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capital loss under section 166(d) and section 1.166-9(b), Income
Tax Regs. We agree with respondent.
Guarantor Payments
Section 166 allows a deduction for the loss sustained on
account of a bad debt. A deduction is allowed to the extent that
the debt becomes worthless during the year. Sec. 166(a).
Section 1.166-9(b), Income Tax Regs., applies to a taxpayer who
enters into a transaction for profit, but not in the course of
his trade or business, to act as a guarantor, endorser, or
indemnitor. This section of the regulations provides that "a
payment of principal or interest made * * * by the taxpayer in
discharge of part or all of the taxpayer's obligation as a
guarantor, endorser, or indemnitor is treated as a worthless
nonbusiness debt". Section 1.166-9(b), Income Tax Regs., further
provides that neither section 163 nor section 165 will apply with
respect to such a payment. Therefore, if the payment falls under
both sections 165 and 166, then it can be deducted only as a bad
debt under section 166. Intergraph Corp. & Subs. v.
Commissioner, 106 T.C. 312, 322-325 (1996), affd. without
published opinion 121 F.3d 723 (11th Cir. 1997); see Putnam v.
Commissioner, 352 U.S. 82, 85-93 (1956); Spring City Foundry Co.
v. Commissioner, 292 U.S. 182, 189 (1934); Horne v. Commissioner,
59 T.C. 319, 336 (1972), affd. 523 F.2d 1363 (9th Cir. 1975).
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