Gift-tax on partnership reconstitution rejected where incoming partner's capital and continuing business arrangement provided adequate consideration.

Gift-tax was held not leviable on the retirement of a partner and induction of a new partner in a reconstituted firm where the incoming partner brought in substantial capital and the business continued uninterrupted. The transaction was treated as one integrated commercial arrangement and a mere readjustment of rights, not a transfer of property without adequate consideration. The value introduced by the new partner was regarded as sufficient consideration, so the outgoing partner's change in status did not give rise to a deemed gift, and the addition was unsustainable.

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Issues: Whether gift-tax was leviable on the retirement of a partner and induction of a new partner in a reconstituted firm, where the incoming partner brought in capital and the transaction was part of a continuing business arrangement.

Analysis: The assessment proceeded on the footing that the retiring partner had surrendered goodwill and that the difference represented a deemed gift. The decisive question was whether the transaction resulted in a transfer of property without adequate consideration, or whether it was merely a readjustment of rights on retirement and reconstitution. The incoming partner contributed substantial capital, the business continued without interruption, and the retirement and induction were part of one integrated commercial transaction. On the facts, the value brought in by the new partner constituted adequate consideration, and the outgoing partner's change in status did not create a taxable gift.

Conclusion: Gift-tax was not leviable on the transaction and the addition was unsustainable.

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