*32 Decision will be entered under Rule 50.
1. In the taxable year petitioner was 30 years of age and a successful practicing lawyer and unmarried and was living in the same household with his mother, his father, and two brothers, one of whom was a minor 17 years of age. The father was 57 years of age, in good health and ran a retail hardware store with very small gross sales and with little, if any, net profits. Petitioner's mother was a semi-invalid and died during the latter part of the taxable year. Petitioner furnished the chief support of the family, owned the premises where the family lived, and exercised family control. In his return he claimed an exemption of $ 2,500 as head of a family. This the Commissioner denied and granted a personal exemption of $ 1,000 as a single man, plus $ 733 for dependents. Held, that under the facts petitioner was the head of the family under the applicable law and regulations and was entitled to a personal exemption credit of $ 2,500 as head of a family. Annette Loughran, 40 B. T. A. 252, followed.
2. In the taxable year petitioner, in a partnership or joint venture transaction, made a profit on the *33 purchase and sale of a real estate mortgage option. One-half of these profits belonged to petitioner and one-half belonged to his associate. Upon the consummation of the deal, petitioner's associate paid over to him one-half of the profits. Held, petitioner is taxable on his one-half of these profits, notwithstanding that prior to the consummation of the deal, but after he had entered into the joint venture or partnership with his associate, petitioner entered into a subpartnership with his brother in which he agreed that his brother should have one-half of petitioner's share of the profits from the mortgage transaction. Burnet v. Leininger, 285 U.S. 136">285 U.S. 136.
*271 The Commissioner has determined a deficiency of $ 1,369.54 in petitioner's income tax for the year 1939. In determining the deficiency the Commissioner made the following adjustments in the net income of petitioner as reported in his return: (a) Income from profession, $ 2,537.30; (b) net short term gain, $ 4,777.50.
Petitioner does not contest adjustment (a) but does *34 contest $ 4,677.50 of adjustment (b). Adjustment (b) is explained in the deficiency notice as follows:
(b) The income as reported by you in your Federal income tax return for the calendar year 1939 has been increased by the sum of $ 4,677.50 to reflect the correct gain realized by you from your share of the proceeds of the sale of a mortgage on property known as "Shipley Farm", Secane, Delaware County, Pennsylvania.
Net short-term gain has been adjusted as follows: *272
| Reported | Corrected | Increase | |
| Shipley Farm | $ 3,650.00 | $ 8,327.50 | $ 4,677.50 |
| North Stanley Street | 100.00 | 100.00 | |
| Totals | $ 3,650.00 | $ 8,427.50 | $ 4,777.50 |
In his income tax return petitioner claimed a credit of $ 2,500 as the head of a family. In explanation of this claimed credit, petitioner stated in schedule J of his return as follows: "Single, but keeps home and sends younger brother to college." Petitioner in his return claimed no credit for dependents. In his determination of the deficiency the Commissioner disallowed the claimed credit of $ 2,500 as head of the family, and instead allowed a personal exemption of $ 1,000 as a single man and a credit for dependents of $ 733.33. *35 Petitioner assigns as error the action of the Commissioner in disallowing a credit of $ 2,500 as head of a family and substituting therefor a personal exemption of $ 1,000. The assignment of error makes no mention of the action of the Commissioner in allowing petitioner a credit of $ 733 for dependents.
In passing upon the issues raised by the pleadings, we shall treat as issue 1 the correctness of the Commissioner's disallowance of the $ 2,500 credit as head of a family and we shall treat as issue 2 the correctness of the Commissioner's action in adding to petitioner's net income $ 4,677.50 net short term gain from the "Shipley Farm" transaction.
FINDINGS OF FACT.
The petitioner resides in Philadelphia, Pennsylvania, and his income tax return for the year 1939 was filed with the collector of internal revenue at Philadelphia, Pennsylvania.
Issue 1. -- In 1939 petitioner was age 30; his father, Oscar Richter, age 57; his mother, Minnie Richter, age 53; his brother, Israel, age 22 or 23; and his brother, Emanuel, age 17; and all lived together in one household in Philadelphia, on premises owned by petitioner.
