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What is the distribution order for an S Corporation when earnings and profits exist from the C Corporation?

S corporations with C corporation earnings and profits will be treated as follows:

1st distributions should be made to the extent of all AAA amounts, which will be treated as S corporation profits.

2nd distributions will be made to the extent of the corporations’ earnings and profits and will be treated as the former C corporations’ taxable dividends.

3rd distributions will be made to the extent of the basis in the stock and will be treated as a return of capital.

4th distributions will be made in excess of the basis of stock and will be treated as a capital gain distribution.


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