Longhorn Company reports current E&P of $130,000 in 20X3 and accumulated E&P at the beginning of the year of negative $260,000. Longhorn distributed $390,000 to its sole shareholder on January 1, 20X3. The shareholder's tax basis in his stock in Longhorn is $130,000. How is the distribution treated by the shareholder in 20X3?

Multiple Choice

• $130,000 dividend.

• $130,000 dividend, $130,000 tax-free return of basis, and $130,000 capital gain.

• $130,000 dividend and $260,000 tax-free return of basis.

• $0 dividend, $130,000 tax-free return of basis, and $260,000 capital gain.