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Petitioner guaranteed the promissory note. Upon PEC's
failure to perform on the note, petitioner was obligated to make
payments to the bank under the guarantor agreement. With or
without a right of subrogation, a guarantor's loss generally will
be in the nature of a bad debt loss and will fall under section
166. Black Gold Energy Corp. v. Commissioner, 99 T.C. 482, 487
(1992), affd. without published opinion 33 F.3d 62 (10th Cir.
1994); Martin v. Commissioner, 52 T.C. 140, 144 (1969), affd. per
curiam 424 F.2d 1368 (9th Cir. 1970). Therefore, we conclude
that the payment in the amount of $450,000 to discharge
petitioner's existing obligation under the guarantor agreement is
deductible under section 166 as a nonbusiness bad debt.4 Because
section 1.166-9(b), Income Tax Regs., provides that the guarantor
payments are a nonbusiness debt, we need not determine whether
petitioner sustained a theft loss.5
4 Thus, if the payment is not deductible under another
section, petitioners may deduct the $450,000 only to the extent
of net capital gains plus $3,000 and may carry forward the
remaining capital loss to succeeding taxable years. Secs. 1211
and 1212. We note that respondent has allowed a $3,000 short-
term capital loss deduction for each of the years in issue.
We also note that petitioner makes no contention that the
$450,000 is deductible as a business bad debt.
5 We note that if there was a loss as a result of
misappropriations by Wheeler, it occurred before the years at
issue. Under sec. 165(e), a theft loss is deductible in the
taxable year in which the taxpayer discovers the loss.
Additionally, even if there was a loss in the years at issue, it
was sustained by PEC and not by petitioners. The record shows
(continued...)
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