If a partnership has debt, the debt generally serves to increase the partner's outside basis. This statement is true.
A capital interest is a partner's share of the net assets of a partnership at liquidation. The partner's outside basis is increased by the amount of the compensation income recognised. Unless an exception is met, a partner who contributes services to a partnership in exchange for profits interest does not recognise compensation income.
The outside basis and the capital account have very similar calculations, cash distributions, and allocation of income and loss. However, the outside basis also includes a share of any debt that the partner has adopted as part of its partnership investment.
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