Jennifer owns 1,000 shares of Ernie Company. Her adjusted basis in the shares is $100,000. Ernie Company has no earnings and profits. It made a cash distribution to its shareholders, of which Jennifer received $60,000. The results of this distribution to Jennifer are:

1. Jennifer must recognize a $40,000 loss and has a zero basis in the stock
2. Jennifer must recognize $60,000 dividend income and her basis in the stock does not change
3. Jennifer has no recognized gain or loss and her basis in the shares is reduced to $40,000
4. None of these