Tax Legal Services · Primary-source case analysis

Generes: Business-Bad-Debt Treatment Requires a Dominant Business Motive

By Aneeta Mishra and Timothy Chan

Published May 17, 2026

United States v. Generes addressed whether losses from corporate loan guarantees were business or nonbusiness bad debts for a taxpayer who was both an employee and a substantial shareholder.

Two economic motives competed

The guarantees could protect salary from employment or preserve the much larger equity investment.

Business motive had to be dominant

A merely significant employment motive did not satisfy the standard for ordinary-loss treatment.

Objective economics tested the claimed purpose

Salary, investment size, guarantee exposure, and surrounding conduct were relevant to the taxpayer’s actual dominant motivation.

The jury instruction used the wrong threshold

Because it allowed recovery on a significant-motive standard, the judgment required correction.

Key takeaways

• Measure salary and investment exposure separately.
• Document the reason for each guarantee when made.
• Apply the dominant-motivation standard to employee-shareholders.
• Distinguish business bad debt from capital-loss treatment.