In 1939 petitioner was practicing law; his mother was a housewife who*36 managed and took care of the home and was in poor state of health; his brother, Israel, had graduated from college the year before and was not employed; and his brother, Emanuel, was attending school at the University of Pennsylvania. In 1939 and for some years prior thereto petitioner's father had a hardware store in Philadelphia, with sales of $ 3 and $ 4 a day and with very little net earnings, if any. He used some of the gross receipts from the business to help defray household expenses, but, by reason of using such funds in that manner, he was unable to pay the bills for some of the merchandise which he purchased for resale in his store, and petitioner in several instances *273 during the taxable year paid these bills for his father out of his own personal funds. The father, Oscar Richter, was in good health, sound in body and mind, and devoted to his family. He was, however, more or less disinterested in work and apparently did no great amount of it. He preferred to listen to the radio and close up his store and take long walks, rather than to attend to business. He and his wife formerly owned the property in which they lived and during the years of the depression*37 they lost it. It was repurchased in 1935 by petitioner and continued to be used as the family residence. Petitioner paid the taxes on this property, paid the interest on the loan against it, made partial payments on the principal, and also paid for extensive repairs to keep the premises in good, livable condition. Petitioner also in the taxable year paid telephone bills, hospital and doctors' bills for his mother, hotel expenses for his mother's trip to Atlantic City, funeral bills for his mother, clothing bills for himself, his two brothers, and his father, paid for the services of a maid in the household, tuition and other expenses for his brother, Emanuel, hardware and electrical supplies for his father's store, and improvements to his father's store, and also furnished spending money for his brother, Israel, who was unemployed.
Petitioner's brother, Israel, in 1932 had begun a career as an amateur boxer. Through the years from 1932 to 1934 he became nationally famous, winning the amateur heavyweight boxing championship. He wanted to be a professional boxer. He was well known as a boxer and fought with the leading professional boxers as a sparring partner and trainer. In*38 1934 he was offered an athletic scholarship at Yale University, based on his physical educational training and the fact that he was a nationally known boxer. At the same time he was offered a scholarship at Pennsylvania State College. It was petitioner who decided that he should accept the scholarship at Pennsylvania State College and prevailed upon him to do so. It was also petitioner who decided where his younger brother, Emanuel, should go to school, and it was he who paid the tuition and other expenses. It was petitioner who selected the doctors who treated his mother in her illness and the hospital where she should stay as a patient while receiving treatment, and it was he who paid the medical bills and also the bills for hospitalization. Petitioner's mother, Minnie Richter, died sometime in the year 1939 and petitioner paid all funeral and burial expenses, amounting to several hundred dollars. The exact date of her death is not disclosed in the record, but it was in the latter part of 1939.
During the year 1939 petitioner was the head of a family as that term is used in section 25 (b) (1), Internal Revenue Code, and as defined by the Treasury regulations promulgated thereunder.
*39 *274 Issue 2. -- From the year 1934 petitioner had been associated with Harry Sklarow (hereinafter otherwise referred to as Sklarow) in the purchase of real estate for speculation purposes, to make a profit on resale and not for the purpose of maintaining it for income. Sklarow had some 30 or 40 years' experience in real estate and was in 1939, and still is, a real estate broker. Sklarow has never done any real estate development or subdividing work, nor has petitioner. Their dealings were mostly with improved real estate, generally with ordinary two-story residences located in the city of Philadelphia.
On or about August 12, 1939, Sklarow told petitioner it was possible to purchase for around $ 10,000 the assignment of a first mortgage on some 107 acres of ground in Delaware County, known as the Shipley farm. This mortgage was in the original face amount of $ 64,800 and was executed by Samuel Crothers, who remained part owner of the property, and by August 12, 1939, it had been reduced to $ 44,081.50. It was in default according to its terms. This mortgage was held by eight different people, one living in Italy, one in Daytona Beach, Florida, two at Southern Pines, *40 North Carolina, one at Whitford, Pennsylvania, and the balance in and about Philadelphia. They were all represented by the Girard Trust Co. of Philadelphia (hereinafter otherwise referred to as the bank).
