In the case of John H. Owoc v. The Liquidating Trustee on Behalf of the Liquidating Trust, No. 24-14048, the 11^th Circuit reversed the decision of the bankruptcy court, with the 11^th Circuit holding that an election to tax a corporation as an S corporation is a shareholder right, not property of the bankruptcy estate. The case arose from the bankruptcy of Owoc’s S corporation (“VPX”), after Owoc (who had been removed as CEO and director of VPX but remained the sole shareholder) sought to revoke the company’s S corporation status to avoid personal tax liability that would arise from the sale of the business. The bankruptcy court previously held against Owoc as the court concluded that S status was estate property for maximizing creditor assets, restricting termination or revocation under the automatic stay rules of 11 U.S.C. §362(a)(3).

Relying on the 3^rd Circuit case of In re Majestic Star Casino, LLC, 716 F.3d 736 (3rd Cir. 2013), the 11^th Circuit reversed the bankruptcy court and held that S-corporation status belongs to shareholders because they retain the power to elect, revoke, and terminate the election. The court also distinguished ownership of S status from corporate NOLs, which are typically considered bankruptcy estate property because they are fixed tax attributes owned by the debtor. In contrast, an S election remains subject to shareholder control, making it a shareholder right rather than a corporate asset.

Notwithstanding Owoc’s win in the 11^th Circuit, whether Owoc can procedurally revoke or terminate S status retroactively remains to be seen (perhaps a private letter ruling request is in the works). This case urges early focus on tax planning and evaluating tax elections when a company is facing financial distress.

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