If the k-1 income taxable to the 1040 shareholder is $100, the the s/h pays tax on the $100 regardless of whether or not they take distributions.

If there is cash available, why not take some of that $100 to pay the tax. Since they are already taxing the $100, the cash is not a taxable distributions.

S corp s/h's rarely, if ever, get "dividends."

If your "dividends" scenario is true, that person is probably a lender, not a s/h, so they cannot get "dividends" or distributions.

FYI, <<Does it also reduce their basis on the K-1?>> Basis is not reported on the S corp K-1.