Election to distribute earnings and profits first. (i) Corporation S has been a cal- endar year C corporation since 1975. For 1982, S elects for the first time to be taxed under subchapter S, and during 1982 has $60 of earn- ings and profits. As of December 31, 1995, S has an AAA of $10 and earnings and profits of $160, consisting of $100 of subchapter C earn- ings and profits and $60 of subchapter S earn- ings and profits. For 1996, S has $200 of tax- able income and the AAA is increased to $210 (before taking distributions into account). During 1996, S distributes $240 to its share- holders. With its 1996 tax return, S properly elects under section 1368(e)(3) and § 1.1368– 1(f)(2) to distribute its earnings and profits before its AAA.
Election to distribute earnings and profits first. (i) In general. An S cor- poration with accumulated earnings and profits may elect under this para- graph (f)(2) for any taxable year to dis- tribute earnings and profits first as provided in section 1368(e)(3). Except as provided in paragraph (f)(2)(ii) of this section, distributions made by an S corporation making this election are treated as made first from earnings and profits under section 1368(c)(2) and sec- ond from the AAA under section 1368(c)(1). Any remaining portion of the distribution is treated in the manner provided in section 1368(b). This elec- tion is effective for all distributions made during the year for which the election is made.
