## Facts

- Hollywood Baseball Association operated a minor-league professional baseball club in the Pacific Coast League.
- League rules required Hollywood, as a condition of participation, to permit other clubs to purchase its players’ contracts on demand at specified prices.
- From 1948 to 1957, Hollywood sold 224 player contracts pursuant to those rules.
- In 1957–1958, while pursuing a plan of complete corporate liquidation and anticipating changes in its market, Hollywood sold eight player contracts to the Pittsburgh Athletic Company and an affiliated club.
- Hollywood reported the contract-sale proceeds as nonrecognized gain under I.R.C. § 337 (sales of “property” during complete liquidation).
- The Commissioner asserted the contracts were excluded from § 337 “property” because they were “stock in trade” or property “held … primarily for sale to customers in the ordinary course” under § 337(b)(1)(A), making the gains taxable as ordinary income.
- After an initial Tax Court decision and Ninth Circuit affirmance, the Supreme Court remanded for reconsideration in light of Malat v. Riddell; on remand, the Tax Court again ruled for the Commissioner, and Hollywood sought review.

## Issues

1. Whether baseball player contracts sold during complete liquidation were “property” eligible for nonrecognition under I.R.C. § 337.
2. Whether those contracts were excluded from § 337 as “stock in trade” or as property held primarily for sale to customers in the ordinary course of business under § 337(b)(1)(A), applying Malat’s meaning of “primarily.”

## Decision

- The Ninth Circuit affirmed the Tax Court.
- The court held the player contracts were “stock in trade” and were held principally for sale to customers in the ordinary course of Hollywood’s business within § 337(b)(1)(A).
- Because the contracts were excluded from § 337 “property,” gain on their sale during liquidation was recognized and taxed as ordinary income.

## Legal Principles

- I.R.C. § 337 generally prevents recognition of gain on corporate sales of “property” during complete liquidation, but § 337(b)(1)(A) excludes stock in trade, inventory-type property, and property held primarily for sale to customers in the ordinary course of business.
- “Primarily,” as construed in Malat v. Riddell, means “of first importance” or “principally.”
- In classifying assets under ordinary-course sale exclusions, courts consider the asset’s economic function in the taxpayer’s business; property that is an integral part of regular operations and routinely sold in that business may be treated as stock in trade/ordinary-course property (consistent with the Corn Products approach).

## Conclusion

The Ninth Circuit concluded that, given the structured requirement and history of frequent contract sales in organized baseball, Hollywood held its player contracts principally for sale in the ordinary course; therefore, § 337 nonrecognition did not apply and the liquidation-related contract-sale gains were ordinary income.


Hollywood Baseball Ass’n v. Commissioner, 423 F.2d 494 (9th Cir. 1970)