“Primarily for Sale” in I.R.C Sections 1221 and 1231 Held To Mean “Principally for Sale” Rather Than “Substantially for Sale” —Malat v. Riddell (U.S. 1966)

Sections 1221 and 1231 of the Internal Revenue Code disqualify from capital gains treatment profits derived from the sale or exchange of property “held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.” In deciding whether these sections deny capital gains treatment to profits realized by real estate dealers from the sale or exchange of land, the circuit courts, while examining similar facts in relation to the same criteria, have reached divergent conclusions. Two recent decisions, Municipal Bond Corp. v. Commissioner and Malat v. Riddell, illustrate these discordant results. In Municipal Bond the Eighth Circuit ruled that a real estate dealer holds land “primarily for sale” only if his principal intention in holding the property is to sell it for gain. In contrast, the Ninth Circuit in Malat held that a real estate dealer holds land “primarily for sale” if, when he originally purchases the property he has as part of his overall plan, a substantial intention to sell the property for gain. In an attempt to resolve this controversy the United States Supreme Court granted certiorari in Malat, and in a per curiam opinion determined that “primarily for sale” means “principally for sale” rather than “substantially for sale.”