The Internal Revenue Bulletin is the authoritative instrument of the Commissioner of Internal Revenue for the announcement of official rulings of the Internal Revenue Service, and for the publication of Treasury Decisions, Executive Orders, legislation, and court decisions pertaining to Internal Revenue matters.

It is the policy of the Service to publish in the Bulletin all substantive and procedural rulings of importance or general interest, the publication of which is considered necessary to promote a uniform application of the laws administered by the Service. It is also the policy to publish all rulings which revoke, modify, amend, or affect any published ruling. Rulings relating solely to matters of internal management are not published. The rulings are prepared in the various divisions of the National Office, including the Office of the Chief Counsel for the Internal Revenue Service. All published rulings have received the consideration and approval of the Chief Counsel.

Revenue Rulings reported in the Bulletin do not have the force and effects of Treasury Department Regulations (including Treasury Decisions), but are published to provide precedents to be used in the disposition of other cases, and may be cited and relied upon for this purpose. However, since each published ruling represents the conclusion of the Service as to the application of the law to the entire state of facts involved, revenue officers and others concerned are cautioned against reaching the same conclusion in other cases, unless the facts and circumstances are substantially the same. In applying rulings published in the Bulletin, personnel of the Service will, of course, consider the effect of subsequent legislation, regulations, court decisions, and rulings.

Each ruling is designated as a "Revenue Ruling" and should be cited by reference to the year of issuance and the Bulletin and page where reported. Thus, Revenue Ruling No. 427, which is reported on page 6 of Bulletin No. 27 for 1955, should be cited as "Rev. Rul. 55-427, I. R. B. 1955-27, 6," until it appears in the Cumulative Bulletin, when it should be cited as "Rev. Rul. 55-427, C. B. 1955-2,-." Rulings are keyed to the applicable sections of the Internal Revenue Code and regulations.

The Bulletin is published weekly, and the contents thereof are consolidated at least semiannually into a permanent Cumulative Bulletin. Persons so desiring may subscribe to the Bulletin through the Superintendent of Documents, as indicated below.

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DEPOSITED BY THE UNITED STATES OF AMERICA

FOREWORD

The Internal Revenue Bulletin is prepared in six parts. Part I includes rulings and decisions which are based on the application of provisions of the Internal Revenue Code of 1954, and unless otherwise stated in the ruling or decision, are published without consideration as to any application of the provisions of the Internal Revenue Code of 1939 or related public laws. Part II includes rulings and decisions which are based on the application of provisions of the Internal Revenue Code of 1939 and related public laws and, unless otherwise noted therein, are published without consideration as to any application of the provisions of the Internal Revenue Code of 1954. Part III contains rulings and decisions pertaining to the various alcohol taxes. This part is subdivided into three subparts according to matters issued under the Internal Revenue Code of 1954 (Subpart A), the Internal Revenue Code of 1939 (Subpart B), and the Federal Alcohol Administration Act (Subpart C). Part IV contains tax legislation and treaties, including related Committee and Conference Reports. This part is subdivided into three subparts according to legislation (Subpart A), tax conventions, Treasury Decisions and Revenue Rulings issued with respect thereto (Subpart B), and Committee Reports (Subpart_C). Part V is devoted to administrative and miscellaneous matters. Part VI includes general announcements which are deemed to be of interest to the general public. With the exception of the disbarment list included in this part, none of the other announcements will be consolidated in the Cumulative Bulletin 1955-2.

The Highlights of this Bulletin include a reference to each item published in the Bulletin. Because these are grouped according to the type of tax involved, the Highlights for a particular issue serve as an index to matters published therein. The Bulletin service carries a cumulative index on a monthly basis. That index appears in the first Bulletin for each month and indexes matters published during the preceding month.

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PART II

RULINGS AND DECISIONS UNDER THE INTERNAL REV. ENUE CODE OF 1939 AND RELATED PUBLIC LAWS

Rulings and decisions published in Part II of the Internal Revenue Bulletin are based on the application of provisions of the Internal Revenue Code of 1939 or the related public laws involved and, unless otherwise noted therein, are published without consideration as to any application of the provisions of the Internal Revenue Code of

1954.

SECTION 113 (a).-ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS: BASIS (UNADJUSTED) OF PROPERTY

REGULATIONS 118, SECTION 39.113(a) (13)-2: Read

justment of partnership interest.

Annual assessments to replenish capital of the partnership should be added to the partner's basis of his interest in the partnership. See Rev. Rul. 56-5, below.

SECTION 117 (a).-CAPITAL GAINS AND LOSSES:

DEFINITIONS

REGULATIONS 118, SECTION 39.117 (a)-1: Meaning

of terms. (Also Section 113 (a) (13); Section 39.113 (a) (13)−2.)

Rev. Rul. 56-5

Goodwill units created by a partnership agreement constitute an integral and indivisible part of a partner's capital investment, and annual assessments paid by a partner to replenish the partnership capital based on his share of the firm's earnings are capital contributions which increase the basis of the partnership interest provided that the income tax is paid thereon. Any gain or loss realized upon the partial or complete liquidation of an individual's partnership interest, a capital asset, is capital in nature and is measured by the difference between the amount received for the partnership interest or portion thereof and the basis of such interest or portion thereof.

