LOCATION: Virginia General Assembly
DOCKET NO.: 487
DECIDED BY: Warren Court (1965-1967)
LOWER COURT: United States Court of Appeals for the Ninth Circuit
CITATION: 383 US 569 (1966)
ARGUED: Mar 03, 1966
DECIDED: Mar 21, 1966
Facts of the case
Media for Malat v. Riddell
Audio Transcription for Oral Argument - March 03, 1966 in Malat v. Riddell
Number 487, William Malat et ux. -- et al., versus Robert A. Riddell, District Director of Internal Revenue.
Mr. Altman --
George T. Altman:
-- you may proceed with your argument.
George T. Altman:
If the Court please.
This is a federal income tax case involving a sale of two pieces of unimproved real estate with the very familiar question of capital gain versus ordinary income.
It involves a -- an acquisition by a group of persons as a joint venture and acquisition of some 45 acres in the Los Angeles area with the purpose of developing it and holding it for rental.
There was testimony indicating that financing -- that there were financing and zoning problems and that incase -- incase these problems were not solve -- couldn't be solved that they would sell the property off in bulk so they wouldn't get hurt.
The District Court made that distinct finding that they would sell it off in bulk so they wouldn't get hurt.
The -- they also made a finding and in the same very -- very same paragraph that they were holding it for sale or development for rental whichever was more profitable.
During the course of the escrow -- there was a six months escrow and during the force of that escrow, there was considerable investigation of financing many efforts to get first on a total project, a thousand apartments for the whole thing.
Then when they couldn't that, they broke it down into getting smaller units financed.
For that purpose, it was necessary to subdivide the property in order to cut it down to small units.
But even there and I'm reciting the history chiefly as the Court Appeals relates it.
And the Court of Appeals obtain, I believe, it has a very good opening statement of the factual history of the case.
They had to break it down into a number of units in order to be able to finance it on a unit basis instead on a single basis that even at that point they were still hoping to withhold what they the frontages, two strips, one on one street, one on the other for commercial development and rental.
But they weren't able to finance the -- even this and this was -- all took place during the six months period of escrow.
And so as the Court of Appeals points out, they were then faced with interest, charges, and payments, and taxes, and so they sold the subdivided portion.
They sold it out.
They reported the ordinary income on that.
Apparently on the theory that since it was subdivided, they have to report it as ordinary.
I don't think that question is before this Court ago as to whether that was right or whether it was wrong or whether it had any bearing on their estimate.
Anyway on the question of the purpose, I think the record is very clear that at no time and there is no suggestion anywhere in the record that there was ever a purpose of selling in order to make a profit.
Respondent's briefs attempts page after page, after page to develop some words, somewhere in the record that shows that but it's a total failure and I covered that in our replied brief.
No record and the record is there anything to support the idea that there was ever a plan to sell the property in order to make a profit.
And the finding of the District Court itself says, “That if their plans for development for income purposes would not carry out, were not successful, they would sell it off in bulk so they wouldn't get hurt.”
And insofar -- as far as I can see, that in itself indicates no idea of making profit on the thing like that.
In fact, it's the very reverse, it's what any normal businessman would do, if went into an investment program.
At some point, he would try to protect himself so he wouldn't get hurt.
That was all it was there.