Charles J. Haslam v. Commissioner

33 T.C.M. 482 (1974)

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Nature of the Case

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Facts

Haslam (P) was employed by Dupont in the explosives division. P worked a great deal of time in the Army Corp of Engineers and had also received training at Michigan College of Mining and Technology where he got his bachelor’s degree of science in 1948. P and Earl established Northern Explosives, Inc. in 1954 to engage in the sales and distribution of explosives. Each party owned 50% and each invested $10,000. P ran the operations while Earl took no active part in operations. The corporation had three other employees as well. P bought out Earl's interest in 1957 for $10,000. In 1960, financial difficulties were encountered, and P guaranteed loans in the amount of $100,000 for the corporation. At this time, P was working full-time for the corporation with a salary of $250 to $300 per week. P got a car, insurance, and other benefits. With the exception of stock dividends, P had no other sources of income. The corporation eventually went under Chapter 11 and went bankrupt in 1964. The banks eventually called in the loans. P got work as a salesman for a steel castings company (with earnings per year shown in the casebook). On his 1967 tax return, P reported a loss of $55,956 based on his losses he sustained in the guarantee of the corporation notes. The IRS disagreed and determined that P's losses were deductible only as a nonbusiness bad debt.