On January 2,2012,David loans his S corporation $10,000.By the end of 2012 David's stock basis is zero and the basis in his note has been reduced to $8,000.During 2013,the company's operating income is $10,000.The company makes 2013 distributions to David of $11,000.David reports a(n):

Question

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David's stock basis is zero, and his loan basis is $8,000. The $11,000 distribution exceeds his loan basis by $3,000, resulting in a $3,000 LTCG. However, since the operating income of $10,000 restores his loan basis to $10,000, the excess distribution of $1,000 over the restored basis results in a $1,000 LTCG.

On January 2,2012,David Loans His S Corporation $10,000