Because UMLIC S-Corp. was always an S corporation, it had no accumulated E&P. See Williams v. Commissioner, 110 T.C. 27, 30 (1998). After adding $45,714,868 to basis and making all other basis adjustments required by sections 1366-1368, each petitioner had an adjusted basis in his New UMLIC S-Corp. shares well in excess of $17.5 million.
The AAA is intended to measure the accumulated taxable income of an S corporation that has not been distributed to the shareholders. See Williams v. Commissioner, 110 T.C. 27, 30 (1998). The portion of a distribution to a shareholder that does not exceed the AAA is a nontaxable return of capital to the extent of the shareholder's adjusted basis in S corporation stock.
Each tax-free distribution reduces the shareholder's basis. See Williams v. Comm'r, 110 T.C. 27, 29-30 (1998). ΒΆ 23 3.