MEMORANDUM OF DECISION

In these consolidated actions plaintiffs seek a refund of taxes paid to the United States. The court has jurisdiction by virtue of 28 U.S.C. § 1346 (a) (1).

The cases have been submitted for decision on the stipulated facts contained in the pre-trial conference order filed May 1, 1967. Counsel for both parties agree that this is a case of first impression.

Plaintiffs Miles and Allen Yourman each held a one-third interest in a partnership with William Anderson as the third member.

The partnership was dissolved in 1955 via a non-pro-rata distribution of partnership assets. Certain unrealized receivables and inventory items were distributed to Anderson. Plaintiffs received certain capital assets; principally land. The fair market value of what each partner received was equal to the cost of acquisition. However, the inventory items which Anderson received had been completely expensed so that the basis was zero.

Taxes were assessed against plaintiffs on the basis that the non-pro-rata distribution of the partnership assets to plaintiffs constituted a taxable event under the provisions of 26 U.S.C. § 751 (1954).

Plaintiffs contend section 751 does not apply for the reason that language contained in section 751(b) (1) (B) limits the application of the section to a situation where a partnership continues in existence after a distribution to some or all of the partners. The section reads, in part, as follows:

The purpose expressed by Congress for the adoption of section 751 was “to prevent the conversion of potential ordinary income into capital gain by virtue of transfers of partnership interest.” 3 U.S.Code Cong. & Ad. News 1954, p. 4097.

There is no credible reason for giving the language the meaning plaintiffs contend. The only logical interpretation to be given to the language in view of express congressional purpose is that it refers to the facts as they exist after the distribution. A dissolved partnership, as well as a partnership which continues to exist, are “as constituted after the distribution.”

Merten’s Law of Federal Income Taxation agrees that section 751 applies to a non-pro-rata distribution whether or not the partnership remains in existence.

With respect to footnote 9, the following is stated at page 102 of Chapter 1, Sub-chapter K, Section 751.3.

Plaintiffs further contend that if section 751 applies to the distribution, the partnership inventory should not be taken into account for the reason that the inventory items at the time of distribution had not appreciated substantially in value as required by section 751(d). This section provides as follows:

Plaintiffs’ position in this regard is that there must be appreciation in fact as opposed to a bookkeeping appreciation.

It is stipulated that the fair market value of the inventory at the time of distribution was $210,959.70, and that the adjusted basis of the inventory on the books was zero. The stipulation further indicates that the fair market value of the inventory was in excess of ten per cent of the fair market value of all the partnership property.

There would seem to be no logical reason for differentiating between an “actual appreciation” and a “bookkeeping appreciation” caused by having expensed the inventory for tax purposes. If the inventory had been sold by the partnership, the result of such sale would have been that the partners would have each been required to pay ordinary income tax on the sales price less the cost basis on the books which here was zero. If the congressional purpose for the enactment of section 751 is to be observed, the distribution here should be treated no differently than a sale by the partnership, and the result should be the same.

Judgment shall be for defendant.

This memorandum shall constitute the findings of fact and conclusions of law. Counsel for defendant shall prepare, serve and lodge a judgment in accordance herewith.