
Treasury Regulation (26 CFR) Section 1.704-1
Section 704(b) of the Internal Revenue Code determines a partner’s distributive share of income, gain, loss, deduction, or credit based on their partnership interest unless the partnership agreement provides otherwise. The IRS regulations under section 704 establish rules for determining substantial economic effect, including maintaining partners’ capital accounts in accordance with specific rules. Compliance with these capital account maintenance rules provides a safe harbor for respecting partnership agreement allocations.