Malat was a participant in a
joint venture that bought some land. They were originally going to build
some apartments to rent or houses to sell, but they had some problems with
financing and zoning, so they eventually gave up and just sold off the
When Malat filed his taxes, he
claimed that the profits from the land sale were a long-time capital
asset (26 U.S.C. §1221)
and paid taxes on the profits at that rate. The IRS denied Malat's claim
and found that the profit was ordinary income (now 26 U.S.C. §61(a)), which is
taxed at a higher rate. Malat appealed.
Malat argued that the land
was primarily to be used for building apartments, so he was in the
"trade or business" of renting apartments, He was not in the
trade or business of selling real estate.
The IRS argued that Malat
was in the trade or business of selling property, and so any profits he
made were ordinary income.
The Trial Court found for the
IRS. Malat appealed.
The Appellate Court affirmed.
The US Supreme Court remanded.
The US Supreme Court looked
at §1221(a)(1), which said that
the definition of a capital asset does not include "property
held by the taxpayer primarily for
sale to customers in the ordinary course of his trade or business."
The Court found that the
word "primarily" should be read to mean "of first
importance" or "principally."
The IRS had been arguing
that "primarily" should be read to mean
The Court sent the case back
to the Trial Court using the proper definition of "primarily."