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. How much income does each shareholder recognize in the second year?

	A.	Each recognizes $7,500 of income.
	B.	Bob recognizes $6,500 of income and Carol recognizes $7,500 of income.
	C.	Bob recognizes only $6,500 of income while Carol recognizes $8,500 because she got to deduct more of the first years loss than Bob.
	D.	Each recognizes only $6,500 of income because their first year loss deduction was limited to their equity contributions.