This discussion is based on my practice that:

1.  NO Section 754 adjustment is recorded on the book.

2.  The book balance sheet is used for Sch L on F1065.

The Sec 754 adjustments has to show up (on line 7a) of M1.  This is because Line 9 of M1 is NET of the 754 adjustment.   The Line 7a amount is needed to account for the book (NO 754 adjustment) and tax (YES for 754 adjustment) .

Without including the 754 adjustment on Line 7a, M1, your capital account balance (Line 9 of M2) would be off from your Sch L capital account balance.