Also, the ‘salary not taken’ theory is premised on pure speculation because it depends on the existence of a profit at the end of the fiscal year. Let’s take the case of our client in the case I referenced above. She did not take a salary while unable to work due injuries from an automobile accident. Also, the S-corporation suffered a net loss at the end of its fiscal year. Under this scenario, our client was without a salary during disability and she never got the benefit of the increase of income to the corporation. In summary the ‘salary not taken’ theory forces two results: (1) S-corporations owners have to pay themselves a salary even when they cannot work in order to survive or (2) the owner must survive with no income until such time that the corporation reports a year end loss at which time the no-fault carrier will presumably acknowledge the lost earnings claim. There is absolutely nothing in the no-fault regulations to support this draconian position.

Not surprisingly, the ‘salary not taken’ theory was resoundingly rejected in our client’s no-fault arbitration. In reversing the denial of benefits, the arbitrator noted that: More…

First, it’s helpful to remember a few basics from the no-fault regulations. 11 NYCRR 65-3.2(a)-(g) emphasize the obligation of the carrier to be helpful and not adversarial: “Have as your basic goal the prompt and fair payment to all automobile accident victims.” Next, the definition of lost earnings is not at all defined by corporate status (i.e.) 11 NYCRR 65-1.1 defines ‘Work Loss’ as “loss of earnings from work which the eligible injured person would have performed had such person not been injured”. Finally, 11 NYCRR 65-1.1 Exclusions lists the individuals who are ineligible to receive no-fault benefits. The excluded persons list includes intoxicated drivers, felons, street drag racers and those who commit suicide. Interestingly, law abiding, S-corporation owners are not on the list of excluded persons.

More specifically, the presumption by the no-fault carrier that the salary not taken during disability will end up in the pocket of the S-corporation owner anyway fails to acknowledge the intrinsic value of the work not performed by the injured owner — as if working and not working had the same value. Obviously, it’s ludicrous to suggest that the corporation would profit with or without the owner’s work, anymore than the no-fault carrier would prosper without its employees who work on no-fault claims, but the ‘salary not taken’ theory suggests just that.

Generally speaking, insurance carriers who provide no-fault benefits give extra scrutiny to applications for lost wage benefits submitted by the self-employed as a result of disability arising from an automobile accident. Because the self employed have control over the reporting of their earnings, no-fault carriers request the production of a variety of financial documents including, but not limited to, tax returns, quarterly statements, and bank statements to verify earnings. However, notwithstanding compliance with these various requests, owners of S-corporations may encounter unique resistance in the approval of their lost wage claim.

In essence, S-corporations are pass-through tax entities. Although S-corporations file an informational federal return (Form 1120S), no income tax is paid at the corporate level. The profits and / or losses of the business are effectively passed through the business and reported on the owners’ personal tax returns. No-fault carriers and the forensic accountants they retain, seize on the pass through nature of the S-corporation to argue that an owner who stops taking a salary because of injury, actually increases the S-corporation’s income by the amount of salary not taken. Because the S-corporation’s profit is in essence the profit of the owner, no-fault carriers argue that the salary not paid because of disability goes back to the owner eventually as profit through the corporation, hence there is no loss. More…