At the end of the year, before distributions, Bombay (an S corporation) has an accumulated adjustments account balance of $20,000 and accumulated E&P of $26,250 from a previous year as a C corporation. During the year, Nicolette (a 40 percent shareholder) received a $26,250 distribution (the remaining shareholders received $39,375 in distributions). (Assume her stock basis is $52,500 after considering her share of Bombays income for the year but before considering the effects of the distribution.)

Required:

1. What are the amount and character of income or gain Nicolette must recognize from the distribution?
2. What is her basis in her Bombay stock at the end of the year?