On January 2, 2015, David loans his S corporation $10,000. By the end of 2015 David's stock basis is zero and the basis in his note has been reduced to $8,000. During 2016, the company's operating income is $10,000. The company makes 2016 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 loan basis to $10,000. The $11,000 distribution exceeds his basis by $1,000, resulting in a $1,000 long-term capital gain.

On January 2, 2015, David Loans His S Corporation $10,000