applicable to wages paid up to $137,700 per employee) (Code Section 3111(a) taxes).  A separate definition applies for purposes of the employment taxes with respect to employees who are covered under the Railroad Retirement Act system.

Taxpayers that have indebtedness forgiven under either Section 1106 or Section 1109 of the CARES Act with respect to a Paycheck Protection Program loan are not eligible for the foregoing deferral provisions.

For taxpayers subject to self-employment tax, the CARES Act permits the deferral of 50 percent of self-employment taxes accrued during the period beginning on the date of enactment of the CARES Act and ending on January 1, 2021 (effectively, 50 percent of the self-employment taxes due for the remainder of 2020) if 50 percent of the deferred taxes are deposited no later than December 31, 2021 and the remainder is deposited no later than December 31, 2022. Taxes deferred under the CARES Act will also be excluded for purposes of calculating estimated tax payments under Code Section 6654.

Effective Date: March 27, 2020.

RELIEF FOR BUSINESS TAXPAYERS

Temporary Suspension of Limitations on Corporations’ Cash Charitable Contributions

Section 2205 of the Act modifies the limitations on deductions of qualified charitable contributions.  For corporations, the 10-perecnt of taxable income limitation is increased to 25 percent of taxable income for qualified contributions, with any excess eligible to be carried forward.

For purposes of this provision, a “qualified contribution” means any charitable contribution if (i) paid in cash during the calendar year 2020 to an organization described in Code Section 170(b)(1)(A) (e.g., churches, education institutions, organizations that receive a substantial portion of support from public contributions, etc.), and (ii) the taxpayer has elected the application of this section with respect to such contribution.  Contributions to donor-advised funds and supporting organizations do not qualify.

This provision also increases the limitation on deductions for contributions of certain food inventory to 25 percent of the taxpayer’s aggregate business income from businesses in which such contributions were made (previously, deductions were limited to 15 percent of such income).

Effective Date: This section of the CARES Act applies in taxable years ending after 2019.

Modifications for Net Operating Losses

Section 2303 of the CARES Act delays the effective date through the current taxable year of certain limitations on a corporation’s ability to deduct net operating losses (“NOLs”) that were enacted in the Tax Cuts and Jobs Act of 2017 (the “TCJA”).  Under this relief provision, a corporate taxpayer’s NOLs arising in a taxable year beginning after December 31, 2017 and before January 1, 2021 generally can be carried back to the five years preceding the taxable year of such loss (see Code Section 172(b)). In addition, the “80 percent limitation of taxable income” rule regarding use of NOLs will not apply to taxable years after December 31, 2017 and beginning before January 1, 2021 (additional rules are provided for taxable years beginning after December 31, 2020) (see Code Section 172(b)).  The increased ability to use NOLs to offset taxable income both in current and previous taxable years should increase an affected corporation’s cash flows to maintain operations and payroll during the COVID-19 emergency.

The TCJA prohibited taxpayers from carrying back NOLs to taxable years ending after December 31, 2017. The CARES Act provides that NOLs that arose in a tax year that “straddled” December 31, 2017 are eligible for the two-year carryback period and twenty-year carryforward provisions that applied prior to the enactment of the TCJA. For the 120 days following the date of enactment of the CARES Act, taxpayers are permitted to file an election under Code Section 6411(a) to carryback eligible NOLs during that arose during a taxable year straddling, but not ending on, December 31, 2017, or to elect to forego the carryback under Code Section 172(b)(3).

The TCJA also introduced what is commonly known as a “transition tax” under Code Section 965, whereby U.S. corporations were deemed to have repatriated certain income from their non-U.S. subsidiaries. For most taxpayers, this deemed repatriation occurred in their 2017 taxable year, unless the taxpayer elected to defer such tax to their 2018 taxable year. For a taxpayer that previously recognized taxable income under Code Section 965, the CARES Act provides that an NOL arising in 2018, 2019 or 2020 cannot be used to offset such income previously recognized under Code Section 965 (by technically deeming the taxpayer to have made the election provided in Code Section 965(n). However, the NOL may still be carried back to such Inclusion Year to offset non-Code Section 965 income. Alternatively, the CARES Act permits taxpayers to apply a carryback method which “skips over” Inclusion Years.

Exceptions: NOLs for REITS shall not be an NOL carryback to any taxable year preceding the taxable year of such loss. Any NOL for a taxable year in which a corporation is not a REIT cannot be carried back to a taxable year in which the corporation is a REIT. In addition, if an NOL is carried back for a life insurance company in a taxable year beginning before January 1, 2018, such NOL shall be treated in the same manner as an operations loss carryback. Finally, for any NOLs carried back to any taxable year with respect to a deferred foreign income corporation (see Code Section 965(a)), the taxpayer will be treated as having made the election not to apply NOL deductions with respect to any taxable year so described (see Code Section 965(n)).