Petitioner decided to take a chance with Sklarow at buying this mortgage for the somewhat lower price of $ 7,500, giving Sklarow his check for $ 500 for the deposit. Sklarow then on August 12, 1939, gave the Girard Trust Co. a check for $ 500, which the bank on the same date acknowledged as a deposit for the purchase of this mortgage. The balance of $ 7,000, less a 5 percent commission, was to be paid upon transfer of a good and marketable title, the bank undertaking to secure the necessary consents to the assignment of the mortgage from the eight heirs, who were scattered over this country and abroad. The purchasers were to take subject to the outstanding taxes.
About the "second or third or fourth day" after Sklarow had received this letter from the bank, he was approached by Samuel Crothers and his brother-in-law, Gerald P. Kynett, who were part owners of the property covered by this mortgage, with a view to purchasing the rights which Sklarow and petitioner had just acquired*41 from the bank. On August 21, 1939, Sklarow agreed with Kynett to sell for $ 24,000 "his agreement to purchase the said mortgage" or "the said mortgage" if he has acquired the same, acknowledging receipt of a $ 100 deposit, the balance to be paid within 30 days. The settlement date was later extended to September 28, 1939. On September 28, 1939, final settlement was made by Sklarow with the other parties in interest and Sklarow that same day caused petitioner to be paid *275 his share of the net profits of the deal. In his Federal income tax return for 1939 petitioner reported $ 3,650 as short term gain from the sale of the mortgage above described.
In making the purchase and sale of the mortgage option Sklarow knew nothing about any participation in the transaction by Israel Richter. Nowhere in the deal was Israel Richter recognized as a party to it.
After petitioner had given Sklarow his check for $ 500 to use as a deposit with the bank as earnest money to secure the purchase of the mortgage, petitioner had a conversation with his brother, Israel, in the presence of his mother, in which he agreed to make Israel a subpartner with him in whatever profits he might make from*42 the venture, Israel agreeing that if the property was ultimately acquired under foreclosure of the mortgage he would lend his services toward putting it on the market as a subdivision. He had no training or experience whatever in subdividing real estate and putting it on the market. After the transaction was consummated and petitioner had received from Sklarow a check for his one-half of the profits, he paid over to Israel approximately one-half of the profits which he received. This payment to Israel was not made in one lump sum, but was included in several payments which extended into 1940 and approximated one-half of petitioner's share of profits from his joint venture with Sklarow. The last of these payments is evidenced by a check for $ 255.40 dated November 15, 1940, which was paid to Harry E. Martin, Inc., Philadelphia, Pennsylvania, and was paid to that corporation for the benefit of Israel Richter in the purchase of an automobile for his personal use.
In an income tax return filed for the year 1939 by Israel Richter he listed as net income $ 4,300 and paid tax thereon. He did not state on this return the source of this $ 4,300 income.
Israel Richter was not a party to*43 the joint venture or partnership between petitioner and Harry Sklarow which negotiated the purchase and consummated the subsequent resale of the Shipley farm mortgage option. Israel Richter was a subpartner with petitioner in petitioner's one-half share of the profits to be derived from the purchase and sale of the Shipley farm mortgage option by the joint venture or partnership between petitioner and Sklarow.
OPINION.
The issues in this proceeding may be summarized as follows:
(1) Whether in the taxable year petitioner was the head of a family and entitled to the $ 2,500 exemption which the statute provides for the *276 head of a family for the taxable year. The petitioner was a single man, but was living with his mother and father and two brothers in one household. Petitioner claims to have paid practically all the expenses of the household and to have exercised family control over his invalid mother and his two brothers, and for these reasons he claims he was the head of a family.
(2) Whether the entire gain of $ 8,327.50 from a real estate mortgage transaction should be taxed to petitioner, as the Commissioner contends, or whether only one-half thereof should be taxed *44 to petitioner and the other one-half should be taxed to petitioner's brother, Israel Richter. It is petitioner's contention that he agreed with his brother to take him in with a one-half interest in petitioner's part of the profits from this transaction, and that they were partners or joint venturers to that extent. It is the Commissioner's contention that Israel Richter was not a participant in this transaction and that anything which petitioner paid his brother out of the profits which he received from this transaction was either a gift or a mere assignment of income and that in all events petitioner was taxable on the entire amount of profits which he received from the transaction.
We shall take up the issues in their order.
