For S corporations with earnings and profits from prior C corporation years, the taxation of distributions to the shareholder isgoverned by rules very similar to the rules for partnerships.

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For S corporations with earnings and profits from prior C corporation years, the taxation of distributions to shareholders is governed by rules that first treat distributions as coming from the S corporation's current earnings and profits (if any), then from the accumulated earnings and profits from its time as a C corporation, and finally as a return of capital or capital gain. This is different from partnerships, where distributions are generally treated as a return of capital to the extent of the partner's basis in the partnership and then as capital gain.

For S Corporations with Earnings and Profits from Prior C