I expect clients to conflate themselves and their wholly owned business corporation; I didn’t expect the new bankruptcy lawyer to treat the corporation as if it didn’t exist.
Yet as I reviewed a B-22 for a rookie bankruptcy lawyer, I found all of the corporation’s gross income included in the means test for the individual shareholder. When questioned, the young lawyer replied that it was a sub Chapter S corporation and therefore he had included it in the debtor’s current monthly income. Not in my book…
My approach to businesses conducted by corporations is based on these principles:
- Legal entities are separate legal persons from their owners.
- Tax treatment is just that, tax treatment. Sub S status doesn’t defeat separateness.
- Only the money drawn out of the corporation, as salary or draw, is includible on B-22.
Sole proprietorships are just the reverse. They are indistinguishable from the owner. The business income is propertly treated as the debtor’s income.
Here in the 9th Circuit we have a BAP decision, Wiegand, 386 B.R. 238, that says the B-22 is wrong where it deducts business expenses “above the line” for determining median income. According to the BAP, the debtor’s gross income is reported on line 4 , and the business operating expenses deducted below. You need to see if Wiegand is followed in your circuit.
So, in the case of the struggling small corporation, regardless of the gross income of the entity, if none of that money is distributed to the owner, there is no business income reportable on b-22. This can make a huge difference for the debtor, and it is consistent with the argument for the shareholder being separate from the corporation.
Watch for an announcement later this week on my 2 hour video presentation on Mastering the Means Test.