*5 Decisions will be entered under Rule 50.
Petitioner, and three other men who were engaged in the real estate business, jointly purchased 68 improved residential lots which were heavily encumbered with liens for delinquent taxes, settled and financed the removal of such liens, sold the lots to various purchasers, and divided the profits and expenses in equal shares. Held, that petitioner and his associates were members of a joint venture; that the lots were held primarily for sale to customers in the ordinary course of the business of such venture and were not capital assets; and that petitioner's share of the net profits is taxable as ordinary income. Held, further, that in computing petitioner's share of such profits, he is entitled to allowances for one-fourth of the real estate taxes paid by the group in the years involved; and the amounts of such allowances are determined.
*682 Respondent determined deficiencies in the income taxes of petitioners, as follows:
| Docket No. | Petitioner | Year | Deficiency |
| 41058 | J. Roland Brady | 1947 | $ 822.78 |
| 41059 | J. Roland Brady and Marian E. Brady | 1948 | 761.86 |
*6 The issues for decision are:
(1) Where J. Roland Brady and three other persons joined in the purchase of 68 improved residential lots, adjusted, financed, and removed liens for delinquent taxes thereon, and then sold the lots to several purchasers, should his one-fourth share of the profits therefrom be taxed as ordinary income or as capital gain?
(2) In computing petitioner's share of the above-mentioned profits, what allowances should be made for real estate taxes paid?
*683 FINDINGS OF FACT.
The petitioners are husband and wife, residing in Pittsburgh, Pennsylvania. The husband filed an individual return for the year 1947, and he and his wife filed a joint return for 1948. Both returns were prepared in accordance with the cash receipts and disbursements method of accounting; and both were filed with the collector of internal revenue for the twenty-third district of Pennsylvania, at Pittsburgh.
J. Roland Brady (hereinafter called the petitioner) was executive secretary of the Pittsburgh Real Estate Board from 1927 to 1937. Beginning in the latter year, he was employed by the Lawyers Title Company in Pittsburgh, and he thereafter continued to be so employed, except for 1 *7 year from March 1947 to March 1948 when he worked as a salesman for a concern that dealt in interior decorating supplies. At the time of the hearing he was vice president of said Lawyers Title Company. Since 1941 he had held a real estate broker's license, but he had never held himself out to the public as a broker and had never collected any commissions in such capacity.
In 1946 an individual named George Goodyear offered to sell petitioner his equity in 68 improved residential lots located in the South Hills section of Allegheny County near Pittsburgh, of which the title was encumbered by liens of from $ 350,000 to $ 400,000 for delinquent real estate taxes and special assessments owing to Mt. Lebanon Township, Mt. Lebanon School District, and Allegheny County. Goodyear had been a real estate developer and builder in the Mt. Lebanon area; he had previously owned several hundred lots in that section, but due to restrictions on building materials imposed during World War II, the 68 lots had not been sold; and he had, prior to 1946, given up his business in the South Hills section and moved to North Carolina. The lots were fully improved with streets, curbs, sewers, and utilities. *8 They were located in one of the best communities in the area where very few lots of such type were available; and for several years there had been a very heavy demand for such lots from builders. Petitioner believed that, if the liens which encumbered the title could be cleared on a satisfactory basis, the lots could be resold at a profit; but that otherwise any moneys spent in acquiring Goodyear's equity would be lost.
Petitioner was financially unable to handle the lots alone, but he arranged with three friends who were in the real estate business, Donald Slocum, John J. Lawler, and Thomas S. Christo, to join with him in handling them on the basis of equal one-fourth share interests. Slocum was a licensed real estate dealer who had carried on that business for nearly 40 years, who advertised as a real estate broker, *684 and who derived a substantial portion of his income from real estate sales; he had known petitioner for many years and had previously joined with Lawler in handling other real estate transactions. Lawler's business was similar to that of Slocum, except that he engaged principally in the management of real estate and had little brokerage activity; he had*9 often held quarter, third, and half interests in real properties. Christo was a member of the Pittsburgh Real Estate Board who advertised and otherwise held himself out as being in the real estate business and who derived a substantial portion of his income from real estate sales.
