MEMORANDUM OPINION

Kevin R. Huennekens, UNITED STATES BANKRUPTCY JUDGE.

The Court must decide in this adversary proceeding whether subchapter S corporation status ("S corporation status") under Title 26 of the United States Code (the "Tax Code")1 is considered "property" for the purposes of 11 U.S.C. §§ 544(b), 548. A hearing on that issue was held on November 30, 2017 (the "Hearing"), at which time the Court took the matter under advisement. For the reasons set forth below, the Court holds that S corporation status is not "property" for the purposes of 11 U.S.C. §§ 544(b), 548.

Jurisdiction and Venue

The Court has subject matter jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 157 and 1334, and the general order of reference from the United States District Court for the Eastern District of Virginia dated August 15, 1984. This is a core proceeding under 28 U.S.C. § 157(b). Venue is appropriate in this Court pursuant to 28 U.S.C. §§ 1408 and 1409.

Background and Procedural History

Health Diagnostic Laboratory, Inc. ("HDL") was a privately held company based in Richmond, Virginia, that offered clinical laboratory services to physicians around the country. Under HDL's business model, HDL processed blood tests it received from physicians and tested biomarkers for the indication of risk for cardiovascular disease, diabetes, and other illnesses. Afterwards, HDL would reimburse the referring physicians for the costs associated with collecting, processing, and handling the blood samples that they had sent to HDL for testing. In January of 2013, the United States Department of Justice ("DOJ") and United States Department of Health and Human Services' Office of Inspector General ("HHS OIG") commenced an investigation into HDL in connection with HDL's business practices including its payment of process and handling fees to the referring physicians as potential violations of the federal anti-kickback statute. HHS OIG issued a special fraud alert on June 25, 2014, advising that the payment of processing and handling fees to referring physicians could violate certain federal anti-kickback laws.

After the special fraud alert, negative publicity and lawsuits ensued. In April 2015, HDL agreed to a multi-million dollar settlement for alleged violations of the federal False Claims Act along with a corresponding corporate integrity agreement with HHS OIG. By that time, HDL's relationship with its prepetition secured lender, Branch Banking and Trust Company ("BB & T"), had become severely strained. HDL eventually defaulted under its BB & T loan facilities. In response, BB & T discontinued HDL's borrowing ability and cut off HDL's access to its existing accounts. With no ability to access its cash and with no alternative sources of financing immediately available, HDL was forced to file for protection under chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code").2

On June 7, 2015 (the "Petition Date"), HDL, Central Medical Laboratory, LLC, and Integrated Health Leaders, LLC (the "Debtors") commenced bankruptcy cases (the "Bankruptcy Cases") by each filing a separate voluntary petition for relief under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of Virginia (the "Court").3 On June 16, 2015, the United States Trustee for the Eastern District of Virginia appointed a statutory committee of unsecured creditors in accordance with section 1102 of the Bankruptcy Code (the "Committee").

HDL's Corporate and Tax Structure

As of the Petition Date, HDL had a four-member Board of Directors (the "Board"), which included Noel L. Bartlett, Robert S. Galen, Joseph P. McConnell, and George Russell Warnick. HDL had 19 shareholders who each owned various percentages of stock.4 Due to its corporate and shareholder attributes, HDL had the capacity to qualify as a "small business corporation" as defined by 26 U.S.C. § 1361(b).

On or about February 16, 2009, HDL filed an election to be classified as an S corporation under 26 U.S.C. § 1362, pursuant to unanimous shareholder consent as required by 26 U.S.C. § 1362(a)(2). Correspondingly, HDL filed S corporation elections with the State of New York Department of Taxation and Finance, the State of Arkansas Department of Finance and Administration, and the State of Mississippi Department of Revenue. Every other state where HDL did business either accepted the federal S corporation status election or did not recognize S corporation status.5

In accordance with Section 12(b) of the HDL Shareholders' Agreement, HDL made distributions to its shareholders as means to reimburse them for HDL's pass-through tax liability.6 HDL also made direct payments to the Internal Revenue Service (the "IRS") and the State Taxing Authorities on behalf of the shareholders. Every year, HDL filed IRS form 1120S, which included a schedule K-1 for each shareholder ("Schedule K-1") as it was required to do by section 6037(c)(1) of the Tax Code. HDL submitted corresponding forms to the State Taxing Authorities. Personally, the shareholders included on their individual tax returns the income, deductions, credits and other items displayed on the Schedules K-1.7

On January 1, 2015, HDL filed a Notice of Termination of HDL's S corporation status with the IRS and the State Taxing Authorities. As required by federal law, a majority of HDL's shareholders had voted in favor of revoking HDL's S corporation status. Consequently, as of the Petition Date, HDL was subject to C corporation tax.

