Corporation S elects S Corporation status effective January 1, 2016. J is the sole shareholder having a basis of $450,000 in his stock. S has accumulated earnings in profits of $600,000. During the same year, S has net earnings of $150,000. S distributed $1,350,000 to J during the tax year.

a The distribution is tax free.

b $600,000 of the distribution is tax free. The remaining $650,000 is taxable.

c $600,000 of the distribution is tax free, $600,000 is a dividend, and the remaining $150,000 is treated as income from the sale or exchange of stock.

d None of the above.

Which is the correct answer and why?