Petitioner and the three above-mentioned parties (hereinafter called associates) bought Goodyear's equity in the 68 lots for a total price of $ 7,500. Each made an equal contribution of $ 1,875. The four associates took title to the lots, subject to the above-mentioned liens, in the name of Frank B. Ewing, who was a brother-in-law of petitioner. The date of purchase was on or about June 2, 1946. The associates entered into a written agreement with Ewing, for the purpose of protection.
After acquiring Goodyear's interest, petitioner and his three associates conferred with the township commissioners of Mt. Lebanon with a view to reducing and removing the $ 350,000 to $ 400,000 delinquent tax liens. They offered to pay $ 60,000 in complete settlement of the same. The argument which they presented to the commissioners in support of their offer was that the lots had remained vacant for some time and that*10 delinquent taxes thereon were increasing, but that if their offer were accepted, the property could be placed in stronger hands with the result that homes would be built thereon and tax revenues would flow from assessments of increased amounts. The township commissioners rejected the offer, but made a counteroffer to settle and satisfy all liens for the amount of $ 68,000. This counteroffer was accepted by petitioner and his associates. Petitioner's part in the negotiations was principally that of a listener.
Petitioner went into the deal with the intention of reselling the property at a profit. Neither he nor his associates intended to use the property personally or to build thereon. None of them had ever engaged in building activities. There were no buildings on the lots capable of producing income.
Petitioner and his associates financed and paid the adjusted delinquent taxes by each contributing $ 2,000 in cash, and by arranging a bank loan with the Potter Title and Trust Company of Pittsburgh (hereinafter called the Potter Bank) to cover the balance of $ 60,000. This loan was evidenced by a demand promissory note, executed by petitioner, Slocum, and Lawler. Christo did*11 not sign the note for *685 the reason that he was too heavily obligated for the bank to extend him further credit; but he executed a written agreement with his three associates, in which he undertook to indemnify them against loss to the extent of his one-fourth interest. As further security to the bank, the associates arranged for Ewing, who held title to the 68 lots, to execute a judgment bond and also a mortgage on the lots in favor of the bank in the penal sum of $ 120,000, which provided that the obligation would mature in 2 years and could be satisfied in full by payment of $ 60,000 principal with interest thereon at the rate of 6 per cent per annum. The four associates did not join Ewing in executing either the bond or the mortgage; and petitioner considered that their liability to the bank was limited to the amount of their $ 60,000 demand note.
After arranging this financing, the associates caused Ewing to transfer the title to an unmarried woman named E. Glenn Wilson. The principal reason for this transfer was to facilitate sale of the lots through deeds executed by Miss Wilson alone, without the necessity of procuring the signatures of the four associates and their*12 wives.
Each of the associates made an additional capital contribution of $ 400 to the project, to cover incidental expenses in connection with the handling of the lots. All capital contributions, including the above-mentioned $ 1,875 each to provide the payment of $ 7,500 to Goodyear, the $ 2,000 each to be applied toward settlement of delinquent taxes, and the last-mentioned amounts of $ 400 each, were paid by the associates through checks delivered to the Lawyers Title Company; and that company credited these amounts, together with the $ 60,000 proceeds from the bank loan, to the four associates in a written account submitted to them.
Following the foregoing transactions, the 68 lots were sold as follows:
August 21, 1946: 15 lots sold to A. N. Young Company for an aggregate price of $ 28,000. Young was a building contractor who was a customer of Lawyers Title Company. While visiting that company's office, he told petitioner of his desire to obtain building lots in the Mt. Lebanon area; and petitioner then stated that he and his associates had acquired the Goodyear lots. Young inquired as to their price. Petitioner, after consulting with his associates, offered the 15 lots for*13 $ 28,000, and this offer was accepted. All proceeds from the sale were turned over to the Potter Bank in partial payment of the above-mentioned $ 60,000 note.
