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the Supreme Court in Putnam was not called upon to decide whether
the payment on a guarantee of corporate debt created a bona fide
debt, but rather, where the guarantee in fact represented bona
fide debt, whether the payment on that guarantee by the
shareholder gave rise to a nonbusiness bad debt deductible only
as a short-term capital loss, or a business bad debt deductible
against ordinary income. Casco Bank & Trust Co. v. United
States, supra at 533-534.
Second, as the Court of Appeals for the First Circuit also
succinctly pointed out:
Since the Supreme Court handed down its decision
in Putnam, lower courts have considered whether a
guaranty of a corporation's obligations by its
stockholder is to be treated as a loan or a
contribution to capital. * * * [Id. at 534.]
The Court of Appeals went on to emphasize that the inquiry as to
how deductions for losses incurred as a result of such guarantees
should be characterized involves a question of fact, not law, and
that such inquiry is to be resolved in the context of traditional
debt-equity principles. Id.; see also In re Lane, 742 F.2d 1311,
1314-1315 (11th Cir. 1984); sec. 1.166-9(c), Income Tax Regs.4
4 The agreement in this case was made on Oct. 22, 1974.
While the regulation in general applies only to agreements
entered into after Dec. 31, 1975, and thus would not apply here,
the rule in paragraph (c) applies to payments, whenever made, on
agreements entered into before Jan. 1, 1976, and therefore does
apply in this case. Sec. 1.166-9(f), Income Tax Regs.
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