Merchants National Bank (Merchants) (plaintiff) held notes representing money that Merchants had loaned to Alabama Naval Stores Company (Naval). Merchants charged off the notes as worthless, and properly reported the charge-off amount as ordinary loss on its federal tax return. Later, Merchants sold the charged-off notes to a third party and reported the sales proceeds as capital gain on its federal tax return. The federal tax commissioner (commissioner) (defendant) issued a deficiency notice against Merchants, determining that the proceeds from the sale of the Naval notes constituted ordinary income. Merchants petitioned the United States Tax Court for a redetermination. The tax court entered judgment in favor of the commissioner. Merchants petitioned for review.