October 18, 1946: 1 lot to Charles A. Gularski and wife for the price of $ 2,500. Petitioner did not know which of his associates made the sale, but thought it might have been Slocum. He agreed to the amount of the sale price.
*686 January 31, 1947: 10 lots to George R. McCormick and wife for the total price of $ 20,000. McCormick was a builder of houses and a customer of Lawyers Title Company. The deal was initiated by a mortgage broker named Bishop, whom petitioner had told of the lots being held by him and his associates. The sale was negotiated during a conference between Bishop, McCormick, and petitioner at the latter's home, and was closed after petitioner had discussed the price with his associates. McCormick made a downpayment of $ 10,000, and gave back a mortgage for the remaining $ 10,000, which was subordinated to a construction loan that McCormick placed on the lots with the Mellon National Bank. The associates had their attorney prepare a written agreement with McCormick, the Mellon Bank, and the Potter*14 Bank, which gave them assurance that the amount due on the lots would be paid from the construction loan and to the Potter Bank, for application on their $ 60,000 note. All proceeds of this sale, as received, were turned over to the Potter Bank as payments on the note.
May 5, 1947: 1 lot to William L. Pardini and wife for the price of $ 1,500. Pardini's wife was approached by two men who suggested the sale of this lot and who left a card bearing the name of E. Glenn Wilson, the person who held the title for petitioner and his associates. Pardini telephoned the number shown on the card and talked with a man who further discussed the sale of the lot. After several telephone conversations back and forth, a price of $ 1,500 was agreed on and the purchase was made. During these conversations, Pardini evidenced interest in two other lots but was slow in making up his mind regarding them. He was then told that the sellers were anxious to get rid of the lots, that other people were interested in them, and that the sellers wanted a quick answer from him. He did not buy these additional lots. It was either Slocum or Lawler who told petitioner that the offer had been received for the*15 first lot, and he agreed to the price.
September 25, 1947: 2 lots to George D. Schreibeis and wife for the total price of $ 4,000. Schreibeis was a builder and a customer of Lawyers Title Company. Slocum contacted him, gave him a plan which showed the property, and negotiated the price. Petitioner had no contact with the purchaser but agreed to the price.
October 8, 1947: 17 lots to McCormick for a total price of $ 31,000; and
October 9, 1947: 18 additional lots to McCormick for a total price of $ 32,500. This purchaser is the same builder who had previously purchased 10 lots on January 31, 1947. The sales of these lots, like the former, were initiated by the mortgage broker, Bishop. Prior to these sales, petitioner and his associates had given McCormick an *687 option to purchase all remaining lots, because they did not believe they would again be so fortunate as to find a buyer for so many lots.
August 2, 1948: 4 lots (being the last of the 68 lots) to McCormick for the total price of $ 4,500.
The aggregate price received for all 68 lots was $ 124,000. None of the lots was advertised publicly for sale.
In 1948, after all except the last 4 lots had been sold and while*16 these were under option to McCormick, Christo assigned his one-fourth interest to an officer of a Pittsburgh bank, without consulting his associates. He made this assignment for the reason that he needed the money. He did not at the time have title to any of the lots.
Petitioner and his associates had no formal agreement covering their various transactions; but there was an understanding among them that each would provide one-quarter of the necessary capital, that profits and losses would be divided equally, and that they would consult with each other regarding the sale prices of the lots. Also, they had no common office and no joint bank account. The McCormick and Young sales were closed at the offices of the Lawyers Title Company; and the other sales were closed either in the offices of Slocum or Lawler or in the office of an attorney. The respective contributions of capital, and also the various expenditures from such capital, were handled through an account at Lawyers Title Company. Proceeds from sales of the lots were turned over to the Potter Bank, in discharge of the $ 60,000 note and in satisfaction of the mortgage and judgment bond which Ewing had executed, until these*17 obligations were met; and thereafter as lots were sold, Slocum or Lawler would prepare a written statement which set forth the selling price of lots, the amounts of costs and expenses attributed to the same, the total profit realized by the associates, and the amount of petitioner's one-fourth share thereof. A copy of such statement would then be sent to petitioner, together with a check for his share.
