M and N formed an equal partnership several years ago to which each contributed cash. On January 1 of the current year the partnership holds cash of $1,000, and equipment with a basis of $1,750 and a fair market value of $4,500. M and N each have an outside basis in their partnership interest of $1,375.

On January 1, P contributes cash of $2,750 and becomes a full one-third partner in the partnership.

A. Prepare a tax basis balance sheet and a 704(b) basis balance sheet on January 1 after P has contributed his cash.

B. Does creating 704(b) capital accounts for L and M have any impact on the tax basis of their partnership interests?