The very limited circumstance when an LLC may be a shareholder in an S corp is when the LLC is a single-member LLC because it is a disregarded entity. The entity tax reporting of husband-wife LLCs is dependent on the state it is in. In non-community property states, these are taxed as partnerships, and in community property states they are considered disregarded entities.
Perhaps Bulldog Tom will confirm if this is the rule that is allowing his client to have one S corp that owns an LLC that is a shareholder of another S corp.