No partnership return was filed by petitioner and his associates for any year. However, petitioner attached to his own income tax returns for 1947 and 1948, statements which showed the sales prices received by him and his associates, the cost attributed to the lots sold, the expenses incurred by the associates in respect to the same, the net profit of the associates, and the amount of petitioner's one-fourth share thereof. Among the group expenses so itemized on petitioner's 1948 return was a payment made to the attorney for legal advice respecting the need for licenses and other questions, and for the preparation of the agreement with McCormick regarding payment of the sale price from the latter's construction loan. Other group expenses so listed included a payment to Bishop for*18 initiating the McCormick sales, a payment to E. Glenn Wilson who held the title and executed the deeds to the lots, and certain other payments for taxes.
*688 Petitioner reported his one-fourth share of the profits for 1947 and 1948, as capital gain; but the respondent, in his notices of deficiency, determined that the same was ordinary income.
Petitioner used his profits to purchase 25 acres of land in Hampton Township, Pennsylvania, which he thereafter held for sale. In 1949 he purchased other property which he sold within 6 months after the purchase; and also in that year, he and another party purchased 3 lots in the Borough of Sewickley, Pennsylvania, which were sold within 9 months after acquisition.
Petitioner and his associates paid real estate taxes on lots held by them, in the amounts of $ 2,097.20 for the year 1947 and $ 375.34 for the year 1948. Respondent, in computing petitioner's share of the net profits from sales of lots in said years, made no allowances for his proportionate shares of these taxes.
OPINION.
Respondent contends, as to the first issue, that petitioner's one-fourth share of the profits here involved was derived from a joint venture for the purchase*19 of the 68 improved residential lots, the removal of the large liens therefrom, and the sale of said lots to customers in the ordinary course of the business of the joint venture; and that such profits are taxable as ordinary income. Petitioner contends, on the other hand, that such profits are taxable as capital gains from sales of property held primarily for investment. We agree with the respondent.
Section 3797 (a) (2) of the Internal Revenue Code of 1939 provides in part, as follows:
The term "partnership" includes a syndicate, group, pool, joint venture, or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this title, a trust or estate or a corporation; * * *
It is generally recognized that a joint venture exists where two or more persons combine in a joint enterprise for their mutual benefit, with an express or implied understanding or agreement that they are to share in the profits or losses of the enterprise and each is to have a voice in the control or management. United States Fidelity & Guaranty Co. v. American Security Co., (M. D., Pa.) 25 F. Supp. 280">25 F. Supp. 280.*20 One of the characteristics of a joint venture is that it usually is formed to handle a single transaction, rather than to carry on a continuing business. West v. Peoples First National Bank & Trust Co., 378 Pa. 275">378 Pa. 275. Where members of such a venture acquire property, improve its marketability when necessary, and then hold it for sale to customers in the ordinary course of the business of such venture, the profits are taxable *689 as ordinary income rather than as capital gains. Cf. George J. Wibbelsman, 12 T. C. 1022; Morris W. Zack, 25 T.C. 676">25 T. C. 676.
