Let's now apply these concepts to Sunchaser Shakery. On January 1st, Sunchaser Shakery Partnership liquidated Nicholas's ownership interest by distributing $260,000 cash and inventory worth $96,000 with an adjusted basis of $430,000 to him. His share of partnership debt was $66,000 and his outside basis was $334,000, including his share of debt just prior to the liquidation. And we want to determine the tax effects of the liquidation for Nicholas. So let's begin with this outside basis which is $334,000. He's being relieved of debt, so we treat that like a cash distribution of $66,000. That leaves a remaining outside basis, I'll just put O.B. for outside basis, of 268,000. Now, we can factor in the basis of the property that was distributed to him, which is the sum of the cash which was $206,000 plus the inventory which was $43,000, or 249,000. And so, we see he has some basis left over after everything's been factored in. And so, that would result in a loss of $19,000 in this case. Nicholas, in this situation, can recognize the loss, however, because he meets the two required conditions. So, we'll say he recognizes the loss and the reason is he meets condition one, which says that he receives only cash and hot assets. In this case, the inventory is the hot assets. And two, some of the adjusted basis of the distributed assets is less than his outside basis. In other words, the $249,000 is less than the $268,000.