Wisconsin Cheeseman, Inc. v. United States

Wisconsin Cheeseman, Inc. (Cheeseman) (plaintiff) packaged fancy cheeses for sale as Christmas gifts. Cheeseman’s business was seasonal, and it incurred high costs between October and December that it covered by borrowing funds each year from September through early November. For the 1960, 1961, and 1962 fiscal years, Cheeseman obtained short-term bank loans each fall and repaid the loans between November and January from its sales receipts. Cheeseman used the rest of its sales proceeds each year to purchase municipal bonds and treasury bills. Cheeseman used the municipal bonds as collateral for the bank loans it obtained each fall to meet its seasonal working-capital needs. Additionally, in the 1961 fiscal year, Cheeseman borrowed $69,360 from a bank to build a new plant. The bank loan was secured by a mortgage on Cheeseman’s real estate. In Cheeseman’s federal income-tax returns, Cheeseman deducted interest on the mortgage and on some of the short-term bank loans. The Commissioner of Internal Revenue assessed a deficiency, and Cheeseman paid the assessments. Cheeseman then brought an action against the United States (defendant), seeking a refund. The district court reasoned that Cheeseman could have sold its municipal bonds to meet its seasonal financial needs and finance the construction instead of using the bonds as collateral to obtain loans or obtaining the real-estate mortgage loan. Because Cheeseman chose to obtain the loans, the court concluded that Cheeseman took the loans for the purpose of carrying the municipal securities, which did not have taxable interest and thus could not support an interest-payment deduction. The court therefore found that no refund was due and entered judgment for the United States. Cheeseman appealed.