Safe harbor provisions. 1. Capital accounts. 1.01. Maintenance of capital accounts: A capital account shall be maintained for each partner. 1.02. Additions to capital accounts: A partner's capital account shall be increased by the following: a. The amount of money contributed by the partner to the partnership. Money contributed by a partner of a partnership includes the amount of any partnership liabilities that are assumed by that partner (other than liabilities described in paragraph b of this section) but does not include increases in the partner's share of partnership liabilities. b. The fair market value of property contributed by the partner to the partnership (net of liabilities securing the contributed property that the partnership is considered to assume or take subject to under Section 752 of the Code). c. Allocation to the partner of partnership income and gain including income and gain exempt from tax and income and gain described in Reg §1.704-1(b)(4)(iv)(g) (reflection of fair market value of partnership property and depreciation, depletion, amortization and gain or loss on such items pursuant to Section 1.04) but excluding income and gain described in Reg §1.704(b)(4)(i) (tax items relating to property that is reflected in the capital accounts at fair market value pursuant to Section 1.04). 1.03. Decreases to capital accounts: A partner's capital account shall be decreased by the following: a. The amount of money distributed to the partner by the partnership. Money distributed to a partner by a partnership includes the amount of the partner's individual liabilities that are assumed by the partnership (other than liabilities described in paragraph b of this Section). b. The fair market value of property distributed to the partner by the partnership (net of liabilities securing the distributed property that the partner is considered to assume or take subject to under Section 752). c. Allocation of the partner of expenditures of the partnership described in Section 705(a)(2)(B) (expenditures of the partnership not deductible in computing its taxable income and not properly chargeable to capital account). Except for amounts with respect to which an election is properly made under Section 709(b) amounts paid or incurred to organize a partnership or to promote the sale of (or to sell) an interest in the partnership shall solely for purposes of this paragraph, be treated as Section 705(a)(2)(B) expenditures, and upon liquidation of the partnership no further capital account adjustment will be made. If a deduction for a loss incurred in connection with the sale or exchange of partnership property is disallowed to the partnership under Section 267(a)(1) or 707(b), that deduction shall solely for purposes of this paragraph be treated as a Section 705(a)(2)(B) expenditure. d. Allocation of partnership loss and deduction, including loss or deductions described in Reg §1.704-1(b)(2)(iv)(g) (reflection of fair market value of partnership property and depreciation depletion amortization and gain or loss on these items pursuant to Section
1.04) but excluding items described in subparagraph (b) of this section and loss or deduction described in Reg §1.704-1(b)(4)(i) (tax items relating to property that is reflected in the capital accounts at fair market value pursuant to Section 1.04) and Reg §1.7041(b)(4)(iii) (percentage depletion in excess of adjusted tax basis of property). 1.04. Adjust asset values to fair market value. a. Upon the occurrence of the following events the value of each of the partnership assets shall be adjusted to the fair market value for book purposes: i a contribution of money or other property (other than a de minimis amount) to the partnership by a new or existing partner as consideration for an interest in the partnership; ii a distribution of money or other property (other than a de minimis amount) by the partnership to a retiring or continuing partner as consideration for an interest in the partnership other than a distribution in which all partners receive simultaneous distributions of undivided interest in the distributed property in proportion to their interest in the partnership; or iii the termination of the partnership for Federal income tax purposes pursuant to §708(b)(1)(b) of the Code. b. When an adjustment is made to fair market value pursuant to this section the capital accounts of all partners shall be adjusted as if the partnership recognized gain or loss equal to the amount of such aggregate net adjustment. c. When an adjustment is made to fair market value pursuant to this section the partners' capital accounts shall be adjusted for allocation to them of depreciation, depletion, amortization, and gain or loss on the book value of the property. d. When an adjustment is made to fair market value pursuant to this section, the partners' distributive shares of depreciation, depletion, amortization, and gain or loss, as computed for tax purposes, with respect to this property shall be determined so as to take account of the variation between the adjusted tax basis and book value of the property in the same manner as under §704(c) of the Code and its Regulations. e. When the book value of property differs from its tax basis the depreciation, depletion or amortization taken for book purposes shall bear the same relationship to that taken for tax purposes as the book value of the property bears to the tax basis. 1.05. Transfer of partnership interest. Upon the transfer of all or a part of an interest in the partnership, the capital account of the transferor that is attributable to the transferred interest carries over to the transferee partner. 1.06. Section 754 elections. a. If the partnership has a Section 754 election in effect, in the case of a transfer of all or a part of an interest in the partnership, adjustments to the adjusted tax basis of partnership property under Section 743 of the Code shall not be reflected in the capital account of the transferee partner or on the books of the partnership, and subsequent capital account adjustments for distributions and for depreciation, depletion, amortization, and gain or loss with respect to the property will disregard the effect of this basis adjustment. The preceding sentence shall not apply to the extent that basis adjustment is allocated to the common basis of partnership property under Reg §1.734-2(b)(1). In such a
case, the basis adjustment shall give rise to adjustments to the capital accounts of the partners in accordance with their interest in the partnership. b. If the partnership does not have a Section 754 election in effect, adjustments to the adjusted tax basis of partnership property under Section 732(d) of the Code will be treated in the capital accounts of the partners in the same manner as Section 743 of the Code basis adjustments are treated under paragraph a of this section. c. If the partnership has a Section 754 election in effect, in the case of a distribution of partnership property, the partner who receives a distribution that gives rise to an adjustment to the adjusted tax basis of partnership property under Section 734 of the Code shall have a corresponding adjustment made to the partner's capital account. d. Adjustment may be made to the capital account of a partner in respect of basis adjustments to a partnership property under Sections 732, 734 and 743 of the Code only to the extent that the basis adjustments (i) are permitted to be made to one or more items of partnership property under Section 755, and (ii) result in an increase or a decrease in the amount at which the property is carried on the partnership's balance sheet, as computed for book purposes. If the book value of a partnership property exceeds the adjusted tax basis of the property, a basis adjustment property may be reflected in a partner's capital account only to the extent the adjustment exceeds the difference between the book value of the property and the adjusted tax basis of the property prior to the adjustment. 1.07. Interpretation. This section is intended to comply with Reg §1.704-1(b)(iv) and shall be interpreted in a manner consistent with this Regulation.