Jacob is a 50% shareholder in Babylon Corporation which is an S corporation. The S corporation had a $40,000 ordinary loss last year and $5,000 of…

Jacob is a 50% shareholder in Babylon Corporation which is an S corporation. The S corporation had a $40,000 ordinary loss last year and $5,000 of ordinary income this year. Before accounting for last year’s losses, Jacob’s basis in his Babylon stock is $16,000 and Babylon owed Jacob $2,000 (an unsecured note having a basis of $2,000) at the end of last year. In addition, Babylon had $50,000 of other liabilities owed to creditors other than Jacob at the end of last year. What income and loss must Jacob report on his current return as a result of owning the Babylon stock (ignoring the at-risk and passive activity limitations)?

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