"But an S Corp can have distributions, with no profit; and a profit, with no distributions."

You are overlooking that the issue at hand is No Earned Income. Which would be the error.

"I wouldn't have a problem preparing a return for an S Corp owner/employee with a K-1 showing $50K of ordinary business income, if those funds were kept in the business to pay off debt or buy more assets."

There is no earned income for a person who was not paid through payroll. They didn't participate in the concept of S Corp. There are all sorts of wrong here, and the preparer has expressed confusion and is right in their understanding that things have gone wrong.

You are not helping, Bob.