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

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

Under subrogation principles, satisfying the guarantee gave the guarantor the creditor’s claim against the primary debtor rather than creating a wholly separate ordinary loss.

Worthlessness produced a bad-debt loss

When the insolvent corporation could not repay the subrogated claim, the loss fell within the Code’s specific bad-debt provisions.

Business character required a proximate relationship

The taxpayer’s investment and incidental legal services did not establish that the guarantee was closely related to his own trade or business, so nonbusiness treatment applied.

Current law governs timing and characterization

Modern section 166 rules, later dominant-motivation doctrine, guarantee terms, basis, partial payments, and worthlessness evidence must be applied to the actual tax year.

Key takeaways

• Collect the guarantee, payment proof, and underlying debt instruments.
• Document subrogation rights and collection efforts against the debtor.
• Identify the taxpayer’s dominant business or investment motive.
• Establish the year and extent of worthlessness under current section 166 rules.