Rules: The rules for determining a shareholder's basis in S corporation stock follow:

Initial basis (or beginning of year)

Choice "d" is correct.

Choice "b" is incorrect. This is only the amount of Sandy's basis at the beginning of the year ($60,000). The income items and distributions also affect Sandy's basis as of the end of the year.

Choice "a" is incorrect. This answer option includes the $60,000 basis at the beginning of the year plus the $10,000 in capital gains during the year, but it incorrectly excludes the ordinary and tax-exempt income from the year and the effect of the distributions during the year.

Choice "c" is incorrect. This answer option incorrectly excludes the $5,000 of tax-exempt income received by Swallow during the year.