For TAX purposes, under Section 752 of the Internal Revenue Code, any increase or decrease in a partner's allocated share of partnership liabilities will cause the outside basis of his or her partnership interest to increase or decrease. However, under GAAP, a partner's capital account cannot be increased or decreased by his or her share of partnership liabilities. Why can't a partner's capital account be increased or decreased by his or her share of the partnership liabilities? 

Multiple Choice

• A partner's capital account can only be increased or decreased by distributions, contributions, undistributed profits and losses.
• GAAP prevents partners' capital accounts from being adjusted by the partnership's liabilities because this would hide the partnership's liabilities in the partners' capital account making it invisible to outsiders. 
• The tax rules are different from the GAAP rules. 
• None of the above.

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