Menu
Tax Notes logo
HOMETax Notes ResearchFederalCourt Documentscourt opinions and orders

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

MAR. 21, 1966

Malat, William, et ux. v. Robert A. Riddell

DATED MAR. 21, 1966
DOCUMENT ATTRIBUTES
  • Case Name
    MALAT et ux. v. RIDDELL, DISTRICT DIRECTOR OF INTERNAL REVENUE
  • Court
    United States Supreme Court
  • Docket
    No. 487
  • Judge
    Warren, Fortas, Harlan, Brennan, Black, Stewart, Clark, Douglas; White
    took no part in the decision of this case.
  • Cross-Reference
    Malat v. Riddell, 383 U.S. 569 (1966)
  • Parallel Citation
    383 U.S. 569
    86 S. Ct. 1030
    16 L. Ed. 2d 102
    17 A.F.T.R.2d (RIA) 604
    66-1 U.S. Tax Cas. (CCH) P9317
    1966 U.S. LEXIS 2016
  • Code Sections
  • Index Terms
    capital assets
  • Jurisdictions
  • Language
    English
  • Tax Analysts Electronic Citation
    1994 TNT 241-98
    1966 LEX 23-156

Malat, William, et ux. v. Robert A. Riddell

                SUPREME COURT OF THE UNITED STATES

 

 

                        Argued: March 3, 1966

 

 

                       Decided: March 21, 1966

 

 

     CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE NINTH

 

CIRCUIT.

 

 

     347 F.2d 23, vacated and remanded.

 

 

     Upon the sale of real estate which had been acquired by a joint

 

venture in which petitioners participated, petitioners reported the

 

profits therefrom as capital gains. Respondent argued that the venture

 

had a dual purpose, to develop the property for rental or to sell it,

 

and that the profit was taxable as ordinary income. The District Court

 

ruled that petitioners failed to establish that the property was not

 

held primarily for sale to customers in the ordinary course of

 

business, and that the profits were not capital gains under 26 U. S.

 

C. Section 1221 (1). The Court of Appeals affirmed. Respondent urges

 

the construction of "primarily" as meaning that a purpose may be

 

"primary" if it is a "substantial" one. Held: The word

 

"primarily," as used in Section 1221 (1), means "of first importance"

 

or "principally."

 

 

     George T. Altman argued the cause and filed briefs for

 

petitioners.

 

 

     Jack S. Levin argued the cause for respondent. With him on the

 

brief were Solicitor General Marshall, Acting Assistant Attorney

 

General Roberts, Melva M. Graney and Carolyn R. Just.

 

 

     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 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."

 

 

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, 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 Section 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, 331 U.S. 1, 6. And see Hanover Bank v. Commissioner, 369 U.S. 672, 687-688; Commissioner v. Korell, 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, 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., 364 U.S. 130, 134.) A literal reading of the statute is consistent with this legislative purpose. We hold that, as used in Section 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.

Vacated and remanded.

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.

 

FOOTNOTES TO OPINION

 

 

1 The taxpayer and his wife who filed a joint return are the petitioners, but for simplicity are referred to throughout as "petitioner."

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

     "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 Compare Rollingwood Corp. v. Commissioner, 190 F.2d 263, 266 (C. A. 9th Cir.); American Can Co. v. Commissioner, 317 F.2d 604, 605 (C. A. 2d Cir.), with United States v. Bennett, 186 F.2d 407, 410-411 (C. A. 5th Cir.); Municipal Bond Corp. v. Commissioner, 341 F.2d 683, 688-689 (C. A. 8th Cir.). Cf. Recordak Corp. v. United States, 163 Ct. Cl. 294, 300-301, 325 F.2d 460, 463-464.

 

END OF FOOTNOTES TO OPINION
DOCUMENT ATTRIBUTES
  • Case Name
    MALAT et ux. v. RIDDELL, DISTRICT DIRECTOR OF INTERNAL REVENUE
  • Court
    United States Supreme Court
  • Docket
    No. 487
  • Judge
    Warren, Fortas, Harlan, Brennan, Black, Stewart, Clark, Douglas; White
    took no part in the decision of this case.
  • Cross-Reference
    Malat v. Riddell, 383 U.S. 569 (1966)
  • Parallel Citation
    383 U.S. 569
    86 S. Ct. 1030
    16 L. Ed. 2d 102
    17 A.F.T.R.2d (RIA) 604
    66-1 U.S. Tax Cas. (CCH) P9317
    1966 U.S. LEXIS 2016
  • Code Sections
  • Index Terms
    capital assets
  • Jurisdictions
  • Language
    English
  • Tax Analysts Electronic Citation
    1994 TNT 241-98
    1966 LEX 23-156
Copy RID