S Corp shareholders do not get a 1099 from their own entity. They get a K-1.

S Corps do not pay dividends. S Corp shareholders take Distributions. Distribution in excess of basis is not dividends.

You seem to be describing that there might be Distribution in excess of equity, which would be after the tax return that results in the computation of income and other pass throughs.

So, your shareholder might have capital gain, after all the rest is resolved, offset, sold off, etc.

If you have not closed an S Corp before, you might get someone to mentor you on this.