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TITLE 26-INTERNAL REVENUE CODE taxable year, of a capital asset held for not more than 9 months. (2) Nonbusiness debt defined For purposes of paragraph (1), the term "nonbusiness debt" means a debt other than- (A) a debt created or acquired (as the case may be) in connection with a trade or busi- ness of the taxpayer; or (B) a debt the loss from the worthlessness of which is incurred in the taxpayer's trade or business. (e) Worthless securities This section shall not apply to a debt which is evidenced by a security as defined in section 165(g)(2)(C). (f) Reserve for certain guaranteed debt obligations (1) Allowance of deduction In the case of a taxpayer who is a dealer in property, in lieu of any deduction under sub- section (a), there shall be allowed (in the dis- cretion of the Secretary) for any taxable year ending after October 21, 1965, a deduction- (A) for a reasonable addition to a reserve for bad debts which may arise out of his li- ability as a guarantor, endorser, or indemni- tor of debt obligations arising out of the sale by him of real property or tangible per- sonal property (including related services) in the ordinary course of his trade or busi- ness; and (B) for the amount of any reduction in the suspense account required by paragraph (4)(B)(i). (2) Deduction disallowed in other cases Except as provided in paragraph (1), no de- duction shall be allowed to a taxpayer for any addition to a reserve for bad debts which may arise out of his liability as guarantor, endors- er, or indemnitor of debt obligations. (3) Opening balance The opening balance of a reserve described in paragraph (1)(A) for the first taxable year ending after October 21, 1965, for which a taxpayer maintains such reserve shall, under regulations prescribed by the Secretary, be determined as if the taxpayer had maintained such reserve for the preceding taxable years. (4) Suspense account (A) Requirement Except as provided by subparagraph (C), each taxpayer who maintains a reserve de- scribed in paragraph (1)(A) shall, for pur- poses of this subsection and section 81, es- tablish and maintain a suspense account. The initial balance of such account shall be equal to the opening balance described in paragraph (3). (B) Adjustments At the close of each taxable year the sus- pense account shall be- (I) reduced by the excess of the sus- pense account at the beginning of the year over the reserve described in para- graph (1)(A) (after making the addition for such year provided in such para- graph), or (i) increased (but not to an amount greater than the initial balance of the sus- pense account) by the excess of the re- serve described in paragraph (1)(A) (after making the addition for such year pro- vided in such paragraph) over the sus- pense account at the beginning of such year. (C) Limitations Subparagraphs (A) and (B) shall not apply in the case of the taxpayer who main- tained for his last taxable year ending before October 22, 1965, a reserve for bad debts under subsection (c) which included debt obligations described in paragraph (1)(A). (D) Section 381 acquisitions The application of this paragraph in any acquisition to which section 381(a) applies shall be determined under regulations pre- scribed by the Secretary. (g) Cross references (1) For disallowance of deduction for worthlessness of debts owed by political parties and similar organizations, see section 271. (2) For special rule for banks with respect to worthless securities, see section 582. (3) For special rule for bad debt reserves of certain mutual savings banks, domebtic building and loan associ- ations, and cooperative banks, see