Tax Legal Services · Primary-source case analysis

Putnam: A Guarantor’s Unrecoverable Payment Was a Bad Debt, Not an Ordinary Loss

By Aneeta Mishra and Timothy Chan

Published August 21, 2026 · Updated October 17, 2026

Decision: Putnam v. Comm’r, 352 U.S. 82 (1956).

Putnam v. Commissioner involved a lawyer and shareholder who guaranteed obligations of a publishing corporation, paid the creditors when the company failed, and claimed the unrecovered amount as a fully deductible ordinary loss.

Payment transferred the creditor’s debt to the guarantor

Payment put the guarantor in the bank’s position on the existing debt. It did not create a new obligation that had always been worthless. The Court also distinguished a required guarantor payment from voluntarily buying a known-worthless claim as a gift. Those distinctions explained why the specific bad-debt provisions governed. Putnam, 352 U.S. at 85, 88–90.

Worthlessness produced a bad-debt loss

Putnam paid $9,005.21 to the bank in December 1948, after the company had stopped trading and sold its assets but remained legally in existence. He argued for a fully deductible nonbusiness profit-transaction loss. The Court instead applied the specific nonbusiness bad-debt rule and affirmed short-term capital-loss treatment. Putnam, 352 U.S. at 83–85, 87–88, 92–93.

The business-bad-debt argument was abandoned

Putnam’s publishing venture was separate from his law practice. More importantly, he abandoned his alternative business-bad-debt argument in the Supreme Court. The dispute there was whether his nonbusiness guarantor loss escaped the specific bad-debt rules altogether. The Court did not apply a later dominant-motivation test to decide that abandoned claim. Putnam, 352 U.S. at 84 n.7, 87–88.

Current law governs timing and characterization

This case applied the 1939 Code to a 1948 payment. A present guarantee requires separate review of section 166, the applicable guarantee rules, payment and recovery rights, and business versus investment character. Do not treat Putnam as a decision that every shareholder guarantee is nonbusiness or that signing a replacement note is equivalent to paying cash.

Key takeaways

• Collect the guarantee, payment proof, and underlying debt instruments.
• Document subrogation rights and collection efforts against the debtor.
• Identify the claimed trade or business separately from the shareholding or other investment.
• Establish the year and extent of worthlessness under current section 166 rules.