S-Corp's are not public companies but closely-held companies, considered not "as fashionable" as LLC's, says Rob Wood, tax attorney with Wood, LLP in San Francisco, California. S-Corp's are limited to 100 shareholders of only a certain type and are considered tax-like partnerships, like a flow-through. Wood says they're very flexible for family businesses but have also been set up by huge corporations.
In a case in Austin, Texas, the basic idea being litigated is marrying the idea of the flow, through an S-Corp with an ESOP, or Employee Stock Ownership Plan, says Wood. An ESOP is a fancy kind of pension plan which is designed to buy stock of the employer. The gimmick, according to Wood, is to keep profits from being taxed to anybody for many years and then flip it and make distributions to the owners in the future.
Wood's guess is that the court will allow it. Most people think that this is an aggressive strategy but there aren't many ESOPS used to begin with and they tend to be expensive. Wood thinks the approach the tax court will take is simply that if there's a fix to this, Congress needs to do it and the rules seem to allow it but they won't stop it.
Robert Wood is a tax attorney with Wood, LLP in San Francisco, California and spoke with The Tax Law Channel, an affiliate of The Legal Broadcast Network. The Legal Broadcast Network is a featured network of the Sequence Media Group.