Bankruptcy Proceedings

On September 17, 2015, the Court entered an order (the "Sale Order"), which authorized the sale of substantially all of the Debtors' assets to True Health Diagnostics, LLC ("True Health") under the terms of an Asset Purchase Agreement ("APA").8 On September 29, 2015, True Health acquired substantially all of the Debtors' operating assets. On May 12, 2016, the Court entered an order (the "Confirmation Order"),9 which confirmed the Debtors' Modified Second Amended Plan of Liquidation (the "Plan").10 The HDL Liquidating Trust was formed pursuant the terms of the Plan on the Effective Date.11 Through the Plan, 11 U.S.C. § 1123, and the trust agreement executed to implement the Plan, the HDL Liquidating Trust is the successor of the Debtors and the Committee.12

On June 7, 2017, the Liquidating Trustee commenced this adversary proceeding (the "Adversary Proceeding") by filing a complaint (the "Tax Complaint") against the United States Internal Revenue Service, State Taxing Authorities, and the Shareholder Defendants (the "Defendants"). See Complaint, Arrowsmith v. United States, No. 15-32919, APN 17-04300 (Bankr. E.D. Va. June 7, 2017), ECF No. 1. Counts 1 through 4 of the Tax Complaint seek to avoid the revocation of the Debtors' S corporation status as a fraudulent transfer under sections 544(b) or 548 of the Bankruptcy Code. See id. at 20-24. The United States filed a motion to dismiss (the "Motion to Dismiss") the Tax Complaint under Rule 7012(b)(6) of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules") on July 12, 2017. See United States' Motion to Dismiss and Brief in Support, Arrowsmith v. United States, No. 15-32919, APN 17-04300 (Bankr. E.D. Va. July 12, 2017), ECF No. 4. The United States argued in Section IV(B) of its Motion to Dismiss that the claims asserted against it in "[c]ounts 1 through 4 regarding the `un-revocation' of S corporation status" should be dismissed "because a debtor's tax status is not `property.'" Id. at 4, 29-31.

The Court scheduled the Hearing to determine the sole issue raised in Section IV(B) of the Motion to Dismiss of whether S Corporation status was considered "property" for the purposes of the fraudulent transfer provisions of 11 U.S.C. §§ 544(b), 548 (the "Hearing Issue"). See id. at 29-31 § IV(B). The Court ordered the other Defendants named in the Tax Complaint to "(a) file a motion, brief, or joinder regarding the Hearing Issue or (b) confirm in writing to counsel for the Plaintiff that such defendant waives the right to file any pleading regarding the Hearing Issue and agrees to be bound by the Court's disposition of the Hearing Issue" on or before September 25, 2017. See Order, Arrowsmith v. United States, No. 15-32919, APN 17-04300 (Bankr. E.D. Va. Sept. 1, 2017), ECF No. 23. All but two of the Defendants named in the Tax Complaint chose to join the United States' Motion to Dismiss.13

Federal Tax Law Framework

Under the Tax Code, the "default" tax status for corporate entities in the United States is a subchapter C corporation status ("C corporation status"). See 26 U.S.C. § 1361. The tax laws of subchapter C of Chapter 1, Title 26 of the Tax Code govern C corporation taxation. C corporations are subject to two levels of taxation, or "double taxation," whereby the corporation's net income is taxed, and dividends to the shareholders are taxed as well.

In contrast to C corporation status, S corporation status confers "pass-through taxation." S corporations pass corporate income, losses, deductions, and credits to their shareholders. In turn, shareholders of an S corporation must report their respective attributable shares of the income and losses of the S corporation on their personal tax returns. See, e.g., Gitlitz v. Comm'r of Internal Revenue, 531 U.S. 206, 209, 121 S.Ct. 701, 148 L.Ed.2d 613 (2001). In order to qualify for S corporation status, a corporation must be a small business corporation. That means it must be an eligible domestic corporation with no more than 100 shareholders (who cannot be partnerships, corporations, or non-resident alien shareholders) and have only one class of stock. See 26 U.S.C. § 1361(b).14 In order to file for S corporation status, every shareholder of the corporation must consent to the election. See id. § 1362(a)(2). Termination of S corporation status may occur by one of three means: (1) by the consent of a majority of shareholders and the corporate entity; (2) by the corporation ceasing to be a small business corporation; or (3) by having passive corporate investment income that exceeds 25% of gross receipts for 3 consecutive taxable years along with accumulated corporate earnings and profits. See id. § 1362(d)(1)-(3).

