This rule applies whether or not the S corporation has E&P from C corporation tax years.
The difference between S corporations with C Corporation E&P (and S corporations without C Corporation E&P), is reflected when there are distributions in excess of undistributed previously taxed income.
When distributions are actually made from an S corporation, they are assumed to come first from income that has already been taxed, but has remained undistributed as retained earnings.
Thus, when you make distributions up to the amount of undistributed previously taxed income, they distributions are not taxed any further.
If an S corporation with C corporation E&P makes a distribution in excess of AAA, the excess is treated as a taxable dividend to the extent of C corporation E&P.
The following example illustrates how distributions are treated depending on whether the corporation has C Corporation E&P.
So if you are a C Corporation, what happens when you convert to an S corporation?