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the amount of business interest reported on his income tax returns.
The evidence does not identify the portion of the payments that
constitutes interest as distinguished from principal.
The $76,361 and $19,139 that petitioner paid to TexCommBk as
guarantor does not give rise to the payment of interest by
petitioner. Rather, such payments by petitioner as guarantor of
Payne & Potter's debt obligation to TexCommBk are to be treated in
their entirety as the payment by petitioner of his obligation under
the guaranty, and they give rise to a debt obligation of Payne &
Potter in favor of petitioner. In effect, petitioner is to be
treated as having made a loan to Payne & Potter. See Putnam v.
Commissioner, 352 U.S. 82, 85 (1956); Southern Pac. Transp. Co. v.
Commissioner, 75 T.C. 497, 565-566 (1980).
Petitioner's guaranty of Payne & Potter's debt obligation was
not made in the course of petitioner's trade or business. Petitioner
practiced law as an attorney. He did not engage in real estate
development outside of his involvement as a 50-percent owner of the
stock of Payne & Potter. Petitioner's investment in and his guaranty
of the $705,000 debt obligation of Payne & Potter constituted
investment, not ordinary business, activity. Accordingly, due to
Payne & Potter's insolvency, petitioner is entitled only to a
nonbusiness bad debt deduction for the $76,361 and the $19,139 paid
to TexCommBk in 1987 and 1988, respectively, on his guaranty,
deductible as short-term capital losses. Sec. 1.166-9(b), Income Tax
Regs.
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