December 20, 2012
The Court of Appeals issued a published decision in Brown v Home Owners Insurance Company, (Docket #307458, rel’d 12/4/12) regarding the calculation of the wage loss benefit for a sole shareholder and sole employee of a profitable Subchapter S corporation. As is explained below, the Court found that sauce for the goose is not sauce for the gander. The unanimous panel held that the amount of the work loss benefit due to such an individual under a no-fault personal protection injury policy includes the lost profits of the S corporation in addition to the lost wages paid to the shareholder as an employee of the corporation. In doing so, the Court quoted the case of Adams v Auto Club Insurance Association, 154 Mich App 186 (1986):
“The goal of the no-fault act is to place individuals in the same, but no better, position than they were in before their automobile accident.” Brown, slip opinion at 5.
Defendant, Home Owners Insurance Company, had argued that the question in Brown is governed by the case of Ross v Auto Club, 481 Mich 1 (2008), in which the Michigan Supreme Court had found that the losses of a Subchapter S corporation that was losing money could not be used to lower the benefit based on wages when making these same calculations for its sole employee and shareholder.
In a Subchapter S corporation, the net profits of the corporation flow through directly to the shareholder(s) and is treated as income on their personal income tax returns. Typically, a sole shareholder is also the sole employee of the corporation and receives regular wages throughout the year and a W-2 form at the end of the year. The annual net profit or loss is also declared on the shareholder’s personal tax return and added to or subtracted from the wages to determine his or her total taxable income from the corporation. In the Ross case relied upon by the defendant in Brown, plaintiff had made a claim for lost income based on the wages component of his taxable income alone. Defendant Auto Club had denied his claim for work-loss benefits because his Subchapter S corporation had actually lost more money than it had paid him in wages over each of the three years prior to the accident at issue. Ironically, Auto Club’s denial of benefits in Ross was based on the Adams case, the source of the above quote from Brown, which upheld the use of an unincorporated sole proprietor’s net profits or loss (as opposed to his gross receipts) in determining his lost income.
The majority of the Supreme Court in Ross found that Auto Club had inappropriately disregarded the Subchapter S corporation’s separate existence by including its losses in the benefit calculation and that the plaintiff should be treated the same as an employee of any other corporation that was losing money. Ross, supra, at 8. It should be noted that Justice Corrigan, joined by Justice Markman, dissented from this approach, expressing the view that it was inappropriate to treat otherwise similarly situated sole proprietors differently in this context based only on whether they had chosen to incorporate. The dissent argued that the corporation’s losses at least created a factual question as to the actual amount of lost income from work. Id at 21-22.
Another quote from Adams that is contained in both Brown and Ross is that a “corporation’s separate existence will be respected, unless to do so would subvert justice or cause a result that would be contrary to some other clearly overriding public policy.” Ross, supra, at 8. The Court of Appeals in Brown found that this standard is met when the corporation’s profits had provided additional income to the insured that should be counted in calculating his benefit, even though the Supreme Court has already ruled in Ross that this standard is not met when the corporation’s losses diminished his income so these losses cannot be used in determining the amount of lost income that should be replaced by the insurer.
In conclusion, after reading Brown and Ross, the following rules apply in calculating wage loss benefits pursuant to 3107(1)(b) for a sole shareholder/sole employee of a Subchapter S corporation: Losses cannot be used to diminish the amounts received in wages, but profits can be used to increase the amounts received in wages. For an unprofitable Subchapter S corporation, wage loss benefits will be calculated based on wages only. For a profitable Subchapter S corporation, wage loss benefits will be calculated based on wages plus profits.
One would hope and anticipate that this seeming contradiction will be addressed by the Supreme Court in the near future.
NOT IN KANSAS ANYMORE RESIDENCE AND DOMICILE ISSUES CONTINUE
CONTRIBUTOR – THOMAS G. HERMAN
Residence and domicile issues continue to arise concerning motor vehicle accidents in Michigan. This is especially true in situations involving young adults. USAA v McDevitt (Docket # 307958, rel’d 11/27/12) recently approved utilizing first party no-fault “domicile” factors for purposes of third party residual liability coverage for a “resident” relative in a Michigan automobile policy. The Court did note that the insurance policy could have provided a specific alternative definition of resident. By leaving the term “resident” undefined, the Court followed precedent from motor vehicle accident cases that residence and domicile are essentially synonymous. The Court refused to apply a dictionary definition of “resident” or a fire insurance policy’s interpretation of residence.
In McDevitt, the 20 year old son and step-son of the named insureds had enlisted in the Army and was home on a one week leave before being deployed to Afghanistan. He was driving a borrowed vehicle when he was killed in a two car collision. The insurance company filed a declaratory judgment action to determine potential third party coverage to the occupants of the other vehicle.
The automobile policy provided third party residual liability coverage for the named insureds and “a person related to you by blood, marriage, or adoption who is a resident of your household.”
The decedent had lived with the named insureds in Michigan, his mother and step-father, off and on, prior to joining the Army. He had also lived with his biological father in Kansas at various times. He graduated from high school in Kansas and had a Kansas driver’s license. After being kicked out of his father’s house, McDevitt stayed with an uncle in Kansas for several months. He eventually came back to Michigan where he moved in with his mother and step-father for four months. He enlisted in the military in April 2009 and returned to Michigan for one week in August 2009 after completing boot camp. He was then stationed at Fort Knox, Kentucky for nine months. McDevitt then came back to Michigan for another one week leave. He still also had personal belongings at the Michigan residence and received some of his mail at that address.
The insurance company argued that the decedent had not actually lived at the Michigan residence for over a year. Over the previous three years, he had only stayed there for four months plus two one week visits. The Court, however, elected to apply the domicile factors from Workman v DAIIE, 404 Mich 477 (1979) and Dairlyland v Auto Owners, 123 Mich App 675 (1983). Both those cases interpreted “domicile” for purposes of first party no-fault coverage under 3114 of the No-Fault Statute. Both those cases apply a “totality of the circumstances” test including a number of factors such as subjective intent, mailing address, driver’s license, and voting registration, storage of personal property, etc. The Court also applied traditional Michigan domicile rules that a person can have only one domicile or legal residence and that a person’s place of domicile continues until a new domicile is established. Weighing all the factors, the trial court and Court of Appeals each held that McDevitt was still domiciled with his mother and step-father in Michigan, rather than in Kansas or Kentucky. He was, therefore, entitled to residual liability coverage as a resident relative.
Domicile determinations are often very confusing for teenagers and young adults who have not yet established their own domicile. While adults are generally considered to have only one domicile, children of divorced parents may have more than one domicile if they spend time and keep belongings at each residence. (Vanguard v Racine, 224 Mich App 229 (1997); Grange v Lawrence, 296 Mich App 319 (2012), discussed in Law Fax on 5/15/12). Although a teenager or young adult may not have “lived” at home for a number of years, they may well still be considered to be domiciled there for purposes of automobile coverage.
WISHING YOU A WONDERFUL HOLIDAY SEASON
AND A HAPPY AND HEALTHY NEW YEAR!!!
FROM YOUR FRIENDS AT
GARAN LUCOW MILLER, P.C.