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YES....AAA account CAN be debited to zero and liabilities be created as you mention in your question.The corporation's AAA can be reduced below zero, in which case the AAA must be restored to a positive amount before taxable distributions from accumulated earnings and profits can be avoided. The AAA, however, cannot be reduced below zero by distributions.
The following is an excellent reference for you...
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Yes. I really appreciate the answer! I'm a CPA with my own S corporation and we just put in the RSA plan. I discovered that the new shareholders will have access to the AAA when their shares vest, and my coowner and I have not taken alot out so AAA is pretty high. I don't have enough cash to pay it all and that's why I wanted the liability. I will follow the reference you gave.
Also refer the link I provided... that is an elaborative reference.
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No thank you very much for being available and willing to answer the question.
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Rakhi - I am reading through the reference you provided. When the AAA is reduced and the liability is received, I assume that for tax purposes that is constructive receipt on the part of the shareholder? If so then I assume gain would be due on any amount exceeding basis?
Sorry I didn't mean to say the liability is received.. I meant to say that when the liability is created but no cash is received, it is still constructive receipt?