Out with a Bang: Eleventh Circuit Holds S-Corp Designation Not Property of the Bankruptcy Estate

Background

In 1997, Owoc—as VPX’s sole shareholder—elected to classify VPX as a Subchapter S Corporation under 26 U.S.C. § 1362(a), allowing VPX’s income and losses to pass through to him rather than being taxed at the entity level. In October 2022, VPX filed for Chapter 11 bankruptcy. After VPX sold substantially all of its assets for $370 million in July 2023, the tax liability from that sale flowed through to Owoc as sole shareholder—even though he would receive none of the sale proceeds. Owoc filed an emergency motion in the bankruptcy court seeking confirmation that the automatic stay did not apply to revocation of VPX’s S-Corp status, or alternatively for relief from the stay, so he could revoke the S-Corp designation and shift the tax burden back to the corporation.

The bankruptcy court held that VPX’s S-Corp status is property of the estate within the meaning of 11 U.S.C. § 541, reasoning that “[t]here is no basis to suggest that the statutory right to avoid an expense, including taxes, is any less a property right than property that produces income,” and, accordingly, that “a corporation has a property interest in its right to avoid the tax expense otherwise known as the S election or status.” In re Vital Pharms., 655 B.R. 374, 387 (Bankr. S.D. Fla. 2023). The bankruptcy court criticized the Third Circuit’s contrary holding in In re Majestic Star Casino, LLC, 716 F.3d 736 (3d Cir. 2013), calling its reasoning fallacious and arguing that, as far as the 11 U.S.C. § 541 inquiry is concerned, S-Corp tax savings are functionally equivalent to net operating losses (“NOLs”),¹ which courts have long treated as estate property.

On appeal, the Eleventh Circuit reversed. Owoc v. The Liquidating Trustee on Behalf of the Liquidating Trust, No. 24-14048 (11th Cir. Aug. 10, 2026).²

The Eleventh Circuit’s Analysis

Control as the Touchstone of Property

The Eleventh Circuit grounded its holding in the principle that “a property interest often includes the property owner’s right to dominion and control.” Id. at 16. The court examined who controls S-Corp status under the Internal Revenue Code (the “IRC”) and concluded that it is the shareholders—not the corporation—who exercise that control at critical junctures, such as the following:

Election: Requires unanimous shareholder consent (§ 1362(a)(2)).
Revocation: Requires consent of shareholders holding more than half the shares (§ 1362(d)(1)(B)).
Termination: A shareholder can unilaterally transfer shares to an ineligible entity (e.g., a corporate entity or nonresident alien), causing the corporation to lose its “small business corporation” status (§§ 1361(b)(1), 1362(d)(2)).

Because “[t]he tax status of the entity is entirely contingent on the will of the shareholders,” citing Majestic Star Casino at 755, the court reasoned the corporation cannot claim a property interest in a status it does not control. The court further illustrated the corporation’s lack of control over its own status by noting how S-Corp status can also terminate based on passive investment income, which is “contingent on ‘market action’” rather than any corporate decision (§ 1362(d)(3)). Quoting In re Health Diagnostic Laboratory, Inc., 578 B.R. 552 (Bankr. E.D. Va. 2017), the court emphasized that “a corporation cannot claim a legal or equitable property interest to a valuable benefit that another party has the power to legally revoke at any time.”

Rejecting the NOL Analogy

The bankruptcy court relied heavily on the analogy between S-Corp status and NOLs, which courts have recognized as estate property since Segal v. Rochelle, 382 U.S. 375 (1966). The Eleventh Circuit identified “two fundamental problems” with this comparison:

First, unlike NOLs, the IRC “does not, and cannot, guarantee a corporation’s right to S-corp status, because the corporation’s shareholders may elect to revoke that status ‘at will.’” NOLs are “a function of the debtor’s operations prior to bankruptcy and are not subject either to revocation by the shareholders or termination by the IRS.” Citing Majestic Star Casino at 755-56. They have a defined amount at the time of filing and their value is “readily determinable.” By contrast, the value of S-Corp status depends entirely on future earnings and on the shareholders’ continued decision not to revoke.

Second, the court rejected the “benefit to the estate” theory—i.e., the argument that S-Corp status is property because it allows the corporation to pass tax liability to shareholders and thereby retain, under the In re Vital Pharmaceuticals, Inc. facts, more sale proceeds for creditors. The court held that accepting this theory “would expand the assets of the estate beyond what it was at the commencement of the bankruptcy proceeding” in violation of § 541(a)(1). Citing In re Suter, 181 B.R. 116, 119 (Bankr. N.D. Ala. 1994), the court stated plainly: “Bankruptcy does not create interests in property that did not exist otherwise.”

