383 U.S. 569 (U.S. Supreme Court 1966)
Malat v. Riddell is a leading Supreme Court decision in federal income tax law that resolves how to interpret the word "primarily" in the Internal Revenue Code's exclusion of certain property from capital-asset treatment.
Under the Internal Revenue Code's exclusion for property "held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business," does the word "primarily" mean "principal/of first importance" or merely "substantial," such that any substantial sales motive would suffice to deny capital-asset treatment?
For purposes of the capital-asset exclusion in the Internal Revenue Code (then codified at §1221(1), now §1221(a)(1)), the term "primarily" means "of first importance" or "principal." Property is excluded from capital-asset status as dealer property only if the taxpayer's chief or principal purpose in holding the property is sale to customers in the ordinary course of business; the mere existence of a substantial secondary sales motive does not suffice.
The Supreme Court held that "primarily" means "of first importance" or "principal," not merely "substantial." It vacated the judgment and remanded for application of the correct legal standard to the facts.
Malat v. Riddell is the canonical authority defining "primarily" for the dealer-property exclusion in capital-asset analysis. It reorients the inquiry toward the taxpayer's principal purpose at the time of holding/sale, rather than penalizing taxpayers for having any meaningful secondary sales motive. For law students, the case is essential in tax courses covering capital gains, real estate transactions, and characterization issues; it also illustrates textual interpretation, statutory context, and how a single-word construction can materially affect tax outcomes. In practice, Malat shapes fact-intensive litigation over whether a taxpayer is an investor or a dealer, guiding courts to weigh objective indicia—such as development activities, marketing efforts, frequency and continuity of sales, and holding period—through the lens of principal, not merely substantial, purpose.