[MUSIC] Let's now apply these concepts to Sunchaser Shakery. Nicholas has an ownership interest in Sunchaser Shakery Partnership. On December 31st, Sunchaser made an operating distribution consisting of $225,000 cash and property worth $150,000 (an inside basis of $100,000). His outside basis in the partnership interest was $300,000 before the distribution. And we want to know what are the tax effects of the distribution. So recall here that we have ordering rules to factor in when we have an operating distribution. We begin with cash, followed by hot assets, and then we allocate basis to all other assets after that. So let's begin with the outside basis of $300,000. So we start with cash that's been distributed and that's going to reduce his basis. So the $225,000 takes us down to $75,000. So we can kind of view this as the remaining basis. And this is the amount that we will allocate to distributed property. Because Nicholas needs a basis in the property that was distributed to him in case he later sells it or does something else with it. So the inside basis of the property that was distributed to him at that time from the partnership was $100,000. We're going to assign a basis for Nicholas to this asset based on the remaining basis that we calculated above of $75,000. Because that's all he has left to assigned to it. We don't have really a choice in the matter. So in other words, the $75,000 is the amount that we're allocating to the property that was distributed to him. Therefore his new outside basis in the partnership interest is 0. because we had 75 from up here, and we've assigned that now to this new property item. So his $75,000 basis in the property now contains the $25,000 overage. The difference between the $100,000 inside basis at the partnership level and the $75,000 that we assigned to this asset. The $25,000 kind of stays with him until the asset is subsequently sold. And overall, there's no gain or loss for Sunchaser. Nicholas has a $6,000 outside basis in Sunchaser Shakery Partnership immediately prior to receiving a non-liquidating distribution of cash with fair market value of 5,000 and adjusted basis of 5,000. Computer the fair market value $1,500, adjusted basis of $4,000, and furniture with a fair market value of $500 and an adjusted basis of $1,500. And our goal is to determine Nicholas' basis in the distributed property. So the key thing to note with this problem is that there's not sufficient basis here to allocate all property. In other words, a step down in basis is going to be required. So we have $6,000 of outside basis. And he's receiving money that's been distributed of 5,000. And that's always our starting point, showing that we have $1,000 of basis to allocate. And so we're going to allocate this $1,000 of basis as best as we can using the four steps that you learned about. So in step one, we're going to allocate the partnership inside basis to each asset. And so we have the computer, the furniture, and then we'll do a total column. So using the table that was provided, we get the inside basis of each asset at the time of the distribution, 4,000, 1,500, respectively. In step two, we'll calculate the decrease or the step down in basis. And we do that by looking at total inside basis, And our remaining basis to allocate. So subtracting these two numbers, we see that the amount that we need to step down is $4,500. Now in step three, we're going to allocate this step down to assets with the decline in fair market value. And so to look at the decline for each asset, we look at its fair market value minus its adjusted basis at the time of the distribution. And so for the computer, it's $2,500. And for the furniture, it's $1,000. And this allows us to see the relative adjusted basis. Or in other words, the $4,000 from above, minus the $2,500 decline in fair market value or $1,500. And for the furniture, the $1,500 initial inside basis, less the decline in fair market value of $1,000, leaving $500, or the sum of $2,000. And now on step four, we'll allocate the remaining decrease based on the relative adjusted basis. So our remaining decrease, Is the initial $4,500 step down that we calculated a moment ago, less the $2,500 decline in fair market value for the computer and the $1,000 decline in fair market value for the furniture. Meaning we have $1,000 of a remaining decrease to allocate. We also know what the relative adjusted basis is for each item or property. And that's the $1,500 from a moment ago and $500 for the furniture or $2,000. We're going to use this relative adjusted basis to allocate that remaining $1,000 of decrease. So we'll take $1,000 times 1,500 over 2,000 for the computer, or 750. And then we'll allocate the remaining portion, the $250 or $500 over 2,000, for the furniture. And so adding all the numbers up from our table, so overall, our new basis in the distributed property gets computed by summing everything that we've done in each column. So, for the computer we have the $4,000. Initial inside basis, reduced by the decline in fair market value and then reduced by the $750 just computed above. And we see that the new basis in the distributed computer is $750. We do the same approach for the furniture, the $1,500, subtracting the $1,000 and the $250. And we see that its new basis in the distributed property is $250.