- 18 -
as a guarantor. Accordingly, with respect to its transfer of the
�823,943,385 into Nihon Intergraph's checking account at Citibank
Tokyo, Intergraph is not entitled to the claimed foreign currency
loss deduction under section 988, nor to the claimed interest
expense deduction under section 163(a).
Bad Debt Deduction
Alternatively, petitioner argues that Nihon Intergraph's
debt obligation to Intergraph that arose on Intergraph’s transfer
of the �823,943,385 into Nihon Intergraph's checking account was
worthless and that for 1987 Intergraph should be entitled to a
bad debt deduction under section 166 with regard thereto.
Where a taxpayer-guarantor pays the debt obligation of
another and where the taxpayer thereby becomes subrogated to the
rights of the original creditor and has a right of reimbursement
from the original debtor, the taxpayer becomes entitled to a bad
debt deduction under section 166(a)(1) only if and when the new
debt obligation to the taxpayer-guarantor (namely, the right of
reimbursement) becomes worthless. Putnam v. Commissioner, 352
U.S. 82, 85 (1956); Black Gold Energy Corp. v. Commissioner, 99
T.C. 482, 487 (1992), affd. without published opinion 33 F.3d 62
(10th Cir. 1994); Benak v. Commissioner, 77 T.C. 1213, 1218
(1981); see sec. 1.166-9(a), (d), and (e)(2), Income Tax Regs.
Insolvency is only one indication of the worthlessness of a
debt obligation. Roth Steel Tube Co. v. Commissioner, 620 F.2d
1176, 1181 (6th Cir. 1980), affg. 68 T.C. 213 (1977); Riss v.
Page: Previous 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 NextLast modified: May 25, 2011