## Facts

- United Surgical Steel Company, Inc. sold cookware and related items primarily through conditional sales contracts with installment notes.
- Customers generally paid about 10% down and then paid monthly over 12–24 months.
- United reported income from these sales using the installment method under I.R.C. § 453 and maintained a reserve for bad debts.
- For taxable years ending before Oct. 22, 1965, United deducted additions to a bad-debt reserve attributable to “guaranteed debt obligations”; the Commissioner disallowed those deductions, and United initially accepted the disallowance.
- After enactment of Pub. L. 89-722, United asserted it was entitled to reserve treatment for guaranteed obligations for years ending Nov. 30, 1962–1964.
- When United made that claim, assessment for 1962 and 1963 was barred by limitations; 1964 remained open.
- In 1965, United entered a revolving credit arrangement with a bank and assigned customer installment notes and contracts as collateral for advances.
- The bank advanced about 88% of the unpaid balances and held the remainder in a dealer reserve account.
- United continued to service the contracts, collected customer payments, remitted receipts daily to the bank, and receipts were applied against United’s loan balance.
- The Commissioner asserted the assignments were an “otherwise disposed of” event under § 453, requiring immediate recognition of deferred installment gain for 1965 and 1966.
- The parties stipulated loss ratios relevant to recomputing the bad-debt reserve.

## Issues

1. Whether United could claim reserve treatment for guaranteed debt obligations under § 166(g) and Pub. L. 89-722 for taxable years ending in 1962, 1963, and 1964, including whether barred years could receive the statute’s benefits.
2. Whether assigning installment obligations to a bank as collateral for a loan constituted a “disposition” under § 453 that terminated installment reporting for 1965 and 1966.
3. How United’s bad-debt reserve should be recomputed given the stipulated loss ratios.

## Decision

- United could not obtain Pub. L. 89-722 benefits for 1962 and 1963 because assessment for those years was barred when the claim was made.
- United could apply Pub. L. 89-722 to 1964 because assessment for that year remained timely.
- The collateral assignment of installment obligations to the bank did not constitute a disposition under § 453; United could continue installment reporting for 1965 and 1966.
- United’s bad-debt reserve was to be recomputed using the stipulated loss ratios, with the final amounts to be determined in computational proceedings.

## Legal Principles

- Remedial tax provisions such as Pub. L. 89-722 do not reopen closed taxable years absent clear statutory authorization; limitations bars relief for years closed to assessment when the claim is asserted.
- A pledge/assignment of installment obligations as collateral for a loan is not, by itself, an “otherwise disposed of” event under § 453 when the transaction functions as secured financing and the taxpayer retains significant continuing interests (including servicing and economic exposure through a dealer reserve).
- A reasonable bad-debt reserve may be determined by reference to historical loss experience; where loss ratios are stipulated, the reserve should be recomputed on that basis.

## Conclusion

The Tax Court held that Pub. L. 89-722 could not be used to obtain reserve treatment for years already barred by limitations, but it could be used for an open year; it also held that pledging installment notes as collateral in a secured financing arrangement did not trigger § 453 gain recognition, and it directed recomputation of the bad-debt reserve using stipulated loss ratios.


United Surgical Steel Co. v. Commissioner, 54 T.C. 1215 (1970)