Let's now apply these concepts to Sunchaser Shakery.

Nicholas invested $35,000 for

a 33% interest in the capital and profits of Sunchaser Shakery partnership.

After his investment, Sunchaser had taxable income of

$60,000 and tax exempt income of $6,000.

Nicholas withdrew $5,000 and we

want to know what is Nicolas's outside basis in Sunchaser.

So, recall that Section 705 (a) and 733,

provide that a partners adjusted basis is the original basis of the interest,

plus the partners distributive share of all partnership income,

and decreased by any distributions or withdrawals

made by the partner from the partnership.

So, to figure out what's going on here,

we'll start with the original basis of 35,000,

and then we'll factor in his share of each item.

So, we have the taxable income of 60,000 and he's a 33% partner or one third.

So, 20,000 of that goes to him.

And we'll also factor in tax exempt income.

And that's important, even though it's not taxable,

because it keeps it from being taxed again in the event that he

subsequently sells his partnership interest or a variety of other situations.

So, this is where the magic of basis comes in to protect him from being taxed again.

So, one third of the $6,000 is $2,000.

We also know that he had a distribution or withdrawal,

where he took something out of the partnership,

and that was $5,000.

So, when we factor all this together,

his outside basis in the partnership after everything is considered is $52,000.

On January 1, Sunchaser Shakery partnership was formed.

Nicholas acquired a 20% interest by contributing

restaurant equipment with an adjusted basis of $22,000,

that was subject to an $8,000 liability.

During the year, Sunchaser paid off the liability and

reported $100,000 of ordinary income.

And we want to know what is Nicholas's outside basis at year end.

So, this is a situation where we need to use our full basis formula,

to kind of think about what happened at the initial inception,

as well as what happened over time as the partnership operated throughout the year.

So, let's begin with the adjusted basis of any property transferred,

since there was no cash involved, which is $22,000.

We also know that there was a liability assumed away by the partnership,

in other words, taken away from Nicholas.

So, it's an $8,000 liability,

he's a 20% partner.

So, they're really effectively only taking 80% of the liability away from him,

because he's still responsible for a portion of all partnership liabilities.

That is his ownership portion or 20%.

However, as the year went on,

they actually paid off the liability that was on this particular asset.

So, overall his share of liabilities,

throughout the year, decreased.

So, the $8,000 was paid off,

he's a 20% owner,

so he has 20% responsibility for that.

And then, the partnership incurred ordinary income of $100,000.

And again, he's a 20% partner.

So, he gets $20,000 as his share.

So, overall, when we factor all this up together,

we see that his outside basis at your end is $34,000.

Nicholas and Emily are equal partners in Sunchaser Shakery partnership.

On January 1, they each had a $50,000 outside basis.

During the year, Sunchaser borrowed $40,000,

for which both partners were equally liable.

Sunchaser also incurred an operating loss of $30,000 for the year,

and our goal is to determine the outside basis for each partner at year end.

So, recall that outside basis is the original basis plus

the partners distributive share of any income and allocated liability,

less any share of the loss from the partnership throughout the year.

As equal partners, the calculations will be the same,

because they both have the same basis.

So, if we begin with on January 1,

each partner had a $50,000 basis.

We know that liabilities increased,

so that's going to affect basis.

So, the $40,000 liability,

each partner gets one half of that,

as 50% partners, or $20,000.

And then, basis will be decreased by their share of the loss from the year,

which we were told was $30,000.

Then again, each partner is a 50% partner.

So, overall Nicholas and Emily each have a $55,000 basis in the partnership at year end.

Sunchaser Shakery Partnership was formed on January 1.

Nicholas acquired a 25% interest by contributing both a freezer,

where the basis of $12,000 subject to a $4,000 liability and $7,000 cash.

During the year, Sunchaser also incurred of $40,000

non-recourse debt and paid off the liability on the freezer.

There are no guarantees or loss limitation agreements on the non-recourse loan.

We want to know what is Nicholas's outside basis at year end,

if Sunchaser realized an ordinary loss of $6,000 for the year.

So, this is a great situation,

because it allows us to use the entire basis formula,

starting with the initial contribution,

as well as tracking items that occurred throughout the tax year.

So, let's begin with the original basis,

or in other words the basis at the time of

the contribution and then kind of track things going forward.

So, he contributes cash of $7,000 and he contributes this freezer,

which had an adjusted basis at that time of $12,000.

Or in other words, $19,000 for the two items of property.

Now, let's factor in all the changes and everything going on with the liabilities.

So, we have an assumed liability on the freezer at the time of

contribution and that's a $4,000 liability.

He's a 25% partner so really the only thing that's being assumed away from him,

is the difference, one minus his ownership interests or 75%.

In other words, he's still responsible for 25% of that liability,

even after it's assumed away by the partnership, or $3,000.

In addition, there's the non-recourse loan,

which the partnership took during the year.

It's a $40,000 loan,

he's a 25% owner so,

he's responsible ultimately for 25% of that liability,

or $10,000, which increases his basis.

Then, throughout the year,

the partnership also paid off the freezer loan or the $4,000 liability.

So the $4,000 liability has now been paid off by the partnership throughout the year.

He's a 25% owner so that reduces his basis,

because he has less liabilities that he's now responsible for, by $1,000.

And then, finally, there's the ordinary loss that occurred throughout the year of $6,000.

He's a 25% owner,

so $1,500 of that loss will be attributable to him,

when determining his basis.

So, we take our $19,000 from over here,

factor in all these liability issues that we determined here,

and then factor in the loss his share of the loss of $1,500 and adding everything up,

we see that his outside basis at the end of the year is $23,500.