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of a noncorporate taxpayer resulting from the worthlessness of a
nonbusiness debt is treated as a short-term capital loss. Sec.
166(d)(1).
Under certain circumstances, a taxpayer’s payment in
discharge of an agreement to act as guarantor, endorser,
indemnitor or other secondary obligor (hereinafter generally
referred to as guarantor) may be either (1) deducted as a
worthless business debt pursuant to section 166(a) or (2)
deducted as a worthless nonbusiness debt pursuant to section
166(d) (subject to treatment as a short-term capital loss).14
13(...continued)
(A) subsection (a) shall not apply to any
nonbusiness debt; and
(B) where any nonbusiness debt becomes worthless
within the taxable year, the loss resulting therefrom
shall be considered a loss from the sale or exchange,
during the taxable year, of a capital asset held for
not more than 1 year.
(2) Nonbusiness Debt Defined.--For purposes of
paragraph (1), the term “nonbusiness debt” means a debt
other than--
(A) a debt created or acquired (as the case may
be) in connection with a trade or business of the
taxpayer; or
(B) a debt the loss from the worthlessness of
which is incurred in the taxpayer’s trade or
business. * * *
14� 1.166-9. Losses of guarantors, endorsers, and
indemnitors incurred, on agreements made after December 31, 1975,
in taxable years beginning after such date.--
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