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worthless. Sec. 1.166-9(d), Income Tax Regs. Furthermore, such
a payment may be treated as a worthless debt only if the taxpayer
demonstrates that reasonable consideration was received in return
for the assumption of the secondary liability.
We understand petitioners’ contention to be that
petitioner’s payment of the underlying liability to Union Bank in
discharge of petitioner’s obligation as a guarantor may be
treated as a worthless debt and that petitioners may deduct the
payment pursuant to section 166(a) or (d). However, petitioners
have made no contentions and offered no evidence that petitioner
entered into an agreement to act as a guarantor in exchange for
reasonable consideration, that petitioner entered into such an
agreement in the course of his trade or business or a transaction
for profit, that petitioner had an enforceable legal duty to make
the payment, or that petitioner entered into such an agreement
before the obligation became worthless. Accordingly, we conclude
that petitioners have failed to demonstrate that petitioner’s
payment of the underlying liability to Union Bank constitutes a
worthless debt for purposes of section 166. Consequently, we
hold that petitioners are not entitled to deduct the payments as
either a worthless business debt pursuant to section 166(a) or as
a worthless nonbusiness debt pursuant to section 166(d).
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