Effective Date: The amendments made by this section apply to taxable years beginning after December 31, 2017 (with special rules for NOLs arising in taxable years beginning before January 1, 2018 and ending after December 31, 2017).

Modifications of Limitation on Losses for Taxpayers Other than Corporations

Similar to the relief provided for in Section 2303 of the CARES Act with respect to NOLs, Section 2304 of the CARES Act delays the effective date of the “excess business loss” limitations for non-corporate taxpayers that were enacted in the TCJA.

By way of background, under the TCJA, for any taxable year of a non-corporate taxpayer beginning after December 31, 2017 and before January 1, 2026, the deduction of “excess business losses” was disallowed (see Code Section 461(I)(1)). Any such disallowed excess business losses were treated as an NOL carryover to the following taxable year under Code Section 172 (see Code Section 461(I)(2)). For these purposes, an “excess business loss” means the excess (if any) of:

  1. The aggregate deductions of the taxpayer for the taxable year which are attributable to trades or business of such taxpayer (determined without regard to whether or not such deductions are disallowed for such taxable year under Code Section 461), over
  2. The sum of (a) the aggregate gross income or gain of such taxpayer for the taxable year which is attributable to such trades or business, plus (b) $250,000 (200 percent of such amount in the case of a joint venture).

Under Section 2303 of the CARES Act, the effective date of these provisions in the TCJA is delayed from December 31, 2017 to December 31, 2020 (see Code Section 461(I)(1)), so that passthrough entities and sole proprietorships will be able to use excess business losses with respect to 2018, 2019, and 2020. Accordingly, for taxpayers that previously had an NOL carryforward in 2019 resulting from disallowed excess business losses in 2018 will no longer have such NOL resulting from the disallowed excess business losses. For tax years beginning in 2021 through 2026, taxpayers may treat disallowed excess business losses as NOLs for purposes of carrying such disallowed excess business losses forward to subsequent tax years.

The CARES Act also makes certain technical amendments to the definition of “excess business losses” as provided in the TCJA. These amendments include clarifying that: (i) deductions permitted under Code Sections 172 and 199A will be disregarded in determining excess business losses; (ii) the calculation of excess business losses will include the lesser of (A) capital gain attributable to a trade or business and (B) net capital gain income; and (iii) excess business losses will be determined without regard to any capital losses or any deductions, gross income, or gain attributable to any trade or business or performing services as an employee.

Effective Date: This section of the CARES Act applies to all taxable years beginning after December 31, 2017.

Modification of Credit for Prior Year Minimum Tax Liability for Corporations

The TCJA repealed the corporate alternative minimum tax (the “AMT”) and amended Code Section 53(e) to allow for refunds of outstanding AMT credit carryforwards over a phase-in period ending on December 31, 2021. Section 2305 of the CARES Act would accelerate the ability of corporate taxpayers to claim credits and refunds for their outstanding AMT credit carryforwards.

Under Section 2305 of the Act, a corporate taxpayer’s AMT credit carryforwards are fully refundable in its tax year beginning in 2019.  In addition, a corporate taxpayer may elect for the AMT credit carryforward to be fully refundable in its tax year beginning in 2018.

Applications for refunds will be deemed as made under Code Section 6411, which generally means that such applications will be subject to a 90-day review, processing and payment timeline. However, the IRS can disallow an application in whole, or in part, as a result of omissions or errors noted during the 90-day review period. Further, any such refund will be treated as a “tentative refund,” meaning that the refund may be subsequently disallowed upon further examination by the IRS. Special rules may apply to taxpayers filing a consolidated return.

Effective Date: This section of the CARES Act applies to taxable years beginning after December 31, 2017.

Modifications of Limitations on Business Interest

Section 2306 of the CARES Act relaxes the limitations on the deductibility of business interest that were enacted in the TCJA.

By way of background, prior to the enactment of the TCJA, business interest expense was generally fully deductible (subject to potential limitations in cases involving related or foreign parties). Under the TCJA, for tax years beginning after December 31, 2017, Code Section 163(j)(1) limited the deduction for business interest (subject to exceptions for taxpayers in specified businesses or with gross receipts below specified levels and subject to special rules for passthrough entities) to the sum of:

  1. “business interest income” (the term “business interest income” meaning interest includible in gross income and properly allocable to a trade or business);
  2. 30 percent of the “adjusted taxable income” of the taxpayer, but, in no event, less than zero (the term “adjusted taxable income” meaning taxable income computed without regard to any item of income, gain, deduction or loss not properly allocable to a trade or business, any interest income or expense, net operating loss, Code Section 199A deduction and, for tax years beginning before January 1, 2022, any deduction for depreciation, amortization or depletion); and
  3. “floor plan financing interest” (interest paid on indebtedness used to purchase, and secured by, motor vehicles held for sale or lease).

Any interest expense disallowed due to being in excess of the threshold provided above was considered as paid in the following year and could be carried forward indefinitely.

