MERCHANTS NATIONAL BANK V. COMMISSIONER
199 F.2d 657 (5th Cir. 1952)
NATURE OF THE CASE: This was a dispute over the status of zero basis recovery of bad
debt. Merchants (P) challenged a Tax Court decision sustaining an income tax deficiency
assessment after P deducted as ordinary loss what should have been long-term capital loss,
and included as long-term capital gain what should have been ordinary income.
FACTS: Merchants (P) held notes of Alabama Naval Stores Company from loans made by the
bank to Naval. There was an unpaid balance of $49,025.00. In 1941 and 1943 at the direction
of national bank examiners, P charged off the notes as worthless. They were then held on a
zero basis. The deductions were taken for the charge off as ordinary losses. In 1944, P sold
the notes for $18,460.58, which it reported on its 1944 return as a long-term capital gain.
The Commissioner held this to be ordinary income.
ISSUE:
RULE OF LAW:
HOLDING AND DECISION:
LEGAL ANALYSIS:
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