Income Tax > Income Tax Keyed to Freeland > Deductions Affected by Characterization Principles
Charles J. Haslam v. Commissioner
Citation. 33 T.C.M. (CCH) 482 (1974)
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Brief Fact Summary.
Charles Haslam and his wife, Petitioners, attempted to deduct bad business loans. Charles Haslam owned an explosives corporation and personally guaranteed loans during financially difficult times. The corporation eventually went bankrupt.
Synopsis of Rule of Law.
Business bad debt losses are only deductible against ordinary income, and non-business bad debt losses are deductible only as short-term capital losses.
Charles J. Haslam and Harriet S. Haslam, Petitioners, are husband and wife and live in Slingerlands, New York. Petitioner and Earl Canavan established Northern Explosive, Inc. in 1954. The corporation sold and distributed explosives. Each owned 50% having invested $10,000. Petitioner managed the corporate business and was employed as a salesman. Petitioner bought out Canavan in 1957. Northern encountered financial problems and took out loans in the amount of $100,000. Petitioner guaranteed these loans. The corporation would eventually go into bankruptcy. Petitioners claimed a $55,956 business loss on the bad debt from the Northern loans. The Commissioner of Internal Revenue did not allow the deduction determining that it was deductible only as a non-business bad debt.
Are Petitioners allowed business or non-business deductions for losses arising from the guaranteed debts of Charles J. Haslam’s corporation?
Judge Forrester issued the opinion for the Tax Court in holding that Petitioners may take the loss as a business deduction.
Petitioner was both an employee and a stockholder, and the Tax Court had to determine his dominant motivation for the loan guarantee. In this case, the Tax Court found that the facts showed that the motivation was to protect Petitioner’s employment. Petitioner had no other job and no other income. A salary of $15,000 per year was a more valuable interest to Petitioner.