Upon the sale of real estate which had been acquired by a joint
venture in which petitioners participated, petitioners reported the
profits therefrom as capital gains. Respondent argued that the
venture had a dual purpose -- to develop the property for rental or
to sell it -- and that the profit was taxable as ordinary income.
The District Court ruled that petitioners failed to establish that
the property was not held primarily for sale to customers in the
ordinary course of business, and that the profits were not capital
gains under 26 U.S.C. § 1221(1). The Court of Appeals affirmed.
Respondent urges the construction of "primarily" as meaning that a
purpose may be "primary" if it is a "substantial" one.
Held: The word "primarily," as used in §1221(1), means
"of first importance," or "principally."
347 F.2d 23, vacated and remanded.
PER CURIAM.
Petitioner [
Footnote 1] was
a participant in a joint venture which acquired a 45-acre parcel of
land, the intended use for which is somewhat in dispute. Petitioner
contends that the venturers' intention was to develop and operate
an apartment project on the land; the respondent's position
Page 383 U. S. 570
is that there was a "dual purpose" of developing the property
for rental purposes or selling, whichever proved to be the more
profitable. In any event, difficulties in obtaining the necessary
financing were encountered, and the interior lots of the tract were
subdivided and sold. The profit from those sales was reported and
taxed as ordinary income.
The joint venturers continued to explore the possibility of
commercially developing the remaining exterior parcels. Additional
frustrations in the form of zoning restrictions were encountered.
These difficulties persuaded petitioner and another of the joint
venturers of the desirability of terminating the venture;
accordingly, they sold out their interests in the remaining
property. Petitioner contends that he is entitled to treat the
profits from this last sale as capital gains; the respondent takes
the position that this was "property held by the taxpayer primarily
for sale to customers in the ordinary course of his trade or
business," [
Footnote 2] and
thus subject to taxation as ordinary income.
The District Court made the following finding:
"The members of [the joint venture], as of the date the 44.901
acres were acquired, intended either to sell the property or
develop it for rental, depending upon which course appeared to be
most profitable. The venturers realized that they had made a good
purchase price-wise, and, if they were unable to obtain acceptable
construction financing or rezoning . . . which would be
prerequisite to commercial development, they would sell the
property
Page 383 U. S. 571
in bulk so they wouldn't get hurt. The purpose of either selling
or developing the property continued during the period in which
[the joint venture] held the property."
The District Court ruled that petitioner had failed to establish
that the property was not held primarily for sale to customers in
the ordinary course of business, and thus rejected petitioner's
claim to capital gain treatment for the profits derived from the
property's resale. The Court of Appeals affirmed, 347 F.2d 23. We
granted certiorari (382 U.S. 900) to resolve a conflict among the
courts of appeals [
Footnote 3]
with regard to the meaning of the term "primarily" as it is used in
§ 1221(1) of the Internal Revenue Code of 1954.
The statute denies capital gain treatment to profits reaped from
the sale of "property held by the taxpayer
primarily for
sale to customers in the ordinary course of his trade or business."
(Emphasis added.) The respondent urges upon us a construction of
"primarily" as meaning that a purpose may be "primary" if it is a
"substantial" one.
As we have often said, "the words of statutes -- including
revenue acts -- should be interpreted where possible in their
ordinary, everyday senses."
Crane v. Commissioner,
331 U. S. 1,
331 U. S. 6.
And see Hanover Bank v. Commissioner, 369 U.
S. 672,
369 U. S.
687-688;
Commissioner v. Korell, 339 U.
S. 619,
339 U. S.
627-628. Departure from a literal reading of statutory
language may, on occasion, be indicated by relevant internal
evidence of the statute itself
Page 383 U. S. 572
and necessary in order to effect the legislative purpose.
See, e.g., Board of Governors v. Agnew, 329 U.
S. 441,
329 U. S.
446-448. But this is not such an occasion. The purpose
of the statutory provision with which we deal is to differentiate
between the "profits and losses arising from the everyday operation
of a business," on the one hand (
Corn Products Refining Co. v.
Commissioner, 350 U. S. 46,
350 U. S. 52)
and "the realization of appreciation in value accrued over a
substantial period of time," on the other. (
Commissioner v.
Gillette Motor Transport, Inc., 364 U.
S. 130,
364 U. S.
134.) A literal reading of the statute is consistent
with this legislative purpose. We hold that, as used in § 1221(1),
"primarily" means "of first importance" or "principally."
Since the courts below applied an incorrect legal standard, we
do not consider whether the result would be supportable on the
facts of this case had the correct one been applied. We believe,
moreover, that the appropriate disposition is to remand the case to
the District Court for fresh factfindings addressed to the statute
as we have now construed it.
Vacated and remanded.
MR. JUSTICE BLACK would affirm the judgments of the District
Court and the Court of Appeals.
MR. JUSTICE WHITE took no part in the decision of this case.
[
Footnote 1]
The taxpayer and his wife, who filed a joint return, are the
petitioners, but, for simplicity, are referred to throughout as
"petitioner."
[
Footnote 2]
Internal Revenue Code of 1954, § 1221(1), 26 U.S.C. §
1221(1):
"For purposes of this subtitle, the term 'capital asset' means
property held by the taxpayer (whether or not connected with his
trade or business), but does not include --"
"(1) . . . property held by the taxpayer primarily for sale to
customers in the ordinary course of his trade or business."
[
Footnote 3]
Compare Rollingwood Corp. v. Commissioner, 190 F.2d
263, 266 (C.A.9th Cir.);
American Can Co. v. Commissioner,
317 F.2d 604, 605 (C.A.2d Cir.),
with United States v.
Bennett, 186 F.2d 407, 410-411 (C.A.5th Cir.);
Municipal
Bond Corp. v. Commissioner, 341 F.2d 683, 688-689 (C.A.8th
Cir.).
Cf. Recordak Corp. v. United States, 325 F.2d 460,
463-464, 163 Ct.Cl. 294, 300-301.