Over the long term, XYZ has been quite profitable in its operations as evidenced by the corporation’s substantial accumulated earnings and profits. Unlike a C-Corp, where a distribution is first treated as a taxable dividend, as provided by §301(c), a distribution from an S-Corp is first treated as a return of stock basis or out of the S-Corp’s Accumulated Adjustment Account which both ultimately receives tax-free treatment. As provided by §1367(a)(1), income earned by an S-Corp increases the shareholders' basis in the corporation's stock, and a distribution from those earnings is treated as a tax-free reduction of the shareholders’ previously increased stock basis under §1368. Due to this advantageous treatment provided to S-Corps, it provides
