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Business Reputation
Petitioner argues that he may deduct the bankruptcy
settlement payments under section 162 as expenses to protect his
business reputation. Petitioner bases the deductibility of the
payments upon the adverse business consequences that would have
resulted to his medical practice from a failure to pay the
default judgment and bankruptcy order. Generally, a taxpayer may
deduct ordinary and necessary expenses paid or incurred in
carrying on his trade or business. Sec. 162(a).
We have, however, concluded that the $450,000 payment is a
nonbusiness debt. If a guarantor's payment is found to give rise
to a debt, then the guarantor cannot deduct the payment as a
business expense under section 162. Fincher v. Commissioner, 105
T.C. 126, 138-139 (1995); see Horne v. Commissioner, supra at
336. In that event, the guarantor can deduct the payment only
when, and in the amount, permitted under section 166. See Horne
v. Commissioner, supra at 335. We have determined that the
guarantor payment is a nonbusiness debt and, therefore, the
payment cannot be deductible under section 162.
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5(...continued)
that petitioner maintained PEC as an entity distinct from
himself. Where the taxpayer has availed himself of the corporate
form, this Court generally will not disregard the existence of
the corporation in order to reduce the taxpayer's tax liability.
Rink v. Commissioner, 51 T.C. 746, 752 (1969).
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