Let's now apply the concepts of condition for to Sunchaser Shakery. Assume Sunchaser Shakery partnership distributes the following to Nicholas in liquidation of his ownership interests. Cash of $256,000, inventory A with a fair market value of a $129,000 and adjusted basis of $50,000 and inventory B with fair market value of $17,000 and adjusted basis of $25,000. Nicholas's outside basis is $334,000 including his share of $66,000 of Sunchaser debt. Determine the tax effects of the liquidation for Nicholas. Condition four is applicable here because we have a distribution of money and hot assets and the outside basis is less than the inside basis of all distributed assets. So as before, we need to determine how much of the basis do we need to allocate. We start just like we always start by looking at the basis before the distribution which is $354,000. Factor in the debt relief which is treated as a cash distribution which means we have $268,000 of basis to allocate. So now we must allocate this remaining amount of basis $268,000 to the distributed assets and we're going to do this in three steps. Step 1, we're going to assign inside basis to the distributed assets. So we'll start with the basis to allocate of 268,000 and then going in the proper order of cash and hot assets and we don't have any other property here, we will allocate the inside basis that was provided to us in the problem. To allocate some basis to cash of 256,000, we'll allocate some initial basis to inventory A 50 and some initial to be 25,000. So after factoring all this and we see that we now have a required decreased the basis to make of $63,000. So now we go to Step 2 where we're going to allocate the remaining decrease, the $63,000 to property with unrealized depreciation to the extent of unrealized appreciation. Hereby depreciation we're not referring to cost recovery like makers or anything like that, we are referring to a depreciation value or just a decrease in value meaning adjusted basis would be greater than fair market value. So looking at our two items of inventory A and B, we see that only inventory B has decreased in value over time. So we're going to allocate basis at this step to just inventory B. So the fair market value of B is $17,000 and it's adjusted basis is $25,000. So we're going to allocate $8,000 at this step which means we have $55,000 of remaining decreased to make. Then just as an aside, so we track everything. We now have sort of an interim subtotal basis of B of $17,000 which is the 25 minus the eight that we just assigned to it. Now we go to Step 3 where we're going to allocate the remaining decrease to property in relation to its adjusted basis. So we'll allocate a portion of the decrease that's left to A, inventory A using the adjusted basis to figure out the proportion. So the adjusted basis of A is 50,000, the adjusted basis of B is $25,000, but would we just reduced that by A giving an interim basis of 17,000. So we'll use the $17,000 for this purpose because we've already made an adjustment. So we have $55,000 of remaining decreased to make and we'll allocated in this proportion for the $50,000 basis to inventory A. So 50,000, 50,000 over the sum of the two basis amounts for the inventory or 41,045. We'll then allocate the remaining amount of the $55,000 that's left but just to write it out formally, it would be the $17,000 interim basis that we calculated in Step 2 that proportion of the total basis of the two assets at this step or 13,955. So we now see that we've adjusted for all the required decrease. So to summarize our answer, to label the final adjusted basis of each asset, cash would be 256,000, inventory item A would be 8,955 which is the 50,000 minus the $41,045 that we computed in Step 3, and then for inventory item B, it would be $3,045 which is the interim basis from Step 2 of $17,000 less the 13,955 from Step 3. Just to check it, we see it's $268,000 and we add all that up which matches our initial starting point and then overall there's no gain or loss recognized. Assume Sunchaser Shakery partnership distributes the following to Nicholas and liquidation of his ownership interests: cash of $242,000, accounts receivable with a fair market value of $12,000 and adjusted basis of zero, inventory with a fair market value of a $120,000 and adjusted basis $74,000. Nicholas is outside basis is $334,000 including his share of $66,000 of Sunchaser debt. We want to determine the tax effects of the liquidation for Nicholas. Condition 4 is applicable here because we have a distribution of money and hot assets and the outside basis is less than the inside basis of the distributed assets. So like before, we need to determine how much of basis do we need to allocate to the assets. So we start with the basis before the distribution which is $334,000. We factor in the debt relief which is treated as a distribution of cash of $66,000 meaning that we have $268,000 of basis to allocate. So now we must allocate this $268,000 of basis to the distributed assets and we'll do this in three steps. In Step 1 we'll assign the inside basis of each asset to the distributed assets. So starting with our basis to allocate of $268,000, we allocate some basis to cash of 242,000, some initial basis to the accounts receivable which at the time of the distribution has an inside basis of zero so we allocate nothing to it, and some initial basis to the inventory of 74,000. So then we see we have a required basis decreased to make of the net of $48,000. Now we go to Step 2 where we allocate the remaining decrease to property with unrealized appreciation to the extent of unrealized appreciation. If we look back at the different items of property, we see that no assets here have any unrealized appreciation. They've all increased in value. In other words, the fair market values are both greater than their adjusted basis of the two items of property that is the accounts receivable and the inventory. So we skip this step. There's nothing here to do. So we go to Step 3. In Step 3, we're going to allocate the remaining decrease to property in relation to their adjusted basis. So we'll allocate some of the decrease to the accounts receivable. In other words, we have $48,000 of decreased to assign. We'll do it on the basis of relative adjusted basis with which the accounts receivable has zero. So zero over zero plus 74,000, the basis of the other asset or in other words zero. So all of the remaining decrease will then by default be assigned to the inventory or the 48,000. But just to be formal we'll write 48,000 times 74,000 over zero plus 74,000. So then we see that we've assigned all of the basis decrease to the required assets and so then to summarize our answer, you final basis amounts would be $242,000 for the cash, accounts receivable would be zero, and the inventory would be $26,000, would be the $74,000 reduced by the $48,000 decrease that we assign in Step 3 and as before, there's no gain or loss in the situation.