Advice has been requested with respect to the treatment of a partnership interest when a partner partially or completely retires from the partnership under the circumstances presented below.

The interest of each partner in the instant partnership is expressed in units owned by him. At one time the partnership articles pro

vided for subdivision of partnership units into capital and goodwill units. Accordingly, some of the partners own partnership units consisting of both capital and goodwill units while others own only capital units. The subdivision was used to measure the partnership interest of a withdrawing partner. By later amendments to the articles, the partnership goodwill was recorded on the firm's book at a nominal amount and henceforth was regarded as a partnership asset having no value for purposes of determining the value of the member's partnership interest. In order to replenish the firm's capital after a large amount had been paid to the estate of a deceased partner, the partners agreed to provide additional working capital by annual assessments based on the number of partnership units held by each. The assessments were credited to an "intangible asset" account and represented a proportionate part of each partner's share of the firm's profit.

After having paid the assessment for two years, the taxpayer, who was a partner in the firm, partially retired. One of the above assessments was paid for the year of his partial retirement. Pursuant to the provisions of the articles then in force, he received from the firm cash and cash equivalents constituting his distributive share of the partnership net income for the taxable year of his partial retirement and consideration for the liquidation of two-thirds of the units representing his partnership interest. No part of the amount received by the partner in consideration of the liquidation of a portion of his partnership interest was attributable to firm earnings not yet subjected to tax whether realized or unrealized by the firm prior to such liquidation. The remaining one-third of his units continue to be subject to the risks and profits of the business for five years and he is obliged to pay annual assessments computed on the basis of his reduced profits share. Pursuant to the partnership agreement, the partner received nothing with respect to his investment in goodwill units nor with respect to the annual assessments paid by him.

The partner's goodwill units were not separate investments in and of themselves which he could dispose of without affecting his capital units but both constituted an integral and indivisible part of his partnership interest. The cost of such goodwill units to a partner is not separately deductible by him in whole or in part upon partial or complete liquidation of his partnership interest. Such cost, however, is reflected in the cost of his partnership interest and is part of the basis therefor. The annual assessments which he paid are not deductible by him. Since the purpose of those payments was to replenish the firm's working capital, they are capital contributions, that is, capital expenditures for the partnership interest. As such, they are a part of his partnership interest even though they can be reflected in the liquidation value of such interest only upon termination of the firm and not upon his retirement. Since these annual asessments are a part of the member's partnership interest, there can be no depreciation with respect to them.

Upon his partial or complete retirement, the member realizes gain or loss measured by the difference between the amount received for his partnership interest or portion thereof and the basis of such interest

or portion thereof. Since the whole of the basis of the member's partnership interest was allocable to his entire interest, two-thirds of his basis was allocable to two-third of his interest.

G. C. M. 26379, C. B. 1950-1, 58, holds that the sale of a partnership interest is a sale of a capital asset which is subject to the provisions of section 117 of the Internal Revenue Code of 1939. The disposition of a partnership interest, even though it be by way of liquidation thereof, is a capital transaction. Any gain or loss realized upon partial or complete liquidation of a partnership interest is capital in nature. The assessment paid by a partner for a year in which he partially or completely retires should be treated in the same manner as assessments paid by him in years prior to his retirement, that is, as an addition to his basis in his partnership interest, provided that the income tax is paid thereon.

Accordingly, it is held that goodwill units created by a partnership agreement constitute an integral and indivisible part of a partner's capital investment, and annual assessments paid by a partner to replenish the partnership capital based on his share of the firm's earnings are capital contributions which increase the basis of the partnership interest provided that the income tax is paid thereon. Any gain or loss realized upon the partial or complete liquidation of his partnership interest, a capital asset, is capital in nature and is measured by the difference between the amount received for the partnership interest or portion thereof and the basis of such interest or portion thereof.

SECTION 812 (b).-NET ESTATE: EXPENSES, LOSSES, INDEBTEDNESS, AND TAXES

REGULATIONS 105, SECTION 81.37: Taxes.

Rev. Rul. 56-6

Deficiencies in Federal income taxes assessed against the decedent resulting from nonrecognition of his minor son as a member of a partnership are deductible from decedent's gross estate in the full amount paid by decedent's estate.

Advice has been requested relative to the amount allowable as a deduction from the decedent's gross estate for deficiencies in Federal income taxes assessed against the decedent resulting from a determination by the Internal Revenue Service that the decedent's minor son may not be recognized as a member of an alleged family partnership. The decedent made a purportedly absolute transfer of an interest în his business to his minor son. He filed a gift tax return for the year of the alleged transfer, reporting a gift to his son. Thereafter, the business was conducted in partnership form. However, for certain years decedent's minor son was not recognized as a member of a partnership for Federal income tax purposes, but no action was taken in a State court to declare the partnership invalid as to the son. Deficiencies in Federal income taxes were assessed against the decedent's estate and overassessments of tax were credited to the son. It appears that the deficiencies are collectible in full from the estate, the son's guardian not having consented to crediting the overassessments, which have been refunded to the guardian for the benefit of the son, and no