## Facts

- Charles J. Haslam and another investor formed Northern Explosives, Inc. in 1954; Haslam managed the business and worked as a salesman.
- Haslam later acquired the other investor’s shares and became the sole shareholder, with a total equity investment of about $20,000.
- As the corporation experienced financial distress, a bank loaned roughly $100,000 to the corporation, and Haslam personally guaranteed the corporate debt.
- The bank required security for the guarantee, including Haslam’s personal securities and his residence.
- Haslam worked full time for the corporation until its failure and earned about $15,000 per year; his income came primarily from this employment.
- The corporation entered bankruptcy in 1964 and could not repay the bank.
- The bank sold Haslam’s pledged securities to satisfy the guaranteed debt, causing Haslam a loss of $55,956.
- On the Haslams’ 1967 federal income tax return, they claimed the $55,956 as a business bad debt deduction.
- The Commissioner recharacterized the item as a nonbusiness bad debt (short-term capital loss) and issued a deficiency; the taxpayers petitioned the Tax Court.

## Issues

1. Whether the loss from Haslam’s payment under his guarantee of his corporation’s debt was a business bad debt (ordinary deduction) or a nonbusiness bad debt (short-term capital loss).
2. Whether Haslam’s dominant motivation in guaranteeing the corporate debt was protecting his trade or business as an employee, rather than protecting his equity investment.

## Decision

- The Tax Court held for the taxpayers.
- The court ruled that the $55,956 loss was deductible as a business bad debt.
- The court rejected the Commissioner’s classification of the loss as a nonbusiness bad debt.

## Legal Principles

- A shareholder-employee’s loss from guaranteeing corporate debt is classified by the taxpayer’s dominant motivation for making the guarantee.
- If the dominant motive is to protect the taxpayer’s trade or business as an employee (e.g., salary and continued employment), the resulting loss is a business bad debt deductible against ordinary income.
- If the dominant motive is to protect the taxpayer’s investment as a shareholder, the resulting loss is a nonbusiness bad debt treated as a short-term capital loss subject to capital-loss limitations.
- In assessing motivation, courts weigh objective facts such as the relationship between salary and investment, the taxpayer’s dependence on the employment income, and the role of the guarantee in keeping the business operating.

## Conclusion

Because Haslam’s salary and continued employment were more economically significant to him than his stock investment and the guarantee was made to keep the financially troubled business operating, the court found his dominant motivation was employment protection and allowed an ordinary deduction for a business bad debt.


Haslam v. Commissioner, 33 T.C.M. (CCH) 482 (T.C. 1974)