Non dividend distributions from S Corp Controlled groups

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.

Answer:
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...Read more...