Multiple choice

1. On August 5, 2012, Descartes purchased a new office building for $1 million.  On October 3, 2012, she began to rent out office space in the building. What is Descartes’s cost recovery for 2012?

a. $100,000

b. $25,641

c. $5,350

d. $0

2.Assume the same facts as in the previous problem.  Assume further that Descartes sells the office building on July 12, 2016.  What is Descartes’s cost recovery for 2016?

a. $100,000

b. $25,640

c. $13,888

d. $0

Nhi and Nehemiah recently formed a corporation named 2N, Inc. (or “2N”).  On December 31, 2011, 2N issued 800,000 shares of common stock to Nhi and 800,000 shares of common stock to Nehemiah.  Nhi and Nehemiah each paid $0.01 per share for their stock ($0.01 equaled the per share fair market value on December 31, 2011).  Their stock is subject to a 4-year “repurchase option” (at cost) in favor of 2N.  Each 2N repurchase option will “lapse” over time so that on December 31 (of 2012, 2013, 2014 and 2015), 200,000 shares will be released from the repurchase option.  For example, if Nhi quits 2N before December 31, 2015, 2N can repurchase Nhi’s “unvested shares” for $0.01 per share (no matter what the fair market value is on that date).

3.Assume that Nhi DID file a timely “83(b) election.”  On December 31, 2012, Nhi is still working at 2N and thus 200,000 of Nhi’s 800,000 shares are “released” from the 2N repurchase option (i.e., 200,000 of Nhi’s shares “vest” on December 31, 2012).  On that same day, the fair market value of the 2N stock was $1.01 per share. What 2012 income, if any, must Nhi report as a result of these events?

a.$800,000

b.$202,000

c.$200,000

d.$0

4.Assume that Nehemiah DID NOT file a timely “83(b) election.”  On December 31, 2012, Nehemiah is also still working at 2N and thus 200,000 of Nehemiah’s 800,000 shares are also “released” from the 2N repurchase option (i.e., 200,000 of Nehemiah’s shares “vest” on December 31, 2012).  On that same day, the fair market value of the 2N stock was $1.01 per share.  What 2012 income, if any, must Nehemiah report as a result of these events?

a.$800,000

b.$202,000

c.$200,000

d.$0