The court thus concluded that “the analogy of S-corp status to NOLs is of limited validity” and, applying Board of Regents v. Roth, 408 U.S. 564, 577 (1972), held that the enjoyment of a benefit alone does not create a property interest—a party must have “a legitimate claim of entitlement” to the benefit rather than merely “a unilateral expectation of it.”

Key Takeaways

For bankruptcy practitioners: The Eleventh Circuit becomes the second circuit court (after the Third Circuit in Majestic Star Casino) to hold that S-Corp status is not property of the estate. The decision reinforces that § 541’s broad scope has meaningful limits—it cannot expand the debtor’s rights beyond those existing at the commencement of the case. The control analysis is the dominant framework: if a non-debtor party (here, the shareholder) possesses the statutory right to revoke or terminate a tax attribute, that attribute does not belong to the estate.

For tax practitioners: The decision confirms that the IRC’s allocation of control over S-Corp elections to shareholders is not overridden by bankruptcy. A sole shareholder who faces pass-through tax liability from a bankruptcy sale may retain the statutory right to revoke or terminate the S election without interference from the automatic stay. The court’s clear distinction between NOLs (debtor-controlled, fixed in value, and recognized as estate property) and S-Corp status (shareholder-controlled, variable, and not estate property) provides a useful analytical framework for evaluating other tax attributes in bankruptcy.³

For shareholders electing S-Corp treatment: Bankruptcy has provided one path to seek to avoid or shift tax liability arising from S-corporation pass-through treatment: Even while a corporation is in bankruptcy, the shareholders (or, in Owoc, shareholder) may retain the statutory ability to revoke or terminate the S election, and the bankruptcy filing itself is not a termination event. Non-bankruptcy efforts to avoid those pass-through consequences have been less successful. For example, in a case that has been affirmed by the Ninth Circuit nearly two weeks after Owoc, a minority shareholder in an S-Corp argued that his co-owners’ unauthorized, disproportionate distributions created a second class of stock under 26 U.S.C. § 1361(b)(1)(D), thereby terminating the S election. Maggard v. Commissioner, No. 3965-20, 2024 Tax Ct. Memo LEXIS 79, at *8-11 (T.C. Aug. 7, 2024), aff’d, 2026 U.S. App. LEXIS 26012 (Aug. 26, 2026). The Tax Court held that the one-class-of-stock requirement under Treasury Regulation § 1.1361-1(l)(2) looks to a corporation’s governing provisions—not actual distribution practices—and that absent a formal amendment to those documents, disproportionate distributions alone cannot terminate the S election. The taxpayer remained liable for his proportionate share of pass-through income despite a freeze-out, a loss of practical control of the corporation, and receiving none of the distributions owed to him.

¹ For federal income tax purposes, other than with respect to S corporations, NOLs are generally considered tax attributes of the corporation that realized the NOLs. NOLs may be carried forward to offset future corporate income, and they may be subject to limitations if the corporation undergoes a change of ownership. See 26 U.S.C. § 382. Generally speaking, and subject to limited circumstances in which corporate tax attributes may carry over to a successor, NOLs cannot be used by any corporation other than the corporation that generated the NOLs.
² Earlier cases have addressed the related question of whether a bankruptcy filing terminates an S-Corp election when the shareholder loses control to a trustee. In In re Stadler Associates, Inc., the bankruptcy court reasoned that because 26 U.S.C. § 1362(d), which allowed for only three ways to terminate S-Corp status, ought to be strictly construed, then a Chapter 7 bankruptcy filing cannot be treated as a fourth method of termination. 186 B.R. 762, 764 (Bankr. S.D. Fla. 1995). The Tax Court later agreed in Mourad v. Commissioner, holding that In re Stadler’s reasoning applies in the Chapter 11 context, concluding that a Chapter 11 filing neither terminated the election nor did it, relatedly, create a separate taxable entity. 121 T.C. 1, 5 (2003); see also Williams v. Commissioner 123 T.C. 144, 147-48 (2004) (explaining how an individual’s bankruptcy filing creates a separate taxable estate that is a separate taxpayer from the debtor, and § 1398 allocates income, deductions, credits, and tax attributes between them). This latter issue contrasts with the treatment of corporate debtors, for whom § 1399 provides that no separate taxable entity results from the bankruptcy filing.
³ As a practical reporting matter, In re Stadler noted that a shareholder who disagrees with an S corporation return filed by a bankruptcy trustee may use Form 8082, Notice of Inconsistent Treatment or Amended Return, to assert an inconsistent position. 186 B.R. 762, 764. The court treated the shareholder as bound by the returns that were filed by the trustee—forms for use by S-Corps which were accepted by the IRS—because no Form 8082 had been filed.