Charles J. Haslam v. Commissioner
33 T.C.M. 482 (Tax Ct. 1974)

  • Haslam owned 100% of the stock in a corporation that sold explosives. He was also the general manager. When times got tough, Haslam cosigned some loans for the corporation, putting his personal assets up for collateral.
  • The loans weren't enough and the corporation went bankrupt. The bank took $56k of Haslam's assets in satisfaction of the loan.
  • When he filed his taxes, Haslam claimed the $56k loss as a business bad debt under 26 U.S.C. 166. The IRS disagreed.
    • The IRS argued that the loss could only be claimed as a non-business bad debt.
      • The difference is that a business bad debt loss is deductible against ordinary income while a non-business bad debt loss is only deductible as a short-term capital loss.
  • The Tax Court found for Haslam.
    • The Tax Court found that Haslam was "in the business" of being an employee. If he had made the loans to keep the company afloat so he could continue being an employee, then it would be a business bad debt.
      • On the other hand, if Haslam had made the loans to protect his stock investment, then it would be a non-business bad debt.
    • The Tax Court noted that Haslam's adjusted basis in the company's stock was only $20k, while his salary as an employee was $15k a year. Based on those numbers, the Court found that Haslam made the loans to save his salary, not his stock. Therefore, it was a business bad debt.