Section 2306 of the CARES Act relaxes the limitation described above for taxable years of taxpayers other than partnerships beginning in 2019 or 2020 by substituting “50 percent” for “30 percent” in the second part of the limitation. For partnerships, the limitation is relaxed only for taxable years beginning in 2020. In addition, unless a partner elects otherwise, in the case of any excess business interest of the partnership for any taxable year beginning in 2019 which is allocated to the partner, 50 percent of such excess business interest shall be treated as business interest which is paid or accrued by the partner in the partner’s first taxable year beginning in 2020. The limits of Code Section 163(j)(1), as set forth above, do not apply to such excess business interest. Instead, the partner may claim a deduction for such excess business interest to the extent that partner is allocated “excess taxable income” from the partnership as described above. A partner may carry-forward any disallowed excess business interest to future tax years indefinitely.

Any taxpayer may elect out of the foregoing amendments to Code Section 163(j), provided that, in the case of a partnership, the election must be made by the partnership (and applies to all partners with respect to that partnership). Such an election may only be revoked with the consent of the IRS.

The CARES Act also allows a taxpayer to elect to use its adjusted taxable income in its 2019 tax year for purposes of computing the limitation under the second part of Code Section 163(j) above for tax years beginning in 2020. In the case of a short tax year, a proportionate amount of the adjusted taxable income for the taxpayer’s 2019 tax year may be used for computing the limitation for such short tax year. In the case of a partnership, this election must be made by the partnership (and applies to all partners with respect to that partnership).  For taxpayers affected by the likely economic downturn in 2020, the ability to use their 2019 adjusted taxable income to determine their business interest deduction for their 2020 tax year will likely significantly increase their ability to claim business interest income expense deductions for their 2020 tax year, reducing their net cost of capital.

Effective Date: Section 2305 of the CARES Act is effective for tax years beginning after December 31, 2018.

Technical Amendments Regarding Qualified Improvement Property

Section 2307 of the CARES ACT corrects an error in the TCJA regarding the deductibility of “qualified improvement property.”  The TCJA erroneously required businesses to depreciate this property using the straight-line method over the 39-year life of a building.  The correction enables businesses to write off the cost of this property immediately.  “Qualified improvement property” means any improvement to the interior portion of a non-residential building if the improvement is placed in service after the date such non-residential building was placed in service. However, the following types of improvements are not considered “qualified improvement property” for this purpose: (1) enlargements to the building; (2) any elevator or escalator; or (3) any improvement to the internal structural framework of the building.

This correction is anticipated to be particularly beneficial for the hospitality industry.

Effective Date: This provision is effective as if it had been originally included in the TCJA, i.e., for tax years beginning after December 31, 2017. Taxpayers may amend prior year tax returns to claim this deduction.

Temporary Exception from Excise Tax for Alcohol Used to Produce Hand Sanitizer

Section 2308 of the CARES Act provides a temporary exception from the excise tax imposed under Chapter 51 of the Code on distilled spirits used for or contained in hand sanitizer. Under this amendment, any distilled spirits removed from bonded premises after December 31, 2019 and before January 1, 2021 for use in or contained in hand sanitizer products produced and distributed in a manner consistent with guidance issued by the Food and Drug Administration related to the outbreak of SARS or COVID-19 will not be subject to the excise tax imposed under Chapter 51. In addition, any distilled spirits or products described in this section will not be subject to any requirements related to labeling or bulk sales under the Federal Alcohol Administration Act or the Alcoholic Beverage Labeling Act.

Effective Date: This section applies to distilled spirits removed from bonded premises after December 31, 2019 and before January 2, 2021.

RELIEF FOR INDIVIDUALS

Stimulus Payments

Section 2201 of the CARES Act adds new Section 6428 to the Code to provide eligible, individual taxpayers a one-time refundable tax credit.  This “recovery rebate” (also referred to frequently in the media as a stimulus payment) is equal to the sum of (i) $1,200 ($2,400 for eligible individuals filing a joint return), plus (ii) $500 for each qualifying child (as defined in Code Section 24(c)) of the taxpayer.  An “eligible individual” means any individual who is not any of the following:  (1) a nonresident alien individual, (2) a dependent of another taxpayer, and (3) a trust or an estate.

The amount of the credit allowed under this section will be reduced (but not below zero) by $5 for each $100 by which the taxpayer’s adjusted gross income exceeds (1) $150,000 in the case of a joint return, (2) $112,500 in the case of a head of household, and (3) $75,000 in the case of an individual taxpayer. For example, the amount is completely phased-out for single filers with incomes exceeding $99,000, $146,500 for head of household filers with one child, and $198,000 for joint filers with no children.

In order to calculate and issue the stimulus payments, the IRS will review information reported on eligible taxpayers’ 2019 federal income tax return.  If a return has not yet been filed for 2019 (now due on July 15, see earlier Dorsey e-Alert here), the IRS will review an eligible taxpayer’s 2018 federal income tax return.  If the IRS doesn't have a 2018 or 2019 tax return, it will review information from a 2019 Form SSA-1099, Social Security Benefit Statement, or Form RRB-1099, Social Security Equivalent Benefit Statement, to calculate the stimulus check amount.

