A and B are equal partners, and the partnership's only asset is Capital Asset #1, which has a fair market value of $800,000 and an adjusted basis of $300,000. C becomes a one-third partner by contributing Capital Asset #2 with a fair market value of $700,000 and an adjusted basis of $150,000. At the time of its contribution, Capital Asset #2 is encumbered by a $300,000 recourse liability, which the partnership assumes. Also, at that time, the partnership revalues its assets under Treasury Regulations 1.704-1(b)(2)(iv)(f).

1. How is the $300,000 liability allocate?
2. What will be C outside basis upon becoming a partner?

(c) What result in (a), above, if the $300,000 liability is a nonrecourse debt secured by Capital Asset #2 and the partners agree to use the traditional method to allocate 704(c) gain?