Riddell, district director of internal revenue



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United States Supreme Court

MALAT et ux.

v.

RIDDELL, DISTRICT DIRECTOR OF INTERNAL REVENUE



Docket No. 487

Date of Decision: March 21, 1966

Judge: Per Curium
Tax Analysts Citation: 1994 TNT 241-98

Parallel Citations: 17 AFTR2d Para. 66-182

Principal Code Reference: Section 1221
Summary

Provided by Tax Analysts. Copyright 2000 Tax Analysts. All rights reserved.

COURT MUST DETERMINE 'PRIMARY' PURPOSE WHEN LAND IS PURCHASED WITH INTENT TO DEVELOP OR SELL.

William Malat was a participant in a joint venture that acquired

a parcel of land. Malat contended that the intention was to develop and

operate an apartment project on the land. Due to lack of financing, the

interior lots of the tract were divided and sold. The profit from the sale

was reported and taxed as ordinary income. The possibility of developing

the remaining parcels was further explored. After encountering problems

with zoning restrictions, Malat sold his interest in the remaining property.

Malat asserted that the property was held for the purpose of

development and, accordingly, treated the profit from the sale as capital

gains. The IRS asserted that the intention was either to develop or sell

the land, depending on which avenue would be most profitable. Therefore,

the IRS argued, the property was held by Malat primarily for the sale to

customers in the ordinary course of business and thus was not a capital

asset. Malat paid a deficiency and filed for a refund. The district court

denied the refund, ruling that because the property was held for dual

purposes, Malat failed to establish that the property was not held

"primarily" for sale to customers. The Ninth Circuit affirmed.

The Supreme Court, by per curium opinion, vacated the lower

court's decision and remanded for fact finding in light of a different

legal standard. Interpreting the language "property held by the taxpayer

primarily for sale to customers in the ordinary course of his trade or

business" set forth in section 1221, the Court ruled that "'primarily'

means 'of most importance' or 'principally.'"

US-SUP-CT, [66-1 USTC ¶9317], William Malat et ux., Petitioners v. Robert A. Riddell, District Director of Internal Revenue, Capital gains: Sale of real estate: Meaning of property held “primarily” for sale: Dual purpose.--, (Mar. 21, 1966)

[66-1 USTC ¶9317]William Malat et ux., Petitioners v. Robert A. Riddell, District Director of Internal Revenue
Supreme Court of the United States, No. 487, 383 US 569, 86 SCt 1030, 3/21/66, Vacating and remanding CA-9, 65-2 ustc ¶9452, 347 F. 2d 23

On Writ of Certiorari to the United States Court of Appeals for the Ninth Circuit.


[1954 Code Secs. 1221(1) and 1231]




Capital gains: Sale of real estate: Meaning of property held “primarily” for sale: Dual purpose.--In determining that gain on the sale of real estate which had been acquired with intent either to develop it for rental purposes or to sell it, whichever would be more profitable, was ordinary income because the property was held primarily for sale in the ordinary course of business, the District Court and the Court of Appeals applied an incorrect legal standard. “Primarily” means “of first importance” or “principally.” The Court of Appeals, in affirming the District Court, had said that when the taxpayer resolved to sell, that purpose became the primary purpose. BACK REFERENCES: 66FED ¶4729.634.


One dissent.
George T. Altman, 424 S. Beverly Drive, Beverly Hills, Calif., for petitioners. Thurgood Marshall, Solicitor General, Richard M. Roberts, Acting Assistant Attorney General, Melva M. Graney, Carolyn R. Just, Department of Justice, Washington, D. C. 20530, for respondent.
Per Curiam:
Petitioner 1 was a participant in a joint venture which acquired a 45-acre parcel of land, the intended use for which is somewhat in dispute. Petitioner contends that the venturers’ intention was to develop and operate an apartment project on the land; the respondent’s position is that there was a “dual purpose” of developing the property for rental purposes or selling, whichever proved to be the more profitable. In any event, difficulties in obtaining the necessary financing were encountered, and the interior lots of the tract were subdivided and sold. The profit from those sales was reported and taxed as ordinary income.
The joint venturers continued to explore the possibility of commercially developing the remaining exterior parcels. Additional frustrations in the form of zoning restrictions were encountered. These difficulties persuaded petitioner and another of the joint venturers of the desirability of terminating the venture; accordingly, they sold out their interests in the remaining property. Petitioner contends that he is entitled to treat the profits from this last sale as capital gains; the respondent takes the position that this was “property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business,” 2 and thus subject to taxation as ordinary income.
The District Court [64-1 ustc ¶9432] made the following finding:
“The members of [the joint venture], as of the date the 44.901 acres were acquired, intended either to sell the property or develop it for rental, depending upon which course appeared to be most profitable. The venturers realized that they had made a good purchase price-wise and, if they were unable to obtain acceptable construction financing or rezoning . . . which would be prerequisite to commercial development, they would sell the property in bulk so they wouldn’t get hurt. The purpose of either selling or developing the property continued during the period in which [the joint venture] held the property.”
[Primary Purpose of Holding Property]

