Merchants National Bank v. Commissioner

Merchants National Bank (plaintiff) held notes on money it had loaned to Alabama Naval Stores Company. It charged off the notes as worthless and properly reported that charge-off as an ordinary loss on its federal tax return. It later sold the same charged-off notes to a third party and reported the sale proceeds as capital gain. The federal tax commissioner (defendant) issued a deficiency notice, treating the sale proceeds as ordinary income instead. The Tax Court sided with the commissioner, and Merchants sought review.