During 2008,Houston Nutt,the sole shareholder of a calendar year S corporation,received a distribution of $16,000.On December 31,2007,his stock basis was $4,000.The corporation earned $11,000 ordinary income during the year.It has no accumulated E & P.Which statement is correct?

Question

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$11,000 ordinary income; $15,000 return of capital,$1,000 capital gain.Nutt's stock basis is increased by the $11,000 ordinary income allocable to him,giving a basis of $15,000 before the distribution.The first $15,000 of the distribution is a return of capital,reducing the stock basis to zero.The remaining $1,000 constitutes capital gain (the excess over stock basis).

During 2008,Houston Nutt,the Sole Shareholder of a Calendar Year S