Prior Case Law

The issue whether S corporation status constitutes property of the estate in bankruptcy is a matter of first impression within the Fourth Circuit. Only a handful of courts outside the Fourth Circuit have considered this issue in the context of fraudulent transfers. See Majestic Star Casino, LLC v. Barden Dev., Inc. (In re Majestic Star Casino, LLC), 716 F.3d 736 (3d Cir. 2013); Halverson v. Funaro (In re Frank Funaro, Inc.), 263 B.R. 892 (8th Cir. BAP 2001); Parker v. Saunders (In re Bakersfield Westar), 226 B.R. 227 (9th Cir. BAP 1998); Hanrahan v. Walterman (In re Walterman Implement, Inc.), No. 05-07284, 2006 WL 1562401 (Bankr. N.D. Iowa May 22, 2006); Guinn v. Lines (In re Trans-Lines West, Inc.), 203 B.R. 653 (Bankr. E.D. Tenn. 1996). Of these courts, only the Court of Appeals for the Third Circuit has concluded that S corporation status does not constitute a property right in bankruptcy. See In re Majestic Star Casino, 716 F.3d at 758; see also Official Comm. Unsecured Creditors v. Forman (In re Forman Enterprises, Inc.), 281 B.R. 600, 612 (Bankr. W.D. Pa. 2002) ("[W]e are reluctant to believe that a post-bankruptcy revocation of S status could, under the tax laws of the United States, be utilized to undo previously executed acts. Humpty Dumpty could not be restructured using this scenario."). All of the other courts that have addressed the issue have found S corporation status to be a property right in bankruptcy. See In re Frank Funaro, Inc., 263 B.R. at 898; In re Bakersfield Westar, 226 B.R. at 234; In re Walterman Implement, Inc., 2006 WL 1562401 at *3; In re Trans-Lines West, Inc., 203 B.R. at 662.

The United States Bankruptcy Court for the Eastern District of Tennessee was the first court to consider the issue in In re Trans-Lines West, Inc., 203 B.R. 653 (Bankr. E.D. Tenn. 1996). Donald Lines served as the sole shareholder of the debtor, Trans-Line West, Inc. ("Trans-Line West"). See id. at 656. In 1989, Trans-Line West had elected, through unanimous vote of its one shareholder, to be treated as an S corporation. See id. That election was revoked on March 15, 1995, when Trans-Line West submitted a statement to revoke its S corporation status as well as a Statement of Consent to the revocation from the shareholder. See id. On April 12, 1995, Trans-Line West filed a petition for relief under chapter 11 of the Bankruptcy Code. See id. On April 17, 1995, the IRS accepted Trans-Line West's S corporation status revocation even though the Statement of Consent had not been signed by the owner. See id. A chapter 11 trustee was appointed in 1996. See id. There, as in the case at bar, the trustee commenced an adversary proceeding seeking to avoid the revocation of the debtor's S corporation status under 11 U.S.C. §§ 544(b), 548(a). See id. In order to decide whether the trustee could avoid the transaction as a fraudulent conveyance, the court had to determine first whether the debtor had a property interest in its S corporation status.15 The court turned to the definition of "property" found in the American Jurisprudence treatise and Black's Law Dictionary as something that a person has rights over in order to use, enjoy, and dispose of. See id. at 661 (citing 63A AM. JUR. 2D Property § 1 (1984); BLACK'S LAW DICTIONARY 1216 (6th ed. 1990)). The bankruptcy court reasoned that the debtor did have a property interest in its S corporation status on the date that the status was allegedly transferred because the Tax Code "guarantees and protects an S corporation's right to dispose of [the S corporation] status at will." Id. at 662 (citing 26 U.S.C. § 1362(d)(1)(A)).

The Bankruptcy Appellate Panel for the Court of Appeals for the Ninth Circuit relied heavily on the reasoning in In re Trans-Lines West for its decision in In re Bakersfield Westar. See 226 B.R. 227 (9th Cir. BAP 1998). Bakersfield Westar was a closely held S corporation that was co-owned by two married shareholders. See id. at 229. Thirteen days before Bakersfield Westar filed a petition for relief under chapter 7 of the Bankruptcy Code, the husband submitted a Statement of Revocation of the debtor's S corporation status to the IRS with a statement that he and his wife consented to the revocation. See id. The bankruptcy trustee sought to avoid the revocation of S corporation status as a fraudulent transfer under 11 U.S.C. §§ 544(b), 548(a)(1). See id. The Bankruptcy Appellate Panel for the Ninth Circuit reasoned that Bakersfield Westar had the "guaranteed right to use, enjoy, and dispose" of the right to revoke its S corporation status. See id. at 234. Consequently, that court held that the right to make or revoke S corporation status constituted "property" or "an interest of the debtor in property." Id. at 234 (citing In re Trans-Lines West, Inc., 203 B.R. at 661).

The Bankruptcy Appellate Panel for the Court of Appeals for the Eighth Circuit touched upon the issue in In re Frank Funaro, Inc., 263 B.R. 892 (8th Cir. BAP 2001). That case did not involve a trustee seeking to avoid S corporation status. Instead, the court used the decision in In re Bakersfield Westar to illustrate the legal principle that "actions taken by the owner [of an S corporation] for his own benefit, at the expense of the corporation and its creditors, are subject to review in the corporation's bankruptcy." Id. at 898 (citing In re Bakersfield Westar, 226 B.R. at 232-33).

