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nonbusiness bad debt is a question of fact. Sec. 1.166-5(b),
Income Tax Regs.
The bad debt deduction is limited to bona fide debt, that
is, debts that arise from a debtor-creditor relationship based
upon a valid and enforceable obligation to pay a fixed or
determinable sum of money. Sec. 1.166-1(c), Income Tax Regs.
For purposes of section 166, a contribution to capital is not
considered a debt. United States v. Uneco, Inc. (In re Uneco,
Inc.), 532 F.2d 1204, 1207 (8th Cir. 1976); Kean v. Commissioner,
91 T.C. 575, 594 (1988); sec. 1.166-1(c), Income Tax Regs.
A payment by a taxpayer in discharge of part or all of the
taxpayer's agreement to act as a guarantor, endorser, or
indemnitor of a debt obligation is to be treated as a worthless
debt only if: (1) The agreement was entered into in the course
of the taxpayer's trade or business or a transaction for profit;
(2) there was an enforceable legal duty upon the taxpayer to make
the payment; and (3) the agreement was entered into before the
obligation became worthless (or partially worthless in the case
of an agreement entered into in the course of the taxpayer's
trade or business). Sec. 1.166-9(d), Income Tax Regs.
Generally, if a taxpayer enters into an agreement to act as a
guarantor in the course of trade or business, a payment by the
taxpayer in discharge of part or all of the taxpayer's obligation
as a guarantor is treated as a business bad debt at the time of
payment to the extent that any right of subrogation held by the
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