405 U.S. 93 (1972)
United States v. Generes is a cornerstone Supreme Court decision in federal income tax law addressing when a loss from guaranteeing a closely held corporation's obligations qualifies as a business bad debt, deductible as an ordinary loss, rather than as a nonbusiness bad debt, deductible only as a short-term capital loss.
When a shareholder-employee guarantees corporate obligations and sustains a loss, does the loss qualify as a business bad debt under § 166 only if the taxpayer's dominant motivation in making the guarantee was to protect or further the taxpayer's trade or business (e.g., his employment), rather than his investment?
Under Internal Revenue Code § 166 and Treas. Reg. § 1.166-5(b), a bad debt is a business bad debt—deductible as an ordinary loss—only if it is proximately related to the conduct of the taxpayer's trade or business. For a shareholder-employee who guarantees a corporation's debts, the proper standard is whether the taxpayer's dominant motivation in making the guarantee was to protect or further the taxpayer's trade or business (such as the business of being an employee), rather than to protect his investment. A mere significant or appreciable business motive is insufficient; the business motive must predominate over the investment motive.
The Supreme Court held that the correct standard is the "dominant motivation" test. Because the jury had been instructed that a merely "significant" business motive would suffice, the judgment for the taxpayer was reversed and the case was remanded for application of the proper standard.
Generes is a foundational authority for distinguishing business from nonbusiness bad debts in the shareholder-employee guarantee setting. It articulates the dominant motivation test, requiring taxpayers to substantiate, with objective facts, that their primary aim in guaranteeing corporate obligations was to protect their trade or business (e.g., their employment) rather than their investment. The decision integrates and advances the principles of Whipple by preventing investors from converting capital losses into ordinary deductions simply because they also hold corporate positions. For students, the case is crucial in learning how courts weigh mixed motives and apply evidentiary factors to police the border between ordinary and capital loss treatment under § 166.