- 12 -
is axiomatic that such deductions, if otherwise allowable, are
allowed to the taxpayer to whom the debt is owed. See Sundby v.
Commissioner, T.C. Memo. 2003-204. In this case, petitioners
cannot claim their unreimbursed employee deduction of the $50,000
loan as a bad debt deduction under section 166. The record also
does not contain any evidence indicating a personal loan of
$50,000 from petitioners to KOA. They are not the taxpayers to
whom the debt is owed. Indeed, KOA did not report any loans from
shareholders in its 1999 corporate return.
Petitioners contend, however, that they were entitled to a
deduction for the repayment of the $50,000 loan from Franklin
National Bank because of their role as guarantors in that the
loan repayments were necessary to protect petitioner Brody’s KOA
salary. As a general rule, a guarantor may be entitled to a bad
debt deduction in two situations. The first situation arises
when payments giving rise to the debt are not required under a
guaranty but are involuntary in the sense that they were
necessary in the exercise of sound business judgment to protect
existing property rights. Arrigoni v. Commissioner, 73 T.C. 792,
799 (1980); Martin v. Commissioner, 38 T.C. 188, 191-192 (1962).
The second situation arises when the guarantor is compelled to
pay on the guaranty and the payment gives rise to a claim, which
if worthless, constitutes a bad debt. Estate of Rapoport v.
Commissioner, T.C. Memo. 1982-584. In the situation when a
Page: Previous 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 NextLast modified: May 25, 2011