Loren F. Paullus and Donna Paullus - Page 23

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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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