Choice "C" is correct. If an S corporation has no accumulated earnings and profits, the amount distributed to a shareholder decreases the shareholder's basis for the stock. The distribution is nontaxable to the extent of the shareholder's basis.
Choice "b" is incorrect. The amount distributed to a shareholder does not need to be returned to the S corporation.
Choice "d" is incorrect. Distributions do not increase a shareholder's basis.
Choice "a" is incorrect. Distributions have no effect on a shareholder's basis if they are out of accumulated earnings and profits and are therefore taxable. They would also have no effect on a shareholder's basis if the basis is already zero, which would result in the shareholder recognizing a gain to the extent of the distribution. In this case, we are not told whether or not the basis is already zero.