On January 1^st of year 1, Bob and Carol formed an S-corporation. They are equal 50/50 shareholders, each having contributed $5,000 in exchange for their stock. Carol loaned the corporation an additional $5,000 on June 30^th of year 1 (all appropriate legal steps had been taken to ensure the loan is bona fide). The corporation had an ordinary loss in its first year of $12,000 and ordinary income in its second year of $15,000. Assume that all parties use a calendar based taxable year and that neither the passive nor at-risk limitations are applicable. If the S-corporation distributes property with a fair market value of $6,000 and a basis of $2,000 to Bob and cash of $6,000 to Carol on Oct 30^th of year 1, then what are the tax impacts of the distributions?

	A.	Bob assumes a basis in the property of $2,000, which reduces his stock basis to $3,000. Bob then recognizes $3,000 of the first year loss, which reduces his stock basis to $0. Carol recognizes no gain on the distribution, her basis in stock is reduced to $0, and her basis in debt is reduced to $4,000. Carol may then deduct $4,000 of the first year loss, which reduces her debt basis to $0.
	B.	Bob recognizes a short-term capital gain of $1,000 on the distribution, his basis in stock is reduced to $0, and he cannot recognize any of the first year loss. Carol recognizes no gain on the distribution, her basis in stock is reduced to $0, and her basis in debt is reduced to $4,000. Carol may then deduct $4,000 of the first year loss, which reduces her debt basis to $0.
	C.	Both shareholders recognize a short-term capital gain of $1,000 on the distribution and each of their bases in the S-corporations stock is reduced to $0. Bob may not deduct any of the first year loss while Carol may deduct $5,000 of it.
	D.	Each shareholders basis is reduced to $1,000 by the distributions. Bob may recognize $1,000 of the first year loss, which reduces his stock basis to $0. Carol may recognize $6,000 of the first year loss, which reduces both her stock and debt basis to $0.