2.4.4. Capital Account
Another concept besides tax basis that is critical to a DPP’s tax calculations is its capital account. Capital account is a record of each partner’s equity investment in the partnership: their contributions, their share of income and losses, and their share of distributions. Inside and outside basis measure this as well, but these also include the partnership’s liabilities, such as debt.
Inside basis might generally be described as the partnership’s capital account plus liabilities, such as debt. But there is another critical difference as well. Contributions of property are recorded in the capital account at fair market value. For tax basis purposes, property contributions are recorded at cost.
When a DPP liquidates, it makes distributions according to each partner’s positive balance in her cap