In the instant case, petitioner and his associates joined together to purchase heavily encumbered real estate, to enhance its marketability by removing the liens, and to sell lots for profit to builders or other persons who they believed would become buyers after the title had been cleared. Petitioner was financially unable to handle the project alone, so he arranged with three experienced real estate men to join with him. The necessary capital was contributed by the four associates, in equal shares. The understanding among them was that*21 profits, losses, and expenses would be shared equally; and that all would have equal control in fixing the prices for which the properties were sold. Title was placed in an outside party, so that a mortgage might be arranged without extending the liabilities of the associates, and so that deeds could be executed without obtaining the signatures of the associates and their wives. It is true that no partnership returns were filed; but the profits were computed on a joint basis, and then divided into separate shares. It is immaterial that the petitioner had other employment, for it is well recognized that one may engage in two or more businesses. C. E. Mauldin, 16 T.C. 698">16 T. C. 698, affd. 195 F.2d 714">195 F. 2d 714. We hold that petitioner and his associates were members of a joint venture and that the acts of each are attributable to all. Morris W. Zack, supra.
We are impelled to conclude also that the 68 lots were acquired with a view to producing profits on a quick turnover, as soon as the obstructing liens could be removed, and that they were not acquired for investment purposes. The lots were not income producing, *22 and none of the associates intended either to use them personally or to build upon them. Also, until buildings were constructed, there could be no reasonable expectation of any substantial appreciation in value, for the lots had already been fully improved with streets, paving, curbs, sewers, and utilities, and an active market for improved lots of such character had existed for several years. It is significant, too, that the financing of the project was placed on a short-term basis, notwithstanding that petitioner and Christo had only limited funds available.
The settlement of the large delinquent tax liens aggregating from $ 350,000 to $ 400,000, which exceeded the market value of the properties, and also the arrangements for the mortgage, judgment bond, demand note, and indemnifying agreement with Christo, which were all used in the financing of such settlement, were in themselves major development activities. Steps of such character, to improve marketability of title, may be fully as important as improvement of the land itself through subdivision, grading, or street installations; and they involve similar use of skill, capital, and business activity. Here, most of the contributed*23 capital was expended in the title-clearing process.
*690 The lots were sold promptly, after the encumbrances were removed; and all of them were sold. The first sale was made within 2 months after the properties were acquired; 27 of the lots were sold within the first year; all but 4 of the 68 were sold within approximately 16 months; and even the last 4 had been placed under option prior to the expiration of such 16-month period.
It is true that petitioner and his associates had no common office and did not publicly advertise the lots; but these were not necessary. Slocum and Lawler had their own offices and did their own advertising without reference to particular lots. Also, all four of the associates had been engaged in various phases of the general real estate business for many years; and they knew the builders and other persons who were potential customers. Advertising is merely a means for finding customers; and where an active market exists and potential customers are known, the employment of conventional methods of advertising may not be essential. Moreover, we cannot overlook that in the case of the Pardini sale, there are definite indications that the buyer was*24 solicited and that considerable pressure was brought to bear.
It is our opinion that the lots never were held passively; to the contrary, there was a definite, continuing, and active plan to acquire, disencumber, and hold them primarily for sale to customers in the ordinary course of the business of the joint venture. We hold that they were not capital assets and that petitioner's one-fourth share of the profits from their sale is taxable as ordinary income.
The second issue involves a question as to what if any allowances should be made to petitioner, in computing his one-fourth share of the net profits realized by him and his associates in 1947 and 1948, for real estate taxes paid on the lots held by them in those years. No allowance for such taxes was made in the notices of deficiency.
The petitioner testified that his group paid such taxes in the amounts of $ 2,097.20 for 1947 and $ 375.34 for 1948. The respondent agreed, on brief, that petitioner is entitled to allowances for his share of the real estate taxes paid by the group; but he suggested the possibility that counter-adjustments may not have been made for prorations of taxes in connection with sales of lots, and invited*25 petitioner to make any concessions in this regard which seemed proper. No such concessions have been made.
We hold that, in computing petitioner's share of the net profits derived by him and his associates for the years involved, allowances should be made to him for one-fourth of the real estate taxes paid by the group in the aggregate amounts of $ 2,097.20 for 1947 and $ 375.34 for 1948.
Decisions will be entered under Rule 50.