Stephen F. Scofield and Nancy E. Scofield - Page 19

          deduct as a business bad debt that part of the settlement payment           
          attributable to petitioner's guaranty.                                      
               3.   Whether Petitioners May Deduct the Settlement Payment             
                    under Section 162                                                 
               Petitioners argue in the alternative that they may deduct              
          under section 162 their payments to settle the Northeast                    
          litigation and the adversary proceeding.  A taxpayer may deduct             
          ordinary and necessary expenses paid or incurred in carrying on a           
          trade or business.  Sec. 162(a).  Petitioners argue that O'Malley           
          v. Commissioner, 91 T.C. 352, 361-362 (1988), supports their                
          contention that they may deduct the settlement payment since they           
          paid it to settle an action against petitioner that proximately             
          resulted from his business activity.  We agree as to the portion            
          of the settlement not allocable to the guaranty because bad debts           
          cannot be deducted under section 162.  See Horne v. Commissioner,           
          59 T.C. 319, 336 (1972), affd. 523 F.2d 1363 (9th Cir. 1975);               
          Smith v. Commissioner, 55 T.C. 260, 267 (1970), vacated on other            
          grounds and remanded 457 F.2d 797 (5th Cir. 1972) (section 162              
          does not apply to debts resulting from a taxpayer's loan                    
          guaranty).  The taxpayer in O'Malley made payments which were               
          directly connected with his trade or business as an employee of a           
          trucking company.   Similarly, petitioner's payment to settle               
          claims brought against him by Northeast's creditors other than              
          the bank originated in petitioner's conduct of his duties as an             

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