The Bankruptcy Court for the Northern District of Iowa addressed the issue in a cursory manner in In re Walterman Implement, Inc., No. 05-07284, 2006 WL 1562401 (Bankr. N.D. Iowa May 22, 2006). That case involved an involuntary bankruptcy petition against Walterman Implement. See id. at *1. Walterman Implement submitted a document to the IRS postpetition in order to revoke its S corporation status. See id. The President and sole shareholder of Walterman Implement signed an accompanying statement of consent on the same day. See id. The bankruptcy court relied on In re Bakersfield Westar in determining that S corporation status constituted property of the estate. See id. *2-3. The Court held that the sole shareholder violated the automatic stay by asserting control over property of the estate when he revoked the S corporation status postpetition. See id. at *3.

The Court of Appeals for the Third Circuit departed from the reasoning of In re Trans-Lines West in its decision in In re Majestic Star Casino, concluding that S corporation status did not constitute an interest of the debtor in "property" in a bankruptcy case. See 716 F.3d 736 (3d Cir. 2013). Don H. Barden was the sole shareholder, CEO, and president of Barden Development, Incorporated ("BDI"). See id. at 742. In 2005, BDI acquired the corporation MSC II, which owned and operated the Majestic Star II Casino ("MSC II"). At all times relevant to the case, BDI owned all of the stock of MSC II. See id. Because MSC II was "wholly owned by an S-Corp," BDI could treat MSC II as an S corporation under 26 U.S.C. § 1361(b)(3)(B). Id. at 743. On November 23, 2009, MSC II and related entities filed petitions for relief under chapter 11 of the Bankruptcy Code. See id. On the day the bankruptcy petition was filed, BDI and MSC II were both S corporations. See id. BDI and Barden did not file bankruptcy petitions or participate as debtors in the bankruptcy cases that were filed. See id. Barden filed notice with the IRS that he wished to revoke the S corporation status of BDI and that status was revoked as of January 1, 2010. See id. at 744. The revocation of BDI's S corporation status resulted in the automatic termination of MSC II's S corporation status. See id. at 743-44. In response to the automatic termination, other debtors who had filed bankruptcy petitions with MSC II filed an adversary complaint "asserting that the Revocation caused an unlawful postpetition transfer of MSC II's estate property, in violation of §§ 362 and 549 of the Bankruptcy Code." Id. at 745. In holding that the tax status was not property, the Third Circuit found the definition of "property" was not meant to be as broad as the bankruptcy court in In re Trans-Lines West purported it to be. See id. at 758.

Analysis

The Defendants in this action seek dismissal of Counts 1 through 4 of the Tax Complaint pursuant to Federal Rule of Bankruptcy Procedure 7012(b), which incorporates Federal Rule of Civil Procedure 12(b). A complaint must contain a "short and plain statement of the claim[s] showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). Under Federal Rule of Civil Procedure 12(b)(6), a court determines "whether the complaint, under the facts alleged and under any facts that could be proved in support of the complaint, is legally sufficient." E. Shore Mkts., Inc. v. J.D. Assocs. Ltd. P'Ship, 213 F.3d 175, 180 (4th Cir. 2000) (citing Schatz v. Rosenberg, 943 F.2d 485, 489 (4th Cir. 1991)). "[C]ourts `are not bound to accept as true a legal conclusion couched as a factual allegation.'" Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (quoting Papasan v. Allain, 478 U.S. 265, 286, 106 S.Ct. 2932, 92 L.Ed.2d 209 (1986)). "[T]he tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009).

Counts 1 through 4 allege fraudulent transfers under sections 544(b) and 548(a)(1) of the Bankruptcy Code and to seek to avoid the election made in 2015 to terminate the Debtors' S corporation status. The salient legal issue alleged is whether the Debtors' S corporation status was an interest in "property" that was subject to transfer. If it is not, then the election is not subject to the fraudulent transfer provisions of sections 544(b) and 548(a)(1) of the Bankruptcy Code. The issue whether S corporation status is "property" for the purposes of sections 544(b) and 548(a)(1) is a question of law.16 The fraudulent transfer provision in section 544(b) allows a trustee to avoid obligations voidable under state law.17 The fraudulent transfer provision of section 548(a)(1) allows a trustee to avoid certain transfers that occurred two years prior to the petition date.18 Both provisions allow a trustee to avoid a fraudulent transfer of "an interest of the debtor in property." 11 U.S.C. §§ 544(b), 548(a)(1). For the following reasons, the Court holds that the Debtors' S corporation status is not "property." Accordingly, there was no transfer, of an interest of the Debtors in property that is subject to avoidance under sections 544(b) or 548(a)(1) of the Bankruptcy Code. Counts 1 through 4 of the Tax Complaint will be dismissed.

