Malat v. Riddell
| Decision Date | 27 May 1965 |
| Docket Number | No. 19286.,19286. |
| Parties | William MALAT and Ethel Malat, Appellants, v. Robert A. RIDDELL, District Director of Internal Revenue, Appellee. |
| Court | U.S. Court of Appeals — Ninth Circuit |
George T. Altman, Beverly Hills, Cal., for appellants.
Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, Melva M. Graney, Carolyn R. Just, Attys., Dept. of Justice, Washington, D. C., Thomas R. Sheridan, U. S. Atty., Loyal E. Keir, Asst. U. S. Atty., Chief, Tax Sec., James S. Bay, Asst. U. S. Atty., Los Angeles, Cal., for appellee.
Before MERRILL, DUNIWAY and ELY, Circuit Judges.
Profit derived from sales of property held by a taxpayer, primarily for sale to customers in the ordinary course of his trade or business, is, under section 1221 of the Internal Revenue Code of 1954,1 excluded from treatment as capital gain.
This case presents the question whether real estate sold at a profit by one engaged in the business of dealing in real estate had, under the particular circumstances, been held by him as an investment or primarily for sale to customers. Upon this issue the trial court has found against the taxpayer, ruling that the profit must accordingly be treated as ordinary income. We conclude that the District Court's finding is not clearly erroneous and affirm.
The case involves income tax for the year 1956. The taxpayer2 had reported the gain on the transaction in question as capital gain. The Internal Revenue Service disagreed. A deficiency was assessed and was paid by the taxpayer. This suit for recovery followed.
Taxpayer at all times pertinent to this case was a member of Louis Lesser Enterprises, Ltd., a partnership (to which we shall refer as "Lesser"), which for some time as a business enterprise had been engaged in the purchase and development of real estate for rental.
In 1953 Lesser and four individuals not members of the partnership negotiated for the purchase of 44.901 acres of agricultural land, located at Century and Crenshaw boulevards in Inglewood, California. On August 12, 1953, they organized Century-Crenshaw Plaza as a joint venture, entered into agreement for purchase of the property for the sum of $486,000 and established an escrow for that purpose. At the time of the establishment of the escrow the land was zoned agricultural. A condition to the closing of the escrow was that it be rezoned as residential, and that a corner parcel retained by the seller, 600 × 600 feet, be rezoned as commercial. These changes in zoning were accomplished and the escrow was closed on February 15, 1954.
In the meantime the intentions of the venturers with respect to the land had undergone a series of changes.
At the outset, as taxpayer testified, they "had in mind" a garden-type apartment development of the entire property — a single-mortgage development, requiring no division of the property into separate parcels. This was contingent not only on their securing zoning changes (in which they were successful) but (since they were themselves in no position to finance the project) also on their ability to secure adequate financing. In this respect they first sought the assistance of the Federal Housing Administration but found that they could not secure FHA guarantees on terms acceptable to them. They next sought conventional financing. Their efforts, through mortgage brokers and savings and loan associations, failed. As taxpayer testified, "The mortgage market was very, very soft then, very tight." They then abandoned their original idea of a single-mortgage project. Taxpayer testified: "Our next thought was to build individual apartments, 4-, 6-, 8-unit buildings and finance each one with a separate mortgage." This involved carving out an inner parcel of 20 to 25 acres for the apartment buildings and retaining the two frontage areas on Century and Crenshaw boulevards for commercial use. A subdivision map covering the inner parcel was presented to the City of Inglewood and approved. For two reasons, this idea also had to be abandoned. The rezoning of the frontages could not be secured. Also, despite all efforts, the venturers were still unable to secure financing.
They were now faced with interest charges on their trust deed and with the cost of street improvements and like subdivision expenses. Taxpayer testified "So we took the next best route, * * * and proceeded to sell the lots, the individual lots in the subdivision." The frontage parcels were retained, still in hope that commercial zoning could be secured as to them. The prospects of rezoning remained discouraging and a rift developed among the venturers: Lesser and two individuals "wanted to get out and be done with it." The other two wished to hold on. Eventually those who wished to get out, including Lesser, sold out their interests.
The gain which the venturers had realized on sale of the subdivision lots had been reported as ordinary income and is not here involved. Our sole concern is with the gain realized on the sale of the two frontage parcels.
Taxpayer contends that at no time had the venturers ever contemplated sale of these parcels until the rift among them brought about a change of plans; that at all times these parcels had been held for future development for the production of income; that when the subdivided lots had been sold the frontages were withheld from sale pursuant to original intent.
The Government contends that the prospect of sale was present from the outset, and constituted a primary purpose of the holding at the time of the sale. It points to the following testimony of taxpayer:
The District Court, in its memorandum opinion, stated:
"It appears from the testimony of plaintiff read into evidence from his deposition, referred to above, that the property here in question was purchased with the thought in mind that if the rezoning or appropriate financing could not be accomplished that the parties...
To continue reading
Request your trial
-
Biedenharn Realty Co., Inc. v. United States, 73-3690.
...intention of developing it as rental property or selling it, depending on whichever proved to be the more profitable. Malat v. Riddell, 9 Cir. 1965, 347 F.2d 23, 26. In contrast, having substantially abandoned its investment and farming43 intent, Biedenharn was cloaked primarily in the garb......
-
Devine v. Commissioner
...claimed to produce capital gain. Malat v. Riddell 66-1 USTC ¶ 9317, 383 U.S. 569 (1966), vacating and remanding 65-2 USTC ¶ 9452, 347 F. 2d 23 (9th Cir. 1965). Many factors have been considered by the courts in deciding whether property is held primarily for sale to customers in the ordinar......
-
Malat v. Riddell
...petitioner's claim to capital gain treatment for the profits derived from the property's resale. The Court of Appeals affirmed, 9 Cir., 347 F.2d 23. We granted certiorari (382 U.S. 900, 86 S.Ct. 244, 15 L.Ed.2d 154) to resolve a conflict among the courts of appeals3 with regard to the meani......
-
Municipal Bond Corporation v. CIR
...of the word "primarily" in the statute as meaning "substantial". This is reflected by the opinion of the Ninth Circuit in Malat v. Riddell, 347 F.2d 23, written by the same judge who wrote Margolis. Reliance is made upon the definition of "primarily" made in Rollingwood Corp. v. Commissione......