Malat v. Riddell
83 U.S. 569 (1966)

  • 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 land.
  • 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. Malat appealed.
  • 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 "substantially."
    • The Court sent the case back to the Trial Court using the proper definition of "primarily."