At the end of the year, before distributions, Bombay (an S corporation) has an accumulated adjustments account balance of $16,000 and accumulated E&P of $21,250 from a previous year as a C corporation. During the year, Nicolette (a 40 percent shareholder) received a $21,250 distribution (the remaining shareholders received $31,875 in distributions). (Assume her stock basis is $42,500 after considering her share of Bombays income for the year but before considering the effects of the distribution.)

• What is the amount and character of gain Nicolette must recognize from the distribution?
• What is her basis in her Bombay stock at the end of the year?