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Legal Claim From the facts provided, it appears th

From the facts provided, it appears that Jack probably does have a bad debt deduction for the guaranty of the loan obtained by Larry Ligustrum. There are three issues in this question pertaining to the bad debt deduction: (1) Does a guaranty of a loan qualify for the bad debt deduction?; (2) Is the debt in this case worthless?; and (3) How much of the debt qualifies for the bad debt deduction in the 1997 tax year?

It has been held that a guarantor required to pay under his guaranty may deduct payment as a bad debt if the guarantor is subrogated to the creditor's claim against a debtor from whom recovery is impossible. See Thomas Watson v. Comm., 8 T.C. 569, 576 (1947); Alice duPont Ortiz v. Comm., 42 BTA 173 (1940); aff'd on other grounds sub nom., Wilmington Trust Co. v. Helvering, 316 U.S. 164 (1942). The Supreme Court has held that when a guarantor pays a debt, the debtor's obligation to the creditor becomes an obligation to the guarantor rather than a new debt, as a result of the subrogation from the shift of the original debt from the creditor to the guarantor. Putnam v. Comm., 352 U.S. 8 (1956). In such cases, the guarantor must prove that the guaranty was bona fide and that the right to recover was worthless. Wincorn v. U.S., 61-1 U.S.T.C. ¶9212 (N.D. Tex. 1961).

In Jack's case, he became subrogated to the creditor's claim because he formally guaranteed the line of credit extended by the bank to Larry and was forced to make the first $10,000 payment on the note when Larry defaulted. This gave Jack a claim against Larry and made the debt bona fide. It should also be noted that the guaranty was entered into by the taxpayer for business reasons, rather than personal reasons. Reg. § 1.166-9(b). In this case, although Jack guaranteed Larry's loan as a friend, the guarantee was entered into for business reasons. Larry was one of Jack's largest customers and promised to buy from Jack exclusively in exchange for the...

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Legal Claim From the facts provided, it appears th. (1969, December 31). In LotsofEssays.com. Retrieved 17:13, March 28, 2024, from https://www.lotsofessays.com/viewpaper/1681328.html