Couple questions -
1. If my Sub S (sole shareholder) has never operated as a C Corp, do I have to submit Sched M2 in the 1120S?

2. Setting it up:
Initial paid in capital - 10,000
Year 1 Revenue - 3,000
Year 1 Distribution - $5,000
Since distributions cannot exceed the total Accumulated Adjustment Account, my understanding is that 3,000 would be considered a "distribution" and 2,000 a return of capital and associated reduction in basis. So here is the question, if in Year 2 revenue is $8000 and I make a distribution of 6000, how do I account for the $2000? Can it go back into the capital account taking the basis back to $10,000? Or, once capital it taken out it is out? If that is the case, what happens when you have exhausted the basis?

Thanks!