The District Court ruled that petitioner had failed to establish that the property was not held primarily for sale to customers in the ordinary course of business, and thus rejected petitioner’s claim to capital gain treatment for the profits derived from the property’s resale. The Court of Appeals affirmed, [65-2 ustc ¶9452] 347 F. 2d 23. We granted certiorari (382 U. S. 900) to resolve a conflict among the courts of appeals 3 with regard to the meaning of the term “primarily” as it is used in §1221(1) of the Internal Revenue Code of 1954.


The statute denies capital gain treatment to profits reaped from the sale of “property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.” (Emphasis added.) The respondent urges upon us a construction of “primarily” as meaning that a purpose may be “primary” if it is a “substantial” one.
As we have often said, “the words of statutes--including revenue acts--should be interpreted where possible in their ordinary everyday senses.” Crane v. Commissioner [47-1 ustc ¶9217], 331 U. S. 1, 6. And see Hanover Bank v. Commissioner [62-1 ustc ¶9487], 369 U. S. 672, 687-688; Commissioner v. Korell [50-1 ustc ¶9328], 339 U. S. 619, 627-628. Departure from a literal reading of statutory language may, on occasion, be indicated by relevant internal evidence of the statute itself and necessary in order to effect the legislative purpose. See, e.g. Board of Governors v. Agnew, 329 U. S. 441, 446-448. But this is not such an occasion. The purpose of the statutory provision with which we deal is to differentiate between the “profits and losses arising from the everyday operation of a business” on the one hand (Corn Products Co. v. Commissioner [55-2 ustc ¶9746], 350 U. S. 46, 52) and “the realization of appreciation in value accrued over a substantial period of time” on the other. (Commissioner v. Gillette Motor Co. [60-2 ustc ¶9556], 364 U. S. 130, 134.) A literal reading of the statute is consistent with this legislative purpose. We hold that, as used in §1221(1), “primarily” means “of first importance” or “principally.”
Since the courts below applied an incorrect legal standard, we do not consider whether the result would be supportable on the facts of this case had the correct one been applied. We believe, moreover, that the appropriate disposition is to remand the case to the District Court for fresh fact-findings, addressed to the statute as we have now construed it.
Mr. Justice Black would affirm the judgments of the District Court and the Court of Appeals.
Mr. Justice White took no part in the decision of this case.
Vacated and remanded.
1
2

“For purposes of this subtitle, the term ‘capital asset’ means property held by the taxpayer (whether or not connected with his trade or business), but does not include--


“(1) . . . property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.”
3



11 The taxpayer and his wife who filed a joint return are the petitioner, but for simplicity are referred to throughout as “petitioner.”

22 Internal Revenue Code of 1954 §1221(1), 26 U. S. C. §1221(1):

33 Compare Rollingwood Corp. v. Commissioner [51-2 ustc ¶9374], 190 F. 2d 263, 266 (C. A. 9th Cir.); American Can Co. v. Commissioner [63-2 ustc ¶9514], 317 F. 2d 604, 605 (C. A. 2d Cir.), with United States v. Bennett [51-1 ustc ¶9130], 186 F. 2d 407, 410-411 (C. A. 5th Cir.); Municipal Bond Corp. v. Commissioner [65-1 ustc ¶9247], 341 F. 2d 683, 688-689 (C. A. 8th Cir.). Cf. Recordak Corp. v. United States [64-1 ustc ¶9121]. 163 Ct. Cls. 294, 300-302, 325 F. 2d 460, 463-464.

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