that the difference between the cost, or value as of March 1, 1913, of such interest constitutes gain or loss for the purpose of computing the income of such partner or estate, and that the remaining partners, as a result of this transaction, have only added to their holdings in the partnership property. They have made a purchase and not a sale, and can have realized nothing in the way of profit or loss.24 (C. B. 3, page 61; Sol. Op. 42.) Assume that a retiring partner's capital account shows a credit balance of $25,000. He sells to a continuing partner for $20,000. If the latter subsequently converts the assets into the equivalent of cash at the book figures he will realize a profit of $5,000. If, however, he purchases fixed assets or fails to convert other assets, the $5,000 credit to the retiring partner's account operates as a reserve and is not true surplus or gain. RULING. .... (3) The effect of the admission of a new partner depends upon the terms of his admission. If, under the terms of the partnership agreement he contributes property or cash to the capital of the partnership he acquires a right, upon dissolution, to a return of his contribution together with his proportionate share of the net profits of the partnership business, and in the meantime to a corresponding share in the net earnings of the partnership. There is no realization on the part of any partner. If, on the other hand, he purchases, for cash, an interest in the existing partnership, it is clear that what he has acquired is simply a right to share in the profits of the partnership during its continuance and in any sum remaining, upon the dissolution of the partnership, after the satisfaction of creditors and of the equities as between the contributing partners. Since this would represent a purchase, by the incoming partner, there could be no realization as to him, and, as to the members of the former partnership, the amount paid by him will clearly be income to them in direct proportion to their respective interests in the former partnership and should be returned by them as such. (C. B. 3, page 61; Sol. Op. 42.) ASSETS OF OLD PARTNERSHIP TAKEN OVER AT CURRENT VALUATION. In the detailed opinion (quoted in part above), the specific question was stated as follows: An opinion is requested whether upon the dissolution of a partnership by the withdrawal or death of a partner and the formation of a new partnership which takes over the assets of the old partnership belonging to the remaining partners, at current valuation, the transaction is to be considered closed so that the increase in the value of the assets as written up on the books of the new partnership over the cost or value as of March 1, 1913, of such assets to the former partners constitutes taxable income to them. The answer given by the Treasury confirms the position taken by the author that unrealized appreciation is not income.25 24 See C. B. 5, page 175; O. D. 1033. In other words, to hold that by valuing his contribution to the partnership at a greater amount than its cost to him, or value as of March 1, 1913, he could realize the difference as income would be to hold that the partner could make a profit by selling to himself. Such a conclusion is wholly at variance with the decisions of the courts and the rulings of this department. Distributions to partners other than in cash.-A partner should return for taxation the exact amount of net profit credited to his capital account in the books of the firm at the end of its fiscal year, after deducting tax-exempt interest, etc. Any payments to a partner charged against his capital account are, of course, not returnable because such payments merely represent distributions of capital or of income already reported and taxed. The same principle applies to partnership distributions other than in cash. For instance, a firm may own property or securities which it wishes to divide among the partners. The amount at which such items appear on the firm's books as assets determines the book value of the partners' interests therein, and when distribution is made the items should be entered by the partnership and the partners at book valuation. After distribution of the assets such book valuation is the basis of gain or loss, except that as to assets acquired before March 1, 1913, the value as of that date is also to be taken into consideration in determining taxable gain or deductible loss on subsequent disposition of such assets. RULING. Where a distribution of partnership profits is made in securities carried in an investment account by the partnership, first each partner must be taxed on the basis of his distributable share of the partnership profits for the year 1917, which partnership profits will be ascertained without claiming any loss with regard to the unsold securities held in the investment account of the partnership; second, the individual partners receiving these securities as a distribution of partnership profits shall determine their future gain or loss when such securities are sold and on the basis of the cost of the securities to the partnership or their market value on March 1, 1913, if acquired before that date. (C. B. 1, page 46; T. B. R. 34.) Distributions by limited partnerships.—All divisions of profits by limited partnerships which are of the corporation type (see page 38 for definition) should be treated by the partners as dividends. The normal tax will have been paid, so that for 1924 the recipients will receive credit on such distributions in calculating their normal tax. Undivided profits are not included in the returns of partners of the limited partnership. XLIII XLIV Deductions for Contributions, Donations, Gifts and Subscriptions Deductions for Extraordinary Obsolescence and Amortization The statute specifies the particular deductions and credits which may be subtracted from gross income to determine taxable net income or from the tax as ascertained under certain sections to determine the net tax to be paid. These deductions and credits are listed separately in the law and differ somewhat according to the character of the taxpayer-whether a corporation or an individual, or whether a resident. or a non-resident. In this book all the peculiarities relating to nonresident aliens, including deductions, are relegated to a special chapter, XLVI. The deductions and credits allowed to others than nonresident aliens, whether individuals or corporations, are consolidated and are treated topically in the series of chapters which follows. Since the law is printed in full in Appendix C and since all the provisions relating to deductions are quoted verbatim under the various individual topics in the succeeding chapters, it is not necessary to give at this point the various lists of allowable deductions. For these the reader is referred to sections 214 (a) and 234 (a) of the statute. Deductions limited to those specified in the statute.-While the tax is levied on "net income received," that term is not precisely the "net income" of the accountant's vocabulary. It is a resultant obtained by subtracting from gross income, as determined in the particular manner described in the preceding chapters, certain specified deductions which are discussed in the chapters which follow. In the language of the regulations: REGULATION. Net income is that portion of the gross income which remains after all proper deductions have been taken into account. (Art. 531.) The law expressly excludes certain items usually regarded as legitimate deductions from income, and the Treasury has held that some other items of ordinary expenses are not allowable. Some of |