“Unprofitable” Professional Corporation Can Recover For Lost Profits, Court Holds

Corporate Law Roundup

Sharp Thinking

No. 153      Perspectives on Developments in the Law from Sharp-Hundley, P.C.  May 2018

“Unprofitable” Professional Corporation Can Recover For Lost Profits, Court Holds

            By John T. Hundley, John@sharp-hundley.com, 618-242-0200 

Hundley

            “Professional corporations should be allowed to operate themselves in a tax-efficient manner and still be able to pursue claims for lost profits based on alleged torts, breaches of contract, and other civil wrongs.”

So held a panel of the Appellate Court in Chicago recently in a decision that is likely to become seminal for courts considering lost profit claims of professional corporations. 

            Ruling in Edward Atkins, M.D.S.C. v. Robbins, Salomon & Patt, Ltd., 2018 IL App (1st) 161961, the court dealt with the situation in which the professional corporation deliberately had little or no profit at the end of the year by paying accumulated revenues out to shareholder-employees as salary and bonuses.  The trial court, looking at the plaintiff corporation’s consistent near-zero year-end positions, concluded it could not prove that the defendant law firm’s alleged malpractice had caused plaintiff any injury.         

The appellate panel said the trial court’s reasoning “portrays an improper interpretation of the actual finances of professional corporations and would in all likelihood prevent such corporations from ever proving lost profits.” 

In Atkins, the plaintiff was a professional corporation organized as a “C corporation” under the Medical Corporation Act in 1984.  In contrast to “S corporations,” which typically are merely “pass through” entities which pay no taxes at the corporate level, “C corporations” are subject to taxation at the corporate level.  To avoid double taxation, professional “C” corporations typically pay out their profits by year’s end to their shareholder-employees in the form of salary or bonuses, leaving the corporation with little or no taxable income, the panel explained. (The profits thus are taxed only once, as income of the shareholder-employee.)

Consistent with the practice of most professional “C” corporations, the panel found that the plaintiff corporation in Atkins “intentionally never reported any taxable income because it gave bonuses to its employees and Dr. Atkins commensurate with the amount necessary to reduce its taxable income to zero.”  The trial court’s view that that meant it could not prove lost profits “would allow a windfall to wrongdoers merely because the professional corporation has decided to run its business in the most tax-efficient manner,” the panel said.  “The law did not develop to allow such a boon to wrongdoers.”

            The “circuit court erred when it found as a matter of law that the Corporation could not demonstrate its lost profits based on the Corporation itself being unprofitable yet Dr. Atkins being highly compensated personally,” the court said.  Accordingly, it sent the case back to the trial court for further proceedings.

Percentage Of Work In State Not Critical For IWPCA Claim 

            That 92% of the work was performed out-of-state is not, by itself, grounds for holding that Illinois residents’ wage payment claims are improper under the Illinois Wage Payment & Collection Act (820 ILCS 115), the Appellate Court in Chicago ruled recently. 

           Ruling in Watts v. ADDO Management, LLC, 2018 IL App (1st) 170201, the panel overturned a trial court judge who dismissed a claim under the act because only 8% of the plaintiff truck drivers’ route was in Illinois.

            In Watts, the plaintiffs resided in Illinois; two of the four alleged “employers” were located in Illinois; as third “employer” worked in Illinois; and the fourth “employer” (a Michigan limited liability company) utilized space for its trucks in Illinois.

            The panel held that those facts were sufficient for the act’s application to “all employers and employees in this State” (820 ILCS 115/1).  It said the “act’s applicability does not involve the consideration of the percentage of work performed by Illinois employees inside Illinois.”

All Partnerships Now Under 1997 Act

            All Illinois partnerships formed under the Uniform Partnership Act of 1917 now are governed by the Uniform Partnership Act of 1997, a panel of the Appellate Court’s Third District has held.

            Ruling in Alwan v. Kickapoo-Edwards Land Trust, 2018 IL App (3d) 170165, the panel said the 1997 Act “expressly states its temporal reach” when it states that “[o]n and after January 1, 2008, this Act governs all partnerships” (805 ILCS 206/1206(b)).

            It said that under that plain language, it is “immaterial . . . when the partnerships were formed or if they opted in for earlier coverage under the 1997 Act.”

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