No action is required by eligible taxpayers to receive a stimulus payment.  The IRS will automatically issue the stimulus payment calculated in accordance with new Code Section 6428 based on eligible taxpayers’ return information.  If a taxpayer is not eligible to receive a stimulus payment now, he or she may still be eligible for a stimulus payment at the time the 2020 federal income tax return is filed.  Under new Code Section 6428, payments issued now are treated as advance payments of a refundable credit for the 2020 tax year.  So, for taxpayers who do not receive a stimulus payment in 2020, the taxpayer may be able to claim it next year as a refund or reduction of the tax owed on their 2020 federal income tax return.

Above-the-Line Deduction for Certain Charitable Contributions

Section 2204 of the Act adds a new permanent above-the-line deduction by way of adding Section 62(a)(22) to the Code.  The new rule provides that, beginning with 2020 federal income tax returns, certain taxpayers who do not elect to itemize will be able to deduct up to $300 in qualified charitable contributions.

For purposes of this provision, a “qualified charitable contribution” means a charitable contribution: (i) made in cash; (ii) for which a deduction is typically allowed for charitable contributions under the Code (see Code Section 170); (iii) made to a charitable organization, e.g., churches, education institutions, organizations that receive a substantial portion of support from public contributions, etc. (see Code Section 170(b)(1)(A)); (iv) not made to a supporting organization described in Code Section 509(a)(3); and (v) not made for the establishment of a new, or maintenance of an existing, donor advised fund (see Code Section 4966(d)(2)).

Charitable contributions carried over from a prior taxable year will not qualify for the new above-the-line deduction.

Temporary Suspension of Limitations on Individuals’ Cash Charitable Contributions

Section 2205 of the Act modifies the limitations on individuals’ itemized deductions of qualified charitable contributions.  The 50-percent of adjusted gross income limitation is temporarily suspended for qualified contributions, generally allowing individuals to fully deduct qualified contributions to the extent of their adjusted gross income (reduced by any other charitable contributions otherwise allowed), with any excess to be carried forward.

For purposes of this provision, a “qualified contribution” has the same meaning as set forth above in the discussion of this provision as it affects corporate taxpayers.

This provision also increases the limitation on deductions for contributions of certain food inventory from 15 percent to 25 percent of the taxpayer’s taxable income.

Effective Date: This section of the CARES Act applies in taxable years ending after 2019.

Expansion of Tax-Free Employer Educational Assistance to Include Student Loan Repayments

Section 2206 of the Act allows employers to provide a new category of educational assistance benefits to employees on a tax-free basis in 2020, subject to the existing $5,250 cap on tax-free benefits per employee: student loan repayments made by an employer to an employee or directly to a lender with respect to the principal or interest of an employee’s “qualified education loan” as defined in Section 221(d)(1) of the Internal Revenue Code, if made after March 27, 2020, and before January 1, 2021.

Any employee who receives such excluded income from an employer will not be able to also deduct the corresponding amount of interest paid with respect to such employee’s student loans (see Code Section 221(e)).

Effective Date: This section of the CARES Act applies to payments made after March 27, 2020.

 

Firm Highlights

News

Dorsey & Whitney Advises Beijing Xunzhong on Two Consecutive H Share Placings Raising HK$418.5 Million

