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IRC 704(b) has to do with special allocations of partnership items that basically are made on some basis other than the partnership ownership or profit/loss percentage interests. It is not a set of books on this basis; just the accounting for certain items. The basic thrust of the regulations are that any special allocation method should have economic substance, not just an allocation based solely on tax attributes.
Here's a link to an IRS Audit Guide on the topic of IRC 704(b) allocations:
Tax books in general refers when the accounting for financial transactions
is done differently for income tax
reporting purposes than for some other purpose such as financial reporting. The best and most common example would be keeping the partnership books on the "accrual basis" for financial reporting purposes and keeping the books on the "cash basis" for income tax reporting purposes.
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