On January 2,2014,David loans his S corporation $10,000.By the end of 2014 David's stock basis is zero and the basis in his note has been reduced to $8,000.During 2015,the company's operating income is $10,000.The company makes 2015 distributions to David of $11,000.David reports a(n):

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David's stock basis is zero, and his loan basis is $8,000. The $10,000 operating income restores his stock basis to $10,000. The $11,000 distribution reduces his stock basis to zero and creates a $1,000 long-term capital gain (LTCG) because the distribution exceeds the stock basis by $1,000.

On January 2,2014,David Loans His S Corporation $10,000