Property of the bankruptcy estate is composed of "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). Congressional intent indicates that "property" under the Bankruptcy Code is a sweeping term and includes both intangible and tangible property. See In re Kane, 628 F.3d 631, 637 (3d Cir. 2010). Congress intended that the term "property" under the Bankruptcy Code include:

H.R. Rep. No. 95-595, at 367 (1977), as reprinted in 1978 U.S.C.C.A.N. 5963, 6323. "[I]n determining the scope of § 541 [the Court] must consider the purposes animating the Bankruptcy Code," which includes the intention to "`bring anything of value that the debtors have into the estate.'" Official Comm. Unsecured Creditors v. PSS Steamship Co. (In re Prudential Lines Inc.), 928 F.2d 565, 573 (2d Cir. 1991) (quoting H.R. Rep. No. 95-595, at 176 (1977), as reprinted in 1978 U.S.C.C.A.N. 5963, 6136)). "The scope of [§ 541] is very broad and includes property of all descriptions, tangible and intangible...." Ramsay v. Dowden (In re Ctr. Ark. Broad. Co.), 68 F.3d 213, 214 (8th Cir. 1995); see also Wilson v. Dollar Gen. Corp., 717 F.3d 337, 342 (4th Cir. 2013) ("The bankruptcy estate is comprised of a broad range of both tangible and intangible property interests"); Cordova v. Mayer (In re Cordova), 73 F.3d 38, 42 (4th Cir. 1996) (describing the estate created by § 541 as "broad and all-embracing" (citations omitted)).

No Bankruptcy Code provision "answers the threshold questions of whether a debtor has an interest in a particular item of property and, if so, what the nature of that interest is." Universal Coops., Inc. v. FCX, Inc. (In re FCX, Inc.), 853 F.2d 1149, 1153 (4th Cir. 1988) (citing In re Farmers Markets, Inc., 792 F.2d 1400, 1402 (9th Cir. 1986); 4 Collier on Bankruptcy ¶ 541.02, at 541-11 (15th ed. 1985)).

Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979) (quoting Lewis v. Mfrs. Nat'l Bank of Detroit, 364 U.S. 603, 609, 81 S.Ct. 347, 5 L.Ed.2d 323 (1961)). "[W]hile federal law creates the bankruptcy estate, Butner and the cases following it establish that state law, absent a countervailing federal interest, determines whether a given property falls within this federal framework." Am. Bankers Ins. Co. of Florida v. Maness, 101 F.3d 358, 363 (4th Cir. 1996).

Normally, the "federal [tax] statute `creates no property rights but merely attaches consequences, federally defined, to rights created under state law.'" United States v. Nat'l Bank of Commerce, 472 U.S. 713, 722, 105 S.Ct. 2919, 86 L.Ed.2d 565 (1985) (quoting United States v. Bess, 357 U.S. 51, 55, 78 S.Ct. 1054, 2 L.Ed.2d 1135 (1958)). However, once "`it has been determined that state law creates sufficient interests in the [taxpayer] to satisfy the requirements of [the statute], state law is inoperative,' and the tax consequences thenceforth are dictated by federal law." Id. (quoting Bess, 357 U.S. at 56-57, 78 S.Ct. 1054). At that point federal law and interpretive case law, not state law, "control the ultimate issue whether a taxpayer has a beneficial interest in any property subject to levy for unpaid federal taxes." Drye v. United States, 528 U.S. 49, 57, 120 S.Ct. 474, 145 L.Ed.2d 466 (1999).

Virginia Historic Tax Credit Fund 2001 LP v. Comm'r of Internal Revenue, 639 F.3d 129, 140 (4th Cir. 2011) (citing United States v. Craft, 535 U.S. 274, 278-79, 122 S.Ct. 1414, 152 L.Ed.2d 437 (2002)).

In this case, federal tax law governs any purported property right at issue. Under the Butner principle, there is clearly a countervailing federal interest because S corporation status is a creature of federal law under subchapter S of the Tax Code. State law created "sufficient interests" in the taxpaying entity by affording it the requisite corporate and shareholder attributes to qualify for S corporation status under 26 U.S.C. § 1361(b); thus, at this point, "`state law is inoperative,' and the tax consequences [now] are dictated by federal law." Nat'l Bank of Commerce, 472 U.S. at 722, 105 S.Ct. 2919 (quoting Bess, 357 U.S. at 56-57, 78 S.Ct. 1054). This conclusion is bolstered by the fact that the courts that have extensively analyzed this issue have all concluded that federal law controls. Thus there is no risk of inconsistent treatment of this choice of law issue. See In re Majestic Star Casino, 716 F.3d at 751-52; In re Bakersfield Westar, 226 B.R. at 233; In re Trans-Lines West, 203 B.R. at 661. Federal tax law, which is dependent on certain state law conclusions, dictates whether S corporation status is a property right for sections 544(b) and 548(a)(1) of the Bankruptcy Code.

