Pursuant to a master development plan approved by city council, the city of Sherwood donated cash of $500,000 to Oasis Corporation to induce it to expand its distribution center. In the nine months following receipt of the cash, Oasis spent $600,000 to build a new warehouse on its existing site. How much gross income must Oasis recognize because of the cash contribution, and what is Oasiss basis in the new warehouse?

1. $0 income; $100,000 basis.
2. $500,000 income; $600,000 basis;
3. $0 income; $500,000 basis
4. $500,000 income; $500,000 basis.