1. Tornado, an S corporation, has no earnings and profits. In 2017, Tornado distributed property with a fair market value of $32,500 and an adjusted basis of $26,000 to Dorothy, its sole shareholder. After Dorothys share of any corporate gain or loss was recognized, her adjusted basis in Tornados stock at year end was $25,000. How should Dorothy handle the distribution?

A.		$25,000 as return of capital and $7,500 as nontaxable distributions.
B.	$25,000 as return of capital and $7,500 as taxable capital gain.

C.	$50,000 as return of capital and $1,000 as taxable capital gain.
D.		$25,000 as nontaxable distributions.

2. Rap, Inc., was organized in January 2017 and immediately made an S election. Rap, Inc.s stock is entirely owned by Howard, who contributed $40,000 to start the business. Rap reported the following results for the 2017 year:

Ordinary income	$36,000
Short-term capital loss	4,000
Charitable contributions	1,000
Tax-exempt income	1,000
Sec. 179 deduction	10,000

On April 12, 2017, Howard received a $30,000 cash distribution from the corporation. What is the adjusted basis of his stock on January 1, 2018?

A.		$41,000
B.	$32,000

C.		$31,000
D.	$10,000