## Facts

- Merchants National Bank of Mobile, a national bank, sought review of Tax Court rulings sustaining federal income-tax deficiencies for 1943 and 1944.
- The bank previously owned all stock of an affiliated securities dealer that was liquidated due to federal banking restrictions on bank–securities affiliations.
- During liquidation, the bank received stock of Dorgan-McPhillips Packing Corporation, recorded it on its books at an appraised value, and held it until sale in 1943.
- In 1943, the bank sold the Packing Company stock for a small amount, producing a large loss, which the bank deducted as an ordinary loss.
- The Commissioner treated the 1943 loss as a long-term capital loss on the ground that the stock was a “capital asset” to the bank under the Internal Revenue Code.
- In 1944, the bank claimed a bad-debt deduction on notes of an affiliated undertaking company after charging the notes off as at least partially worthless.
- The Commissioner limited/denied the claimed bad-debt deduction, and the Tax Court sustained the Commissioner on both the 1943 and 1944 items.

## Issues

1. Whether the bank’s 1943 loss on sale of the Packing Company stock was an ordinary loss because the stock was held primarily for sale to customers in the ordinary course of business, or a long-term capital loss because the stock was a capital asset.
2. Whether the bank was entitled in 1944 to the claimed bad-debt deduction on affiliate notes, including the extent and timing of worthlessness.

## Decision

- The Fifth Circuit affirmed the Tax Court.
- The court held the Packing Company stock was a capital asset in the bank’s hands; the 1943 loss was a long-term capital loss subject to capital-loss limitations.
- The court upheld the Tax Court’s bad-debt ruling, concluding the Tax Court did not err in sustaining the Commissioner’s limitation of the 1944 deduction.

## Legal Principles

- Whether property is excluded from “capital asset” status as inventory or as property held primarily for sale to customers depends on the taxpayer’s business and the purpose for which the taxpayer holds the property.
- A national bank’s statutory powers and prohibitions regarding securities activities support treating stock holdings as investments rather than dealer property held for sale to customers in the ordinary course of business.
- Property that may have been held for sale in the ordinary course by a securities-dealing affiliate can be a capital asset when held by a bank under different legal authority and business constraints.
- Bad-debt deductions require proof of the extent and timing of worthlessness; these are factual questions, and appellate review defers to the Tax Court’s findings when supported by substantial evidence.

## Conclusion

The Fifth Circuit sustained the deficiency determinations by holding that the bank’s stock was a capital asset—making the 1943 loss a long-term capital loss—and by deferring to the Tax Court’s supported factual findings limiting the bank’s 1944 bad-debt deduction.


Merchants Nat'l Bank of Mobile v. Commissioner, 199 F.2d 657 (5th Cir. 1952)