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payment to Agway is held to represent a bad debt, it is a
nonbusiness bad debt deductible only as a short-term capital loss
pursuant to section 166(d). The burden of proof is on
petitioners. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 114
(1933). That burden is not lessened in a fully stipulated case.
Borchers v. Commissioner, 95 T.C. 82, 91 (1990), affd. 943 F.2d
22 (8th Cir. 1991).
Petitioners rely heavily on Putnam v. Commissioner, 352 U.S.
82 (1956), citing it for the proposition that payments by an
individual on a guarantee of corporate debt which are not then
repaid to the individual because the obligation to repay is
worthless give rise, as a matter of law, to bad debt deductions,
pointing to the following:
The familiar rule is that, instanter upon the
payment by the guarantor of the debt, the debtor's
obligation to the creditor becomes an obligation to the
guarantor, not a new debt, but, by subrogation, the
result of the shift of the original debt from the
creditor to the guarantor who steps into the creditor's
shoes. Thus, the loss sustained by the guarantor
unable to recover from the debtor is by its very nature
a loss from the worthlessness of a debt. This has been
consistently recognized in the administrative and the
judicial construction of the Internal Revenue laws
which, until the decisions of the Courts of Appeals in
conflict with the decision below, have always treated
guarantors' losses as bad debt losses. * * * [Id. at
85-86; fn. refs. omitted.]
This exact argument was raised and rejected in Casco Bank & Trust
Co. v. United States, 544 F.2d 528, 533-534 (1st Cir. 1976).
First, as the Court of Appeals for the First Circuit pointed out,
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