United Surgical Steel Co. v. Commissioner

United Surgical Steel Company, Inc. (United) (plaintiff) was in the business of selling cookware and china to customers. Most of these sales were conditional sales contracts with installment notes. A customer would usually pay 10 percent down and then make monthly installment payments over 12-, 15-, 18-, or 24-month periods. In 1965, United entered into a loan agreement with First National Bank of Montgomery (First National). Essentially, United had a revolving line of credit with First National, and to secure the loan, United agreed to transfer the notes and contracts it obtained to First National, which would then advance 88 percent of the unpaid balance on the note, with the rest going in a dealer reserve account. United would then make daily payments to First National of the funds received on the notes or contracts. On a weekly basis, the amounts collected on the notes or contracts would be credited against United’s outstanding loan amount. This arrangement attracted the notice of the commissioner of Internal Revenue (defendant), who argued that by pledging these notes or contracts, United deprived itself of the right to claim the installment income at later dates via 26 U.S.C. § 453. The statute did not allow the deferral of installment income for obligations that were satisfied, distributed, transmitted, sold, or otherwise disposed of. The commissioner did not argue that the notes or contracts were sold but that they fit the exception under the otherwise-disposed-of category. United filed suit in the United States Tax Court, and the matter was before the court for ruling on the question of United’s ability to use the installment basis in reporting its income under the notes and contracts.