Longhorn Company reports current E&P of $165,000 in 20X3 and accumulated E&P at the beginning of the year of negative $330,000. Longhorn distributed $495,000 to its sole shareholder on January 1, 20X3. The shareholder's tax basis in his stock in Longhorn is $165,000. How is the distribution treated by the shareholder in 20X3?

Multiple Choice

• $165,000 dividend.

• $165,000 dividend, $165,000 tax-free return of basis, and $165,000 capital gain.

• $165,000 dividend and $330,000 tax-free return of basis.

• $0 dividend, $165,000 tax-free return of basis, and $330,000 capital gain.