Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 60-48

1960-1 C.B. 112

Sec. 165

Sec. 166

IRS Headnote

A loss incurred by an individual from the worthlessness of the debts of an insolvent or liquidated corporation, which debts the individual had paid as guarantor, is not deductible as a loss sustained in a transaction entered into for profit but is deductible only as a business or nonbusiness bad debt under section 166 of the Internal Revenue Code of 1954, depending upon the particular facts of each case.

Full Text

Rev. Rul. 60-48

In view of the decision of the Supreme Court of the United States in Max Putnam et ux. v. Commissioner , 352 U.S. 82, Ct. D. 1800, C.B. 1957-1, 501, reconsideration has been given to the acquiescence by the Commissioner of Internal Revenue in the decision in Abraham Greenspon et al. v. Commissioner , 8 T.C. 431, acquiescence, C.B. 1947-1, 2.

In the Greenspon case, the taxpayers guaranteed loans made to their wholly owned corporation. Subsequently, the corporation was completely liquidated and the taxpayers, as guarantors, were required to make payment on the debts of the corporation which they had guaranteed. The Tax Court of the United States held that since the corporation had ceased to exist at the time of the payment to creditors by the petitioners, no debt could arise from that corporation in favor of the petitioners. Hence, a bad debt deduction was not allowable. However, the court held guaranty obligations were deductible as losses from transactions entered into for profit under section 23(e) of the Internal Revenue Code of 1939 (section 165 of the Internal Revenue Code of 1954).

In the Putnam case, the petitioners had guaranteed loans made to a corporation in which they were stockholders. While the corporation was still in existence, but hopelessly insolvent, the petitioners, as guarantors, made payment on the loans to the corporation's creditors. Based upon the facts in this case, the Supreme Court held that the petitioners, upon payment of the corporation's indebtedness as guarantors, by subrogation, acquired a debt, the loss resulting from the worthlessness of which was a nonbusiness bad debt deductible under the provisions of section 23(k)(4) of the 1939 Code (section 166(d) of the 1954 Code) as a short-term capital loss and not as a loss sustained in a transaction entered into for profit.

However, the Court did not hold that in all cases where a noncorporate guarantor of a corporate obligation is required to make good on the obligation of an insolvent or liquidated corporate debtor which he has guaranteed, the loss to the guarantor is automatically deductible only as a nonbusiness bad debt. The Court merely held that in such cases the guarantor's loss must be reflected as a bad debt deduction, leaving the question of whether the debt is to be treated as a business or nonbusiness bad debt to the particular facts of the case. This decision was based on the conclusion that it is not the payment of the obligation by the guarantor which constitutes the deductible loss, but the acquisition by the guarantor from the creditor of the original debt, which becomes worthless in the guarantor's hands. The Court indicated that the result would be the same even if the debtor corporation were not in existence at the time of the guarantor's payment to the creditors.

Accordingly, it is the position of the Internal Revenue Service that where a noncorporate guarantor of a corporate obligation is required to make payment on obligations of the insolvent or liquidated corporate debtor which he has guaranteed, the loss to the guarantor is not deductible as a loss sustained in a transaction entered into for profit under section 165(c)(2) of the 1954 Code but is deductible only as a business or nonbusiness bad debt under section 166(d) of the 1954 Code, depending upon the particular facts of each case.

The acquiescence in Abraham Greenspon et al. v. Commissioner has been withdrawn and nonacquiescence has been substituted therefor. See page 7, this Bulletin.