(a) A distribution of property by a Pennsylvania S corporation which has no accumulated earnings and profits to a shareholder of the corporation shall not be included in the shareholder's income to the extent that it does not exceed the shareholder's adjusted basis in the stock. Any amount of the distribution in excess of the adjusted basis in the stock shall be treated as a gain from the sale, exchange or other disposition of property.

(b) A distribution of property by a Pennsylvania S corporation which has accumulated earnings and profits shall be treated in the same manner as a distribution by a Pennsylvania S corporation without earnings and profits to the extent of the corporation's accumulated adjustment account. That portion of the distribution in excess of the accumulated adjustment account will be treated as a dividend to the extent of the accumulated earnings and profits of the corporation. Any portion of the distribution in excess of the accumulated earnings and profits of the corporation shall be treated in the same manner as a distribution from a Pennsylvania S corporation without accumulated earnings and profits.

(c) Accumulated adjustment account means an account of the Pennsylvania S corporation which is cumulatively adjusted for the most recent continuous period during which the corporation has been a Pennsylvania S corporation by increasing the account for corporate income and decreasing the account for corporate losses and all distributions of property by the corporation to the shareholders which were not included in the income of the shareholders: Provided, That no adjustment shall be made for any income or loss not in any of the classes of income enumerated in section 303¹ or for any non-deductible expense.

(d) In the case of a non-pro rata distribution of property, the adjustment shall be limited to an amount which bears the same ratio to the balance in such account as the number of shares sold, exchanged or otherwise disposed of bears to the number of shares in the corporation outstanding immediately before such sale, exchange or disposition.