(a) A distribution of property made by an Alabama S corporation with respect to its stock to which, but for this article, Section 40-18-36 would apply shall be treated in the manner provided in subsection (b) or (c) of this section, whichever applies.

(b) In the case of a distribution described in subsection (a) of this section by an Alabama S corporation which has no accumulated earnings and profits:

(1) The distribution shall not be included in gross income to the extent that it does not exceed the adjusted basis of the stock.

(2) If the amount of the distribution exceeds the adjusted basis of the stock, such excess shall be treated as gain from the sale or exchange of property.

(c) In the case of a distribution described in subsection (a) of this section by an Alabama S corporation which has accumulated earnings and profits:

(1) That portion of the distribution which does not exceed the accumulated adjustments account shall be treated in the manner provided by subsection (b) of this section.

(2) That portion of the distribution which remains after the application of subdivision (c)(1) of this section shall be treated as a dividend to the extent it does not exceed the accumulated earnings and profits of the Alabama S corporation.

(3) Any portion of the distribution remaining after the application of subdivision (2) of this subsection (c) of this section shall be treated in the manner provided by subsection (b) of this section. Except to the extent provided in regulations, if the distributions during the taxable year exceed the amount in the accumulated adjustments account at the close of the taxable year, for purposes of this subsection, the balance of such account shall be allocated among such distributions in proportion to their respective sizes.

(d) Subsections (b) and (c) of this section shall be applied by taking into account to the extent proper:

(1) The adjustments to the basis of the shareholder's stock described in Section 40-18-164, and

(2) The adjustments to the accumulated adjustments account which are required by Section 40-18-166.

(e) In the case of any distribution made during any taxable year, the adjusted basis of the stock shall be determined with regard to the adjustments provided in subsection (a) of Section 40-18-164 for the taxable year.