1.John is a 60% shareholder in Arf, an S Corporation.At the beginning of the year, his stock basis is zero.John's basis in a $20,000 loan made to Arf and evidenced by Arf's note has been reduced to $0 by prior losses.During the year, John's net share of Arf's taxable income is $10,000.At the end of the year, Arf makes a $15,000 cash distribution to John.

a.After these transactions, what is John's basis in his stock and what is his basis in the debt?

b.Will John recognize any capital gain as a result of the distribution? If so, how much capital gain will he recognize?