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However, such a payment may be treated as a worthless debt only
if (1) the taxpayer entered into the agreement to act as
guarantor either in the course of the taxpayer’s trade or
business or in a transaction for profit; (2) the taxpayer had a
legally enforceable duty to make the payment; and (3) the
taxpayer entered into the agreement before the obligation became
14(...continued)
(a) Payment treated as worthless business debt. This
paragraph applies to taxpayers who, after December 31, 1975,
enter into an agreement in the course of their trade or
business to act as (or in a manner essentially equivalent
to) a guarantor, endorser, or indemnitor of (or other
secondary obligor upon) a debt obligation. Subject to the
provisions of subparagraphs (c), (d), and (e) of this
section, a payment of principal or interest made during a
taxable year beginning after December 31, 1975, by the
taxpayer in discharge of part or all of the taxpayer’s
obligation as a guarantor, endorser, or indemnitor is
treated as a business debt becoming worthless in the taxable
year in which the payment is made or in the taxable year
described in paragraph (e)(2) of this section. Neither
section 163 (relating to interest) nor section 165 (relating
to losses) shall apply with respect to such a payment.
(b) Payment treated as worthless nonbusiness debt.
This paragraph applies to taxpayers (other than
corporations) who, after December 31, 1975, enter into a
transaction for profit, but not in the course of their trade
or business, to act as (or in a manner essentially
equivalent to) a guarantor, endorser, or indemnitor of (or
other secondary obligor upon) a debt obligation. Subject to
the provisions of paragraphs (c), (d), and (e) of this
section, a payment of principal or interest made during a
taxable year beginning after December 31, 1975, 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 in the taxable year
in which the payment is made or in the taxable year
described in paragraph (e)(2) of this section. Neither
section 163 nor section 165 shall apply with respect to such
a payment. [Sec. 1.166-9, Income Tax Regs.]
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