Malat v. Riddell - 383 U.S. 569, 86 S. Ct. 1030 (1966)

Rule:

The United States Supreme Court holds that, as used in 26 U.S.C.S. § 1221(1), "primarily" means "of first importance" or "principally."

Facts:

Petitioner was a member of a joint venture that bought a parcel of real estate to develop and operate an apartment complex. Because of financial difficulties, some of the lots were sold, and the profits were taxed as ordinary income. Additional difficulties caused petitioner to sell his interest in the remaining lots. The district court held that the joint venturers intended either to sell the property or to develop it for rental, thus petitioner failed to prove that the property was not primarily for sale to customers in the ordinary course of business and, therefore, the profits from petitioner's sale of his interest in the remaining lots were to be taxed as ordinary income, not as capital gains. The Court of Appeals for the Ninth Circuit affirmed both the District Court and the Court of Appeals relying upon earlier decisions which had held that under 1221(1), property was held "primarily" for sale to customers in the ordinary course of trade or business if such sale was a "substantial" purpose of holding the property, even if it was not the "principal" purpose. A writ of certiorari was granted.  

Issue:

Did the lower courts use the correct standard in determining if the lots in question were primarily used in the ordinary course of business? 

Answer:

No.

Conclusion:

On certiorari, the United States Supreme Court held that the ordinary meaning of the word "primarily" in 26 U.S.C.S. § 1221(1) meant "of first importance." The Court held that the district court used the wrong standard to determine if the lots were primarily for use in the ordinary course of business or were simply held for a period of time while their value appreciated. The Court, therefore, vacated the judgment and remanded the case.