A client of mine has two S Corps, in which Corp A has taxable income of $ 280,000 but the non dividend distributions were $ 320,000. At year end the retained earnings is -$78,000. Would this result in a capital gain of $40,000 or $78,000?
Also, Corp B has a loss of $280,000, however Corp B owes the stockholder $1,900,000.The retained earnings in Corp B are (1, 350,000.)
Since this is a controlled group, is there still a Capital Gain from Corp A since Corp B owes him $1,900,000.

#1;Its LTCG is $40K ; you should bear in mind that distribution, $320K, cannot be used to create or increase a negative balance in AAA, $280K.. The AAA balance cannot be reduced below zero by distributions to shareholders. The negative balance in retained earnings is possible , as you can see, but the $320K should be subtacted from AAA to the extent of zero basis NOT below zero basis, neg basis. Since the SH does not have sufficient stock basis to absorb this excess of $40K, then the SH will have a LTCG of $40K;$320-$280K. None of the $40K is dividends as the ending bal of the r/e is negative.

NOTE: as long as any portion of the distribution exceeds the balance of AAA and E&P, then it is a return of capital and could result in capital gains to the shareholder to the extent the distribution exceeds the shareholder's basis in his/her S-corp shares.

An S corp may elect to keep a certain amount of their profits as retained earnings to allow it to save and pay for capital improvements or other expenses with these funds.An S corp may choose to distribute these earnings as dividends(in general, the money that an S corp pays to its shareholders isn't called a dividend. But S corps, in general, pay distributions.), or they may transfer them to the stockholders' equity account as retained earnings. Either way, the earnings are reported as income, and the appropriate taxes must be paid. In general the distributions paid by an S corp to the S corp shareholders are not taxable to the shareholders.In other words, if you're an S corp shareholder and you receive a $320,000 distribution check from an S corp in which you own shares, you generally are not taxed on the $320,000. As long as an S corp shareholder receives a distribution that exceeds his or her basis in the S corp, the in-excess-of-basis distribution gets treated as a long-term capital gain and, therefore, may be taxed.Note that it won't matter whether or not this money is retained by the corporation. Even if the corporation keeps the profits, you will still be taxed on the profits.



#2;I assume that distribution is $1,900K as the AAA balance is neg , -$280K, no distribution from AAA/stock basis, so no increase / decrease in the bal. of AAA( as I assume that AAA bal is neg while the stock basis is zero);however, as the bal in r/e, $1,350K is positive, the distribution from the r/e is dividend up to $1,350K , the rest anount of $550K’d be LTCG.




#3;As mentioned above; yes it does(specifically it depends) as long as $1,900K, owes to SHs as distributions. I mean as long as $1,900K is distributions that B needs to distribute to its SHs, then A corp’s LTCG is $40K while Corp B needs to report$550K as LTCG.