BJ owns NOCTM, Inc. and sells 100 percent of the corporate stock (all outstanding stock) on January 1. 2015 to an ESOP for $5,000,000. His adjusted basis in the stock was $2,400,000. Which of the following is correct?

1. If BJ reinvests the $5,000,000 in qualified domestic securities within 18 months, he has a carryover basis of $2,400,000 in the qualified domestic security portfolio and no current capital gain.

2. BJ has a long-term capital gain of $2,600,000 reduced by the 20 percent small business credit; therefore, his gain is $2,080,000 if he does not reinvest in qualified domestic securities within 18 months.

a. 1 only.

b. 2 only.

c. Both 1 & 2.

d. Neither 1 nor 2.