Let's now apply the concepts of condition 2 the Sunchaser for Shakery. Assumed Sunchaser Shakery partnership has no debt or hot assets, and distributes 50,000 dollars cash, and land worth 160,00 dollars, then adjusted basis of 20,000 dollars to Nicholas and complete liquidation of his ownership interests. Nicholas has an outside basis of 268,000 dollars before the distribution, and we want to determine the tax effects of the liquidation for Nicholas. So this is a condition to distribution, because we have other property being included besides cash and hot assets, and the outside basis is greater than the inside basis of distributed assets. As a result, we're going to adjust the basis of the other property received. Also, there's no gain or loss recognized, and we would allocate the basis in three steps. But here it's a relatively straightforward process, because we only have one item of non-cash property to deal with, in this case the land. So the outside basis before the distribution, is 268 000 dollars we're told. We'll allocate some of that basis to the money received, a 50,000, and the remaining basis, is allocated to the land, of 218,000 dollars. In other words, he will increase the basis of the other property received in this case the land, from 20,000 dollars at the partnership level, to 218,000 dollars, in order to allocate his entire outside basis to the distributed assets. Assume Sunchaser Shakery partnership distributes the following to Nicholas and liquidation of his ownership interests. Cash, of 180 000 dollars, property A, which has a fair market value of 12,000 dollars and a 5,000 dollar adjusted basis, property B, which is 13,000 dollar fair market value, and 10,000 dollar adjusted basis, and inventory worth 96,000 dollars with an adjusted basis of 43,000 dollars. Nicholas's outside basis is 334,000 dollars, including his 66,000 dollars share of SunChaser debt. And our goal is to determine the tax effects of the liquidation for Nicholas. This falls under condition 2, because we have other property being included, and the outside basis is greater than the inside basis of all distributed assets. In other words, this is the same situation as the prior logic check, but here we have several types of assets which makes things a little bit more complicated, requiring us to use the three step process of allocation. So we have to allocate the outside basis in several steps. But first we have to determine how much basis is required to be allocated. So let's begin by looking at the basis before distribution, which is three 334,000 dollars, factor in the debt relief which is treated as a distribution of cash, 66,000 dollars. So the amount of basis that we need to allocate is the difference or 268,000. So now I will allocate this remaining amount to 268,000 dollars to the assets that were distributed, and we'll do this in three steps. In the first step we will sign the inside basis to all distributed assets, that is in the order of cash, hot assets and other assets. So we'll start with the basis to allocate of 268,000 dollars, and then we'll go in the correct order of cash, hot assets and other property. So we'll assign some basis to cash, which is from the above table, of 181,000, signed basis to inventory, 43,000, will sign an initial basis to the property Item A, an initial amount to property Item B, of 10000. So after signing the inside basis to the distributed assets, that is the basis that they had inside the partnership, we see that we have a remaining basis left to allocate of 29,000 dollars. So we now go to step two, which requires us to allocate this remaining basis amount to other property, with unrealized appreciation to the extent of that unrealized appreciation. So we have two items of other property meaning non-cash and non hot assets, and that's property A and property B. Each of these assets has unrealized appreciation, meaning they've increased in value relative to adjusted basis over time. So we'll assign some additional basis to A, which is based on this unrealized appreciation. And it has a 12,000 dollar fair market value, and a five thousand dollar adjusted basis. So we're going to sign another seven thousand dollars of our remaining 29,000 to this asset. Following the same process, we'll assign some additional basis to B. It had a 13,000 fair market value, and a 10000 dollar adjusted basis. So we'll assign another 3000 dollars of our remaining 29 to this asset. So factoring this in, we now see that are 29 minus seven, minus three, means we have nineteen thousand dollars of basis left to allocate to the assets. Now go to step three, which requires us to allocate the remaining basis to all other property in relation to their fair market value. So that means we're going to assign some additional basis to A, based on it's fair market value. And so the fair market value of Item A is 12,000, a fair market value of property item B is 13,000 dollars, so we'll take 12,000 over 12,000 plus 13000, the sum of the two properties, and that proportion of the nineteen thousand dollars is what we will assign to A, or 9120. Following the same approach, we'll assign an additional basis to B, in the proportion of 13, over the sum of the two. Or in other words, the remaining portion of the 19,000 dollars, or 9,880. So taking 19,000 minus 9120 and 9880, means we have now finally allocated all of the basis that we were required to do so. And so we can summarize Nicholas's basis in each item of property now. So it was cash, it was 181,000 dollars, the inventory was 43,000, and then for property item A, it's the initial 5,000 plus the 7000 we added on plus the 9,120 we added on at the end, or 21,120. And in property Item B, was the initial 10,000 plus the 3000 plus the 9,880, or 22880. And we add all this up, we make sure that we've properly accounted for all the basis items and we get 268, 000 dollars, which matches our initial starting point. So we've properly allocated everything. And overall, there's no gain or loss recognized in this situation.