International law firm Dorsey & Whitney LLP acted as Hong Kong legal advisors to Beijing Xunzhong Communication Technology Co., Ltd. (“Xunzhong”) as to Hong Kong law in connection with two consecutive placings of new H shares under general mandate (the “First Placing” and the “Second Placing”, respectively, and together, the “Placings”). Xunzhong’s H shares are listed on the Main Board of the Hong Kong Stock Exchange (Stock Code: 2597). Winbull Securities International (Hong Kong) Limited acted as sole overall coordinator and placing agent on both Placings. The First Placing of 11,190,000 new H shares at HK$28.20 each was completed on September 17, 2026, followed by the Second Placing of 3,550,000 new H shares at HK$29.00 each on October 30, 2026. The Placings raised approximately HK$315.56 million and HK$102.95 million in gross proceeds, respectively, or approximately HK$418.51 million in aggregate (approximately HK$415.96 million in aggregate net proceeds). Both Placings were conducted under the same general mandate granted by shareholders at Xunzhong’s 2025 annual general meeting, and each was completed within one week of the signing of its placing agreement. Completing placings in consecutive months is relatively uncommon in the Hong Kong market, and doing so called on the technical depth of Dorsey’s Hong Kong Capital Markets team. Working closely with Xunzhong to understand its business needs and prepare the transaction documents, the team addressed in quick succession the remaining capacity under the general mandate, disclosure of the use of proceeds and the maintenance of Xunzhong’s public float, enabling both Placings to be completed seamlessly. “We are pleased to have advised Xunzhong on both Placings,” said Rachel Han, Partner and Co-Head of Dorsey’s Asia Capital Markets practice. “We appreciate the trust placed in our team and the close collaboration among all parties involved. We look forward to supporting Xunzhong as it continues to execute its growth strategy and pursue future capital markets opportunities.” Xunzhong is principally engaged in cloud-based communications services and enterprise digitalization services in the PRC. As disclosed in its announcements, the net proceeds of the First Placing are allocated to developing Xunzhong’s new computing power operation services business, while those of the Second Placing will be used to integrate model-as-a-service (MaaS) and AI agent capabilities into its existing cloud communications platform-as-a-service (PaaS) platform and software-as-a-service (SaaS) products. Approximately 55% of the net proceeds of the Second Placing will be used for computing power equipment upgrades for the MaaS system, approximately 35% for MaaS, PaaS and SaaS platform upgrades, and approximately 10% for working capital and general corporate purposes. With a single MaaS platform and shared computing power supporting its PaaS and SaaS offerings, Xunzhong intends for its MaaS, PaaS and SaaS capabilities to complement and reinforce one another, and to address customer needs from multiple angles, from embedding AI in customer communications and business workflows to maintaining stable performance at scale and keeping customer data within controlled environments. Partner and Co-Head of Dorsey’s Asia Capital Markets practice Rachel Han and Of Counsel in the Capital Markets and Corporate Compliance group Carlton Ng, along with Associate Kristy Ting, led the Dorsey Hong Kong Capital Markets & Corporate Compliance group in advising Xunzhong on both Placings.

Insights

Minnesota Consumer-Fraud Enforcement: Disclaimers Won’t Cure Deception, and Penalties Can Add Up

