@helpfuluser I am not sure you have read the 704(b) regulations and if you have, then you do not understand them.
All partnership tax allocations must have substantial economic effect or the allocation is based strictly on the ownership in the partnership. These rules are complicated and misunderstood by many.
The substantial economic effect rules come into play if there are special allocations, which appears to be the facts in the question. If the special tax allocation does not have substantial economic effect, then the default is the allocation is based on the partner's interest in the partnership (PIP rules).
Your comment that most partnerships don't use those rules is because they allocate based on the PIP.
There are provisions that get around the substantial economic effect rules, but one of those provisions require a capital account deficit restoration clause in the partnership agreement / LLC operating agreement. I have yet to see an LLC agreement that has that clause which is due to the limited liability of an LLC member. There could be a provision for a qualified income offset, but once again, doubtful anyone preparing their own partnership return understands those provisions. Finally, the capital accounts must be maintained in accordance with the 704(b) regulations and those capital accounts are NOT book capital account nor are they tax capital accounts.
If you are using any special allocations, then I strongly recommend you consult with a tax professional that understands the Section 704(b) rules.
*A reminder that posts in a forum such as this do not constitute tax advice.
Also keep in mind the date of replies, as tax law changes.