The Fourth Circuit has recognized that certain interests constitute "property" for federal tax purposes when they embody "essential property rights," which include (1) the right to use; (2) the right to receive income produced by the purported property interest; (3) the right to exclude others; (4) the breadth of the control the taxpayer can exercise over the purported property; (5) whether the purported property right is valuable; and (6) whether the purported right is transferable. See Virginia Historic Tax Credit Fund, 639 F.3d at 141 (citing Craft, 535 U.S. at 283, 122 S.Ct. 1414; Drye, 528 U.S. at 60-61, 120 S.Ct. 474).19 A reviewing court must weigh those factors in order to determine whether the interest in S corporation status constitutes "property" for federal tax purposes. See id. at 141.20

Applying the "essential property rights" factors identified by the Fourth Circuit to the case at bar, the Court concludes that S corporation status is not a property right under federal tax law. Only one of the factors identified by the Fourth Circuit leans in favor of classifying S corporation status as property. That is the Debtors' ability to use the S corporation tax status to pass their tax liability through to their shareholders. But the "right to use" is the weakest of the "essential property rights." Without the rights of control and disposition, the right to use is devoid of any meaningful property interest — such as the right to use a tool borrowed from a neighbor. See In re TMT Procurement Corp. v. Vantage Drilling Co., 764 F.3d 512, 523-26 (5th Cir. 2014) (rejecting the debtor's argument that shares of stock it had been allowed to use to establish adequate collateral were "property of the estate," when the debtor had neither the right to control or retain those shares). While the Debtors may have had the right to use the S corporation status, they lacked the ability to control the use of their tax classification. The right to use the classification existed only until termination.21

The second factor, that the tax classification is valuable, does not lean in favor of finding that S corporation status qualifies as a property right. The Liquidating Trustee hopes to generate value through avoidance of the "transferred" S corporation revocation in 2015, thus retroactively reclassifying HDL as an S corporation during that taxable year. The Liquidating Trustee wants to amend the Debtors' 2015 income tax return by refiling it as an S corporation in place of the prior filing as a C corporation. The amended 2015 income tax return will report losses, which will pass through to the Shareholder Defendants. The Trustee expects the individual shareholders to then file their own personal amended income tax returns that will include the Debtors' losses. The Liquidating Trustee hopes to apply those losses against any income the shareholders claimed in 2015 and then to carry the unused losses back for the 2 prior tax years. Those losses will entitle the shareholders to tax refunds from applicable taxing authorities to the extent of the shareholders' basis in the Debtors' stock. The Liquidating Trustee intends to demand those refunds from the shareholders for the benefit of the Liquidating Trust. With these actions, the Liquidating Trustee attempts to create value by collecting money from the United States and the State Taxing Authorities in order to maximize returns to creditors, the largest of whom is, coincidentally, the United States.22 This chain of events (if successful) may create value for the estate. See, e.g., In re Bakersfield Westar, 226 B.R. at 234 ("The ability to not pay taxes has a value to the debtor-corporation in this case").23

The fact that something confers value to the estate does not necessarily create a property right in it. A beneficiary's interest in a life insurance policy may be valuable, but that alone does not make it property of the beneficiary. See, e.g., Wornick v. Gaffney, 544 F.3d 486, 490 (2d Cir. 2008) (holding that a beneficiary of a life insurance policy "has no legal or equitable interest in the policy that could be made part of the property of the beneficiary's bankruptcy estate.").24 Similarly, 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. See, e.g., In re TMT Procurement Corp., 764 F.3d at 523-24.

Congress intended the election of S corporation status to limit the influence of tax considerations on choice of entity used to own a business.25 The election removes a layer of taxation on distributed earnings by permitting the corporation to pass its income through to the corporation's shareholders. The logical consequence of the shareholders' decision to elect S corporation status is their decision to enter into a shareholders' agreement requiring the corporation to make distributions from its earnings to cover the amount of tax the shareholders incur on the income that is passed through to them. This arrangement is generally neutral as to the amount of tax a corporation would otherwise pay. The benefit is to the shareholders — it allows them to avoid double taxation. To the extent there is value inherent in the S election, it is value Congress intended for the corporation's shareholders and not for the corporation.

The Liquidating Trustee would have the "happenstance of bankruptcy" change this.26 As the HDL Shareholders' Agreement is a contract, it can be rejected under section 365 of the Bankruptcy Code.27 The entity producing the income becomes divorced thereby from the entity with the obligation to pay tax on that income. Citing In re Bakersfield Westar, 226 B.R. 227, the Liquidating Trustee contends that there is postpetition value to this ability of the Debtors to avoid directly paying taxes on their own income. The Trustee argues that it is this value that makes the Debtors' S corporation status an interest in property. But this rationale runs afoul of the prohibition against creating in bankruptcy "new property rights or value where there previously were none." In re Messina, 687 F.3d 74, 82 (3d Cir. 2012); cf. Butner v. United States, 440 U.S. at 56, 99 S.Ct. 914 (noting that the holder of a property interest "is afforded in federal bankruptcy court the same protection he would have under state law had no bankruptcy ensued").

