Page 15 - John Hundley 2018

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

“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. Hundley

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

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Sharp Thinking is an occasional newsletter of Sharp-Hundley, P.C. addressing developments in the law which may be of interest. Nothing contained in Sharp Thinking
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