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1031(a) provides for the nonrecognition or deferral of gain or
loss when “property held for productive use in a trade or
business or for investment * * * is exchanged solely for property
of like kind which is to be held either for productive use in a
trade or business or for investment.”
Section 1031(a) treatment, however, does not apply to any
exchange of “property held primarily for sale”. See sec.
1031(a)(2). Section 1221(1) provides that a capital asset does
not include by definition “property held by the taxpayer
primarily for sale to customers in the ordinary course of his
trade or business”.
In Malat v. Riddell, 383 U.S. 569, 572 (1966) (quoting Corn
Prods. Refining Co. v. Commissioner, 350 U.S. 46, 52 (1955), and
Commissioner v. Gillette Motor Transp., Inc., 364 U.S. 130, 134
(1960)), the Supreme Court explained the function of the section
1221(1) definition as differentiating “between the ‘profits and
losses arising from the everyday operation of a business’ * * *
and ‘the realization of appreciation in value accrued over a
substantial period of time’”. The Court also defined
“primarily”, as utilized in section 1221(1), as “‘of first
importance’” or “‘principally.’” Whether property is held by a
taxpayer primarily for sale to customers in the ordinary course
of a trade or business is essentially a factual question.
Guardian Indus. Corp. v. Commissioner, 97 T.C. 308, 316 (1991).
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