- 17 -
consolidates other debt not part of the 1980 agreement,7 and the
principal amount of the debt is greater. Accordingly, at that
time, it cannot fairly be characterized as entered into in the
course of petitioner's trade or business. See Lair v.
Commissioner, 95 T.C. 484 (1990). Moreover, petitioners have not
met their burden of proving that the 1980 guarantee and 1983
renewal were made in the course of petitioner's trade or
business. Accordingly, we hold that petitioners are entitled to
a bad debt deduction in the amount of petitioner's proportionate
share as coguarantor, and such deduction is to be treated as a
nonbusiness bad debt.8
Issue 2. Interest Expense Deductions
7
The $53,189 payment was applied against the $400,000
indebtedness to Weimar Bank. The indebtedness was a
consolidation and refinancing of several outstanding obligations
on which petitioner and Klutts were liable to Weimar Bank(i.e.,
$206,877.73--representing two-thirds of the original $300,000
indebtedness of NROC plus accrued interest; $53,919.44 loan, with
accrued interest, involving the Texaroda transaction--see supra
p. 11; $41,046.73--an individual and separate obligation of
Klutts; and $100,000--relating to the Victoria Bank loan--see
supra p. 12).
8
Although neither party addressed the issue of nonbusiness
bad debts, sec. 1.166-9(b), Income Tax Regs., applies to
taxpayers who enter into a transaction for profit, but not in the
course of their trade or business. That section provides in
relevant part:
a payment of principal or interest made during a taxable
year beginning after December 31, 1975, by the taxpayer in
discharge of part or all of the taxpayer's obligation as a
guarantor, endorser, or indemnitor is treated as a worthless
nonbusiness debt in the taxable year in which the payment is
made * * *.
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