Issue 1. -- Whether petitioner was the head of a family in 1939 and is entitled to a personal exemption of $ 2,500, is governed by section 25 (b) (1), Internal Revenue Code, and section 19.25-4, Regulations 103, printed in the margin. 1 It will be noted from a reading of section 25 (b) (1), that it does not define "head of a family." That has been left for the Treasury regulations. Four essentials are established by the regulations to entitle the taxpayer*45 to the $ 2,500 exemption allowed by the 1939 statute to the head of a family: (1) Actual support; (2) maintenance of the home; (3) right to exercise family control; and (4) actual relationship by blood, marriage, or adoption, supported by legal or moral obligation. See sec. 32.09, vol. 5, Mertens Law of Federal Income Taxation, and cases there cited. See also Mim. 5327, prescribing rules governing the allowance of personal exemption as head of a *277 family and credit for dependents, Cumulative Bulletin 1942-1, p. 81. All four of the enumerated essentials must exist before a taxpayer is entitled to claim exemption of $ 2,500 as the head of a family under section 25 (b) (1) in 1939. If one or more of them is lacking the claim must fail.
*46 It seems to us that petitioner has established by the evidence all four of the essentials which the regulations prescribe. (1) It is clear that petitioner provided most of the financial support for the family. The father operated a small hardware store, but the testimony is to the effect that the store had very little business and little, if any, net earnings. Occasionally the father used some of the gross receipts from the store to meet the family expenses, but whenever he did so petitioner had to pay from his own personal funds bills which the father had contracted for merchandise to sell in the store. On the whole, it was petitioner who provided the funds for the support of the family.
(2) It was petitioner who maintained the home for the family. The premises where the family lived were formerly owned by Oscar Richter and his wife, but during the depression they lost them, and in 1935 petitioner repurchased them and they have remained the family residence ever since, petitioner paying all taxes, cost of repairs, interest on the mortgage, and payments on the principal of the mortgage.
(3) It was petitioner who actually exercised the family control. It was he who determined*47 what physicians should treat his mother in her illness and what hospital she should enter while undergoing treatment. It was he who paid all the bills for medical treatment and hospital care. He also paid all funeral expenses following his mother's death in the latter part of 1939. It was petitioner who decided what college his brother, Emanuel, who was a minor 17 years of age, should attend, and it was the petitioner who paid all expenses. The evidence shows that petitioner's father made no effort to exercise family control. He was quite content to leave such matters to petitioner, his eldest son, who was willing and able to provide the family support. Paragraph 7 of Mim. 5327, to which reference has already been made, deals with the subject of "Right to Exercise Family Control and Obligation to Support," and, among other things, it says:
7. The right to exercise family control is generally the right to determine the manner in which the affairs of the household shall be conducted and this right falls naturally to him who furnishes the means for its support and maintenance. * * *
Such was the effect of our holding in Annette Loughran, 40 B. T. A. 252.*48 In that case the Commissioner seemed to have made much the same contention as he makes here, to wit, that at common law the husband and father is the head of the family and that this position *278 is not lost by reason of actual failure to provide support for the family. In ruling upon that contention, among other things, we said:
* * * It is true that under local law a husband is a head of a family and has a primary legal duty to support his wife; nevertheless, where he has neglected his legal duty and failed to exercise his legal rights as a head of a family, then, in applying a provision of a revenue act, we believe that it is in accord with the intendment of Congress to hold that another person who acts as head of the family under exercise of a moral obligation was the head of the family for purposes of taxation. * * *
(4) Actual relationship by blood, marriage, or adoption, supported by legal or moral obligation. There can be no question, we think concerning the fulfillment of this essential required by the regulations under the facts of the instant case.
Therefore, in pursuance of the Treasury regulations, supra, defining who is "head of the family," which have been*49 approved many times by this and other courts, and following Annette Loughran, supra, we sustain petitioner as to issue 1.
