Choice "c" is correct. Like partnerships, S corporations report both separately and non-separately stated items of income and/or loss. Allocations to shareholders are made on a per-share, per-day basis in accordance with ownership percentage. Shareholders in an S corporation must include on their personal income tax return their distributive share of each separate "pass-through" item. Shareholders are taxed on these items, regardless of whether or not these items have been distributed to them during the year.

Choice "d" is incorrect. This answer option incorrectly assumes that Evan's gross income is calculated as 40% of the distribution for the year ($100,000 x 40% = $40,000) less the basis of $2,000 as of the beginning of the year ($40,000 - $2,000 = $38,000).

Choice "b" is incorrect. This answer option incorrectly assumes that Evan's gross income is calculated as 40% of the distribution for the year ($100,000 x 40% = $40,000).

Choice "a" is incorrect. This answer option incorrectly assumes that Evan's gross income is 1 - 40%, or 60%, of the corporation's operating income for the year ($200,000 x 60% = $120,000), less the basis of $2,000 as of the beginning of the year ($120,000 - $2,000 = $118,000).