The remaining factors also lean in favor of finding that S corporation status does not constitute a property right under federal tax law. Most importantly, a corporation has very little control over S corporation status. The right to exercise dominion and control over an interest is an essential characteristic defining property. See Craft, 535 U.S. at 283-84, 122 S.Ct. 1414 ("In determining whether a federal taxpayer's state-law rights constitute `property' or `rights to property,' the important consideration is the breadth of the control the taxpayer could exercise over the property." (quoting Drye, 528 U.S. at 61, 120 S.Ct. 474)). Numerous other courts have pointed to this factor as being of critical importance. See Stettner v. Smith (In re IFS Fin. Corp.), 669 F.3d 255, 263 (5th Cir. 2012) (noting that, under Texas law, "control over funds in an account is the predominant factor in determining an account's ownership"); Riley v. Nat'l Lumber Co. (In re Reale), 584 F.3d 27, 31 (1st Cir. 2009) ("When determining whether certain funds are considered `an interest of the debtor in property,' the ability of the debtor to exercise control over the property can be determinative"); Sigmon v. Royal Cake Co. (In re Cybermech, Inc.), 13 F.3d 818, 820-21 (4th Cir. 1994) (once an entity deposits a check into its account, its "ability to exercise complete `dominion and control over the funds' is sufficient to `demonstrate an interest in property' under the preferential transfer provision." (quoting In re Smith, 966 F.2d 1527, 1531 (7th Cir. 1992)).

Shareholders have the overwhelming ability to control the tax status of their corporation. Election of S corporation status may be achieved by one method — unanimous shareholder consent. The federal tax statute governing the election of S corporation status states that "[a]n election under this subsection shall be valid only if all persons who are shareholders in such corporation on the day on which such election is made consent to such election." 26 U.S.C. § 1362(a)(2) (emphasis added). The plain language of the statute makes abundantly clear that the shareholders elect S corporation status — not the corporate entity — and that any interest in electing S corporation status belongs to the shareholders.

Contrary to the conclusion drawn by the court in In re Trans-Lines West, an S corporation does not have a vested interest in its tax status after the election has been made.28 Termination of S corporation status may be achieved in one of three ways — by the consent of majority of shareholders and the corporate entity, when the corporation ceases to be a considered a small business corporation, or where passive investment income exceeds 25% of gross receipts for 3 consecutive taxable years and the corporation has accumulated earnings and profits. See id. § 1362(d)(1)-(3). All three are contingent on shareholder or market action. The corporation has no unilateral control over any of the events that could trigger S corporation status revocation. As the Third Circuit found in In re Majestic Star Casino, the "tax status of the entity is entirely contingent on the will of the shareholders." 716 F.3d at 756.

The Liquidating Trustee asserts that the statute and the regulations demonstrate that the S corporation itself controls whether it can revoke its S corporation election. See 26 U.S.C. § 1362(d)(1); 26 C.F.R. § 1.1362-6(a)(3). The Liquidating Trustee argues that the corporation has the ability to guarantee its own tax status because the corporation must file the necessary paperwork with the IRS. However, those regulations pertain to the procedural method by which the corporation implements the decision of its shareholders. The mere filing of the tax form does not confer control over the S corporation status. It is unrealistic to suggest that a corporation could ever revolt against its shareholders by refusing to file the revocation form. Cf. Sery v. Fed. Bus. Ctrs., Inc., 616 F.Supp.2d 496, 505 (D.N.J. 2008) ("finding that a shareholder is bound forever by the decision to elect Subchapter S status is a bridge too far and not something that can reasonably be read into the Subchapter S IRS election forms.").

The Liquidating Trustee doubled down on this position at the Hearing. The Liquidating Trustee argued that, as HDL was a party to it, the Shareholders' Agreement was an "interest of the debtor in property" for the purposes of 11 U.S.C. §§ 544(b), 548. The Liquidating Trustee claims that the parties to the Shareholders' Agreement intended for the S corporation election to run in perpetuity and forever bind the shareholders.29 The Liquidating Trustee alleges that the shareholders violated the Shareholders' Agreement when they revoked the S corporation election because they breached their covenant of good faith and fair dealing under Virginia law. See Stoney Glen, LLC v. S. Bank & Trust Co., 944 F.Supp.2d 460, 465-66 (E.D. Va. 2013). The Liquidating Trustee seeks to avoid the revocation of S corporation status vis à vis HDL's rights as a party to the Shareholders' Agreement.

This argument fails for a myriad of reasons. First, the Shareholders' Agreement gave the shareholders, and not HDL, the right to revoke the S corporation election.30 Second, the shareholders maintained the right to amend the Shareholders' Agreement at any time.31 Third, even if the Liquidating Trustee were correct in his interpretation of the Shareholders' Agreement, the Liquidating Trustee would have no right to specifically enforce a contract that the Debtors rejected.32 Fourth, the IRS and State Taxing Authorities are not parties to the Shareholders' Agreement. They would not be bound by the avoidance of any shareholder decision thereunder in any event. See 26 U.S.C. § 1362(d). The Liquidating Trustee cannot hold the shareholders "tax hostage" by avoiding their decision to revoke the S corporation election. See Sery, 616 F.Supp.2d at 505 n.3 ("[S]hareholders in closely held S corporations would effectively be held hostage if the [c]ourt were to find that Subchapter S election contractually bound a shareholder to preserve the tax favored status.").