It is, perhaps, proper that we mention that petitioner in his income tax return did not claim any credit for dependents. The Commissioner in his determination of the deficiency disallowed petitioner's claimed exemption of $ 2,500 as head of the family and substituted a personal exemption of $ 1,000 as a single man. In addition the Commissioner allowed petitioner a credit of $ 733 for dependents. The assignment of error in the petition attacks the correctness of the Commissioner's action in disallowing petitioner's claimed credit of $ 2,500 as the head of a family, but makes no mention of the Commissioner's determination that petitioner was entitled to a credit of $ 733 for dependents. Respondent in his answer does not affirmatively allege that he erred in allowing $ 733 credit for dependents. The credit for dependents which the Commissioner has allowed is apparently based upon a credit of $ 400 for Emanuel Richter, who was a minor maintained in the household for the entire year 1939, and the remaining $ 333 is apparently based*50 upon a computation for the part of the year in which petitioner's mother was living, she having died after a long illness in the latter part of 1939. This credit for dependents granted to petitioner in the determination of the deficiency appears to be in accordance with the Treasury regulations. At any rate no issue is raised by the pleadings concerning this credit for dependents and, therefore, in a recomputation under Rule 50 it will remain undisturbed.
Issue 2. -- It is clear that petitioner's profits from the purchase and sale of the Shipley farm mortgage option were from a joint venture, or partnership, which he had with Harry Sklarow, and petitioner's brother, Israel, was in no sense a member of that partnership or joint *279 venture. Harry Sklarow testified that Israel was not a party in the deal and that he did not know him in any of the stages of the transaction. We do not understand that petitioner contends to the contrary, because he has requested us to make the following findings of fact with respect to the Shipley farm mortgage transaction:
24. That Harry Sklarow and B. Nathaniel Richter entered said deal as equal partners.
25. That B. Nathaniel Richter *51 had specifically entered into a partnership agreement with Israel L. Richter as to the remaining one-half of the deal; B. Nathaniel Richter to provide the money, Israel L. Richter to develop, sell, distribute and promote a lot subdividing project.
Thus the substance of petitioner's contention is that, while it is true that he and Harry Sklarow were partners and joint venturers in the purchase and sale of the Shipley farm mortgage and each was entitled to receive one-half the profits therefrom, nevertheless, petitioner is taxable on only one-half of his share of the profits because, prior to the earning of his share of the profits, he had entered into a subpartnership agreement with his brother, Israel, under which Israel was to receive a one-half interest in petitioner's share of the profits. Even though petitioner did enter into a subpartnership agreement with Israel under which Israel was to receive one-half of petitioner's share of the profits from the deal, and subsequently payments were made to Israel of approximately one-half of petitioner's share of the profits, it does not relieve petitioner from taxation on his one-half share of the profits which were received by him from*52 the joint venture or partnership between petitioner and Sklarow. See Burnet v. Leininger, 285 U.S. 136">285 U.S. 136; George M. Cohan, 11 B. T. A. 743; affd., 39 Fed. (2d) 540.
Following the Supreme Court's decision in Burnet v. Leininger, supra, we hold that in the instant case whatever right Israel had to one-half of petitioner's share of the profits from his partnership or joint venture agreement with Sklarow in the Shipley farm mortgage deal was derived from his agreement with petitioner to be a subpartner in his interest and rested upon the distributive share which petitioner had and continued to have as a member of the partnership or joint venture of Sklarow and Richter, in which joint venture or partnership Israel was in nowise a member. The amount of petitioner's share of the net profits in that partnership or joint venture is not in dispute. Petitioner concedes that it is as computed by the Commissioner in his deficiency notice. These profits are all taxable to petitioner under Burnet v. Leininger, supra.
The Commissioner*53 is sustained under issue 2.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 25. CREDITS OF INDIVIDUAL AGAINST NET INCOME.
* * * *
(b) Credits for Both Normal Tax and Surtax. -- There shall be allowed for the purposes of the normal tax and the surtax the following credits against net income:
(1) Personal Exemption. -- In the case of a single person or a married person not living with husband or wife, a personal exemption of $ 1,000; or in the case of the head of a family or a married person living with husband or wife, a personal exemption of $ 2,500. * * *
Sec. 19.25-4 [Regulations 103]. Personal exemption of head of family↩. A head of a family is an individual who actually supports and maintains in one household one or more individuals who are closely connected with him by blood relationship, relationship by marriage, or by adoption, and whose right to exercise family control and provide for these dependent individuals is based upon some moral or legal obligation. * * *