Misleading advertising claims can lead to costly consequences. In State of Minnesota ex rel. Ellison v. Wall & Associates, Inc., No. A25-2064, 2026 WL 3118291 (Minn. App. Oct. 19, 2026), the Minnesota Court of Appeals recently affirmed a bench trial verdict against a tax-relief company and two executives for violations of the Minnesota Consumer Fraud Act (“MCFA”) and the Minnesota Deceptive Trade Practices Act (“MDTPA”). The decision, which affirmed a substantial restitution and civil penalty judgment, underscores the broad power of the Minnesota Attorney General to act against deceptive sales practices. The decision also offers practical lessons for businesses seeking to reduce liability risks in consumer-facing communications. Background Wall & Associates (“W&A”), a Virginia-based tax-relief company, marketed assistance to taxpayers seeking relief from outstanding federal and state tax liabilities, often with offers in compromise—agreements to settle tax liabilities for less than the amount owed. In its extensive advertising campaigns, W&A represented that its average client received a 90% reduction in their tax debt, that it was a local company with Minnesota offices, that it provided legal services, and that it would “Solve ALL Tax Problems.” In reality, W&A’s promises bore little resemblance to what many clients received. Most of W&A’s clients saw just a 9.5% reduction in federal tax debt and 1.2% in state tax debt. W&A had no permanent Minnesota offices. And W&A provided neither legal representation nor assistance with filing tax returns—those services required referrals to separate firms for an additional fee. All the while, W&A clients paid upfront and recurring fees, including during periods when W&A did no work on their cases. Minnesota Attorney General Keith Ellison sued W&A, its founder and owner Ernest Kenneth Wall, and its president and CEO Patrick Mark Yates, alleging violations of, among other laws, the MCFA and the MDTPA. Following a 12-day bench trial, the district court determined that W&A violated the MCFA and MDTPA through its false and embellished advertising. The district court also held Wall and Yates individually liable for those violations because they directed, participated in, and acquiesced in the violations. The district court ordered injunctive relief, $2.7 million in restitution (with Wall and Yates jointly and severally liable for $1.3 million), and civil penalties of $786,517 against W&A, $415,500 against Wall, and $207,750 against Yates. The district court also awarded over $2.5 million in attorneys’ fees and costs to the state. W&A, Wall, and Yates appealed to the Minnesota Court of Appeals, which affirmed the district court’s decision on October 19, 2026. Although W&A, Wall, and Yates challenged the judgment on numerous grounds, several highlights of the decision provide important takeaways for consumer-facing businesses. Individual Reliance Is Not Required for Statutory Liability W&A argued that Attorney General Ellison had to prove a causal nexus between each violation of the MCFA and MDTPA and the injury to a particular consumer to establish liability. In W&A’s view, this required proof that each injured consumer had personally relied on W&A’s false representation. The Court of Appeals rejected this argument based on the MCFA’s and MDTPA’s plain language, which requires no proof of actual deception or confusion by consumers. The Court of Appeals finally pointed to the Minnesota Supreme Court’s decision in State v. Minnesota School of Business, Inc., which held that when a defendant’s misrepresentations are directed at and affected “a broad group of consumers, proof of direct individual reliance is not required to establish a causal nexus between MCFA violations and the harm suffered by consumers.” 935 N.W.2d 124, 135 (Minn. 2019). The Court of Appeals affirmed, however, that a causal nexus is necessary to support an award of damages under the MCFA and MDTPA. In making that determination, district courts look to various factors, including whether the misrepresentations were “longstanding, pervasive, and widespread in communications directed to consumers,” whether the seller intended and understood that consumers would rely on the misrepresentations, and whether the information was of a kind on which consumers would typically rely. The Court of Appeals’ decision continues Minnesota School of Business’s broad interpretation of liability under the MCFA and the MDTPA. Coordinated marketing campaigns to a “broad group of consumers” may expose businesses to MCFA and MDTPA liability without customer-by-customer proof of injury. That said, a causal nexus remains an element of an MCFA and MDTPA claim, and businesses involved in litigation should build a clear record at trial and on appeal showing how each of the relevant factors bears on the causal-nexus inquiry. Contractual Disclaimers Are Not an Automatic Defense to a Misleading Pitch W&A next argued that disclaimers in its client contracts prevented consumers from claiming they had been misled by its advertising. Reiterating that individual reliance is not required under the MCFA and MDTPA, the Court of Appeals held that a contractual disclaimer does not necessarily defeat a claim based on a conflicting oral representation. And on the facts of this case, the Court of Appeals agreed with the district court that W&A’s contractual disclaimers were insufficient given the extensive misrepresentations by W&A and the unequal bargaining power between it and its customers. This holding confirms that contractual disclaimers are not a cure-all for misleading advertising or sales practices. Businesses should review the entire customer journey, including pre-contract representations, as those representations may survive a contractual disclaimer to the contrary. And if faced with litigation, businesses should build a strong record, both at trial and on appeal, showing why any disclaimer is effective in context. The State Has Broad Authority to Seek Restitution W&A also challenged Attorney General Ellison’s authority to seek restitution under the state’s parens patriae authority to protect residents’ collective interests, arguing that injury to only 228 Minnesotans did not affect a sufficiently substantial segment of the population. The Court of Appeals rejected a simple headcount approach, instead explaining that the state had a legitimate interest in protecting residents’ economic well-being as a whole. In any event, the Court of Appeals held that if restitution was not appropriate under the state’s parens patriae authority, then it would still be appropriate under the Attorney General’s enforcement powers under Minn. Stat. § 8.31. The decision reinforces that the broader and more sustained the deceptive advertising, the stronger the case for restitution to protect Minnesotans’ economic interests. Civil Penalties Accrue Per Violation, Not Per Defendant The Court of Appeals finally rejected W&A’s claim that the Attorney General’s enforcement powers under Minn. Stat. § 8.31 permit only civil penalties of up to $25,000 for each defendant. Rather, the Court of Appeals explained that penalties are limited to $25,000 per violation. Multiple violations can therefore produce substantially greater penalties. The Court of Appeals also rejected the argument that restitution made penalties unnecessary: repaying consumers does not eliminate the need to address gains from deceptive conduct and deter future violations. Final Takeaways Align every consumer-facing communication. Broad and extensive marketing campaigns can expose businesses to stronger enforcement standards under the MCFA and MDTPA, making it critical that consumer communications remain accurate and consistent from the first advertisement through the final sale. Plan for layered enforcement exposure. Penalties under the MCFA and MDTPA can add up quickly: W&A, Wall, and Yates ultimately faced more than $6 million in civil penalties, restitution, and attorneys’ fees. The decision continues a line of Minnesota cases recognizing the Attorney General’s broad consumer-protection authority. Details matter. Although the Attorney General’s enforcement power is broad, it is not boundless. As the Court of Appeals explained, issues of causation, the effectiveness of contractual disclaimers, and the availability of restitution and civil penalties all turn on the specific facts of the case. Effective advocacy at trial and on appeal is critical to developing the facts relevant to liability and damages.