A corporation lacks control of its tax status in any event because a slight change in corporate form could shatter a corporation's S corporation status without the corporation filing a revocation form. For example, the sale by a shareholder of one share of stock to a partnership or to a nonresident alien would automatically dissolve a corporation's S corporation status. See 26 U.S.C. § 1362(d)(2) (stating that S corporation status is terminated if "such corporation ceases to be a small business corporation"). As the S corporation election could be terminated voluntarily by the actions of any one shareholder, it is impossible to state that a corporation has complete control over its S corporation status. Unilateral shareholder action could extinguish S corporation tax status without the corporation taking any action.

Finally, there is no right to exclude other companies from utilizing S corporation status or from preventing them from enjoying the benefits of that tax classification. Any corporation that possesses the necessary corporate attributes may, through unanimous shareholder consent, elect to be an S corporation. See 26 U.S.C. §§ 1361(b), 1362(a)(2). S corporation status is not reflected as an asset on a corporation's balance sheet. S corporation status is not something of value that can be transferred by the corporation to an acquiring company. S corporation status does not produce income. Rather, S corporation status is a statutory privilege that qualifying shareholders can elect in order to determine how income otherwise generated is to be taxed.

Contrary to the Liquidating Trustee's assertions, a corporation's tax status differs markedly from a corporation's net operating losses ("NOL").33 NOLs have several "essential property rights" that are absent in S corporation status. See Virginia Historic Tax Credit Fund, 639 F.3d at 141 (citing Craft, 535 U.S. at 283, 122 S.Ct. 1414; Drye, 528 U.S. at 60-61, 120 S.Ct. 474). First, a taxpayer corporation has the right to exclude others from an NOL, while a corporation cannot exclude others from using S corporation status. Second, the taxpayer has much more control over an NOL than over S corporation status. NOLs cannot be revoked or terminated by another party, unlike S corporation status, which can be terminated by shareholder action that causes the corporation to cease to qualify as a small business corporation. See 26 U.S.C. § 1362(d)(2). Third, an NOL is transferable to other entities, while S corporation status cannot be transferred. See, e.g., In re A.H. Robins Co., 251 B.R. 312, 315, 320-21 (upholding the validity of a confirmation order that transferred NOLs from the debtor to a successor corporation); see also In re Majestic Star Casino, 716 F.3d at 756 ("A corporation that does not expect to generate sufficient future earnings to use its NOLs may be purchased by another more profitable corporation which may then use the NOLs to shelter its own income, a transaction expressly contemplated by the I.R.C." (citing 26 U.S.C. § 382)).

Holding that S corporation status is not "property" for the purposes of 11 U.S.C. §§ 544(b), 548 is consistent with the complementary provisions of the Bankruptcy Code and Tax Code. Tax status is one part of the legal framework governing the manner in which tax is paid. Some tax statuses, such as the S corporation status, require that an election be made.34 These elections come with beneficial and burdensome consequences. See Nat'l Bank of Commerce, 472 U.S. at 722, 105 S.Ct. 2919 (The Tax Code "attaches consequences, federally defined, to rights created under state law."). The Bankruptcy Code explicitly defers to these tax consequences. See 11 U.S.C. § 346(k); see also Hall v. United States, 566 U.S. 506, 514-15, 132 S.Ct. 1882, 182 L.Ed.2d 840 (2012) (recognizing that section 346 of the Bankruptcy Code applies to federal taxes).

Neither the Bankruptcy Code nor Tax Code allow for a trustee to choose the tax status of the entity. The Bankruptcy Code requires that a trustee furnish returns for any year where a return was not filed according to laws required by the governmental unit with which the tax return was to be filed. See 11 U.S.C. §§ 346(k), 1106(a)(6).35 The Tax Code requires that a trustee "make the return of income for such corporation in the same manner and form as corporations are required to make such returns." 26 U.S.C. § 6012(b)(3). In this case, HDL was a C corporation for tax purposes in 2015. HDL was required to file as such. The Liquidating Trustee cannot use the fraudulent transfer provisions of the Bankruptcy Code to maneuver around the strict requirements of the Tax Code.

Conclusion

After weighing all the factors, this Court will adopt the holding of the Court of Appeals for the Third Circuit that S corporation status is not property under federal tax law. See In re Majestic Star Casino, LLC, 716 F.3d 736 (3d Cir. 2013) (concluding that S corporation status was not "property" under the Bankruptcy Code and sharply disagreeing with In re Trans-Lines West and the cases that followed). Although a corporation and its shareholders can elect to use S corporation status in order to avoid double taxation, that factor alone is not enough to outweigh all the remaining characteristics essential to qualify tax status as a property right. Accordingly, this Court holds that S corporation status is not "property" under federal tax law, and thus cannot be considered "property" for the purposes of sections 544(b) and 548(a)(1) of the Bankruptcy Code.

A separate order shall issue.