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(1) General rule.--In the case of a taxpayer
other than a corporation--
(A) subsections (a) and (c) 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 6 months.
(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 worthless-
ness of which is incurred in the taxpayer's
trade or business.
Under section 166(a)(1), if a debt arose in the course of
the taxpayer's trade or business, a loss is deductible against
ordinary income in the year in which the debt becomes worthless.
Sec. 1.166-9(a), Income Tax Regs. However, under section
166(d)(1)(B), where a debt is a nonbusiness bad debt, a loss must
be treated as a short-term capital loss subject to the limita-
tions of section 1211. Under section 1.166-9, Income Tax Regs.,
a payment by a taxpayer in discharge of his or her obligations as
a guarantor is treated as a business bad debt if the guaranty is
entered into in the course of the taxpayer's trade or business.
If, however, the guaranty is entered into as a transaction for
profit, but not in the course of the taxpayer's trade or busi-
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Last modified: May 25, 2011