Event/Resource

Corporate Counsel Symposium 2026 Materials Hub

Materials Symposium Agenda Sessions 8:30 am - 9:30 am CT Session A: The Corporate Compass: Finding True North When Ethical Duties Conflict Philip Kaplan, Senior Legal Counsel, Howden Re Lucia Suljic, Vice President, Corporate Legal, Canon USA Nicole Stanton, Partner & Deputy General Counsel, Dorsey & Whitney LLP This panel addresses ethical obligations of in-house counsel, including balancing obligations and duties that may conflict with each other. How should a responsible in-house lawyer deal with those challenging situations? Rather than stick to an academic discussion, this panel will revolve around a series of practical scenarios that are designed to be realistic and timely, including situations where counsel is asked to represent both the company and an individual, how and when to disclose uncomfortable facts and inconvenient documents, issues involving changing firms and companies, and multijurisdictional practice. The panel will feature discussion from two experienced in-house lawyers and Dorsey’s Deputy General Counsel. Session B: Managing Rapid Regulatory Change in International Trade and Cross-Border Investment Nathan Brower, Executive Vice President, General Counsel, Nature’s Sunshine Greg Ogunsanya, Senior Vice President, General Counsel and Corporate Secretary, H.B. Fuller Kathryn Wood, Senior Vice President & General Counsel, DecoPac, Inc. Dave Townsend and Lawrence Ward, Dorsey & Whitney LLP This program is designed for attorneys advising on cross-border transactions, international trade, regulatory compliance, and corporate governance matters. Panelists will examine recent developments in U.S. trade and investment law and policy, as well as their impact on international collaborations, corporate compliance, and mergers and acquisitions. The discussion will explore how general counsel and in-house legal teams assess and manage evolving trade-related risks within their organizations. Particular focus will be given to developments during the first two years of the second Trump Administration, including changes in tariff policy, tariff refunds, export controls, economic sanctions, and national security reviews of foreign investment. Through a discussion of regulatory trends and practical case studies, attendees will gain a deeper understanding of the legal risks and compliance obligations associated with cross-border business activities, and hear about practical strategies for advising clients and managing compliance obligations in a rapidly changing trade and investment environment. 9:45 am - 10:45 am CT Session A: The Elon Musk Cases: What Tesla and Twitter Can Teach Your Board of Directors Loren Unterseher, Managing Partner, Oxbow Industries, LLC Shulamite White, Chief Legal Officer and Head of People, Motive Technologies Kirsten Schubert, Tom Swigert, and Jonathan Van Horn, Dorsey & Whitney LLP Recent cases involving Elon Musk and his businesses have had significant impact on principles governing board of directors’ fiduciary duties and corporate processes. This panel will examine recent litigation involving Elon Musk, Tesla, and Twitter, and its effects on the law governing the duties of directors and executives, including the executive compensation and director compensation processes, conflicts that may arise when a single executive has control over multiple businesses, and the ramifications of tweets or other public statements by an executive. Session B: All Eyes on DEI: Managing Diversity Efforts Amid Regulatory Scrutiny and Potential Litigation Maggie Dalton, Senior Commercial Attorney, Cargill; Board Co-Chair, Twin Cities Diversity in Practice Laura A. Vannelli, Legal Counsel, Mayo Clinic Susan Lorenc and Jack Sullivan, Dorsey & Whitney LLP The legal and regulatory landscape surrounding diversity, equity, and inclusion (DEI) initiatives has changed dramatically over the past two years. Law firms and legal departments are continuing to grapple with how to recruit, retain, and develop talent from a wide range of personal backgrounds, in a world where previously accepted recruiting and employment practices are facing increased scrutiny and litigation. This program will provide a practical overview of the current legal regime, including recent federal enforcement actions and litigation trends associated with DEI initiatives. Panelists will discuss practical ways in which organizations can pursue and retain legal talent and increase inclusion while minimizing legal, business, and reputational risk. 11:00 am - 12:00 pm CT Session A: Governance in an Age of Increasing Unpredictability James Chosy, Senior Executive Vice President and General Counsel, U.S. Bancorp Todd Hartman, Executive Vice President and Chief Legal and Risk Officer, Best Buy Co., Inc. Alan Rosselot, Associate General Counsel & Assistant Secretary, Delta Air Lines, Inc. Cam Hoang and Robert Rosenbaum, Dorsey & Whitney LLP More than ever, ensuring that boards are well-informed and forward-thinking is critical to a company’s success. Join our panel of corporate governance experts as they share their experiences advising boards through crisis and unpredictable events; capitalizing on, but also checking, disruptive technologies; and positioning the company to succeed in an environment of shifting government priorities. Session B: A Day in the Life of a Trademark, Copyright & Advertising Attorney: A Hypothetical Case Study Alexander Kim, Vice President and General Counsel, Binks Nate Whitaker, Chief Legal Officer and General Counsel, Crumbl Cathy Dahl and Tiffany Shimada, Dorsey & Whitney LLP What issues are companies facing daily while developing rights in intellectual property, protecting those rights, and staying in compliance with myriad potential issues related to advertising, social media, relationships with influencers, and environmental or governmental claims? This panel will feature two in-house counsel who are navigating these issues, utilizing a hypothetical case study, with the support of two Dorsey attorneys helping to develop a roadmap for meeting business objectives and minimizing the risk of claims. 12:00 pm - 1:15 pm CT Keynote Address Dr. Rebecca Heiss, Stress Physiologist Dr. Rebecca Heiss is a stress physiologist, author, and sought-after speaker who helps audiences transform fear and stress into fuel for greater performance and resilience. Her research has been recognized as “transformative” by the National Science Foundation, and she is the author of two books, Springboard and Instinct. Through her Fear(less) message, Rebecca inspires audiences with practical, science-based strategies to train our brains to work for us – not against us – and navigate change and uncertainty with greater confidence.

