Searcy M. Ferguson, Jr., and Elizabeth L. Ferguson - Page 17

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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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