In order to meet the economic effect safe harbors of Section

In order to meet the economic effect safe harbors of Section 704(b) regulations, which of the following statements is the most true? a. A negative capital account must be restored by the end of the tax year. b. A partner need not be obligated to restore a negative capital account balance. c. Capital accounts must be maintained on a book basis. d. Liquiidation proceeds must be paid in accordance with positive and negative capital account.

Solution

correct option is \"c\"-Capital accounts must be maintained on a book basis

According to safe harbors rule ,There are 3 condition to be met:

1)capital account must be properly maintained on book basis rather on tax basis

2)At the time of liquidation,distribution should be on the basis of positive capital balance.

3)partner should restore the deficit balance withing the time given (not before the tax year)

so Capital account are always maintained on book basis rather than tax basis.