Insights

Observations on the SEC’s 2027 Examination Priorities

The SEC’s Division of Examinations (the “Division”) recently announced its examination priorities (“Exam Priorities”) for fiscal year 2027.1 Although many of the Division’s core areas of focus remain consistent with fiscal year 2026, the 2027 Exam Priorities include notable changes and refinements, which we discuss below, along with other key 2027 examination priorities. Dorsey Observations Renewed focus on economic conflicts of interest. After certain economic-incentive topics received less emphasis in the 2026 Exam Priorities2, the Division has again expressly identified economic conflicts as an examination focus. The 2027 Exam Priorities indicate that the Division will prioritize reviewing advisers’ fiduciary obligations relating to economic conflicts of interest raised by fee rebates, fee and expense calculations, cash management, quid pro quo arrangements, and deposits and withdrawals. Greater emphasis on private-fund practices. Building on the private-fund items in the 2026 Exam Priorities, the 2027 Exam Priorities indicate that the Division will assess private-fund disclosures and controls relating to investment allocations, leverage, affiliated service providers, and fees and expenses. The Division also identified investments in private companies through special purpose vehicles (“SPVs”) and loans provided by private funds and business development companies (“BDCs”) as products the Division will scrutinize. Advisers, particularly private-fund advisers, should evaluate whether their disclosures and compliance programs address these areas. Expanded focus on AI-related cybersecurity risks. While the 2026 Exam Priorities focused on advisers’ use of and representations regarding artificial intelligence (“AI”), the 2027 Exam Priorities specifically highlight AI-enabled cybersecurity threats, including AI-generated phishing and synthetic or “deepfake” voice and video used for social engineering. The shift signals that registrants should consider whether their cybersecurity policies and controls adequately address these evolving threats. New focus on proxy advisory firms. The 2027 Exam Priorities state that the Division will examine advisers that rely on proxy advisory firms, including how those advisers evaluate the firms’ recommendations, assess the bases for those recommendations, identify potential conflicts of interest, and determine whether that reliance satisfies applicable legal obligations. Advisers that rely on proxy advisory firms may wish to consider whether their compliance programs address these areas. Updated focus on Regulation S-P and Regulation S-ID. The 2026 Exam Priorities stated that the Division would engage firms during examinations regarding their progress in preparing incident response programs ahead of the compliance dates for the amendments to Regulation S-P and would examine compliance with the amended rule after those dates. The 2027 Exam Priorities indicate that examinations will focus on whether firms have developed, implemented, and maintained reasonably designed policies and procedures addressing administrative, technical, and physical safeguards to protect customer information and that, in accordance with the amended rule, staff will evaluate response program policies and procedures for unauthorized access to or use of customer information, including customer notification procedures and oversight of service providers. With respect to Regulation S-ID, the 2027 Exam Priorities indicate that examiners will assess whether firms are updating their Identity Theft Prevention Program to address emerging risks, such as those related to AI and stolen credentials. Advisers may wish to consider whether their compliance programs address these areas, as applicable. Summary of Other 2027 Examination Priorities Beyond the developments discussed above, many of the Division’s core examination priorities remain consistent with fiscal year 2026. These include investment adviser fiduciary obligations and compliance programs, examinations of never-examined and recently registered advisers, and cybersecurity and operational resiliency. The Exam Priorities are not exhaustive, and examinations will vary based on each registrant’s business, activities and risks. Advisers should consider the 2027 Exam Priorities in reviewing their compliance programs and preparing for potential examinations, including by: Reviewing risk disclosures and controls. The Division states that, when examining advisers to private funds, it will assess whether investment-related risk disclosures are consistent with fiduciary standards and whether compliance policies, procedures, and controls are designed to address both fund-level and investment-level risks. Reviewing disclosures on allocations, leverage, and affiliated service providers. The 2027 Exam Priorities identify disclosures related to certain investments and allocations, the use of debt and fund-level lines of credit, and the use of affiliated service providers as examples. Confirming the accuracy of fee and expense calculations. The Division states that it will assess the accuracy of fee and expense calculations at both the fund and investment levels, and it identifies fee rebates, cash management, quid pro quo arrangements, deposits, and withdrawals as areas in which economic conflicts of interest may affect the impartiality of advice. Reviewing recommendations of illiquid or hard-to-trade products. The Division states that it will prioritize advisers that recommend products that are difficult to trade, have unusual features, or are illiquid, including loans provided by private funds or BDCs and investments in private companies through SPVs. Confirming that the compliance program is implemented and reviewed. The Division states that it will review compliance program components such as marketing, valuation, and custody, as appropriate, and will typically analyze the annual compliance review. It will also focus on compliance practices when advisers have started advising new asset classes or clients or grown through mergers or acquisitions. 1 SEC Division of Examinations 2027 Examination Priorities. 2 See Dorsey’s Client Alert on the SEC’s fiscal year 2026 exam priorities.