BACKGROUND INFORMATION FOR QUESTIONS 49-50

Mercedes and Manuel recently formed a corporation named MNM Inc. (or "MNM"). On December 31, 2012, MNM issued 800,000 shares of common stock to Manuel and 800,000 shares of common stock to Mercedes. Manuel and Mercedes each paid $0.01 per share for their stock ($0.01 equaled the per share fair market value on December 31, 2012). Their stock is subject to a 4-year "repurchase option" (at cost) in favor of MNM. Each MNM repurchase option will "lapse" over time so that on December 31 (of 2013, 2014, 2015 and 2016), 200,000 shares will be released from the repurchase option. For example, if Manuel quits MNM before December 31, 2016, MNM can repurchase Manuel's "unvested shares" for $0.01 per share (no matter what the fair market value is on that date).

QUESTION 1

Assume that Mercedes DID file a timely "83(b) election." On December 31, 2013, Mercedes is still working at MNM and thus 200,000 of Mercedes's 800,000 shares are "released" from the MNM repurchase option (i.e., 200,000 of Mercedes's shares "vest" on December 31, 2013). On that same day, the fair market value of the MNM stock equals $10.01 per share. What 2013 income, if any, must Mercedes report as a result of these events?

a) $8,000,000

b) $2,002,000

c) $2,000,000

d) $0

QUESTION 2

Assume that Manuel DID NOT file a timely "83(b) election." On December 31, 2013, Manuel is also still working at MNM and thus 200,000 of Manuel's 800,000 shares are also "released" from the MNM repurchase option (i.e., 200,000 of Manuel's shares "vest" on December 31, 2013). On that same day, the fair market value of the MNM stock equals $10.01 per share. What 2013 income, if any, must Manuel report as a result of these events?

a) $8,000,000

b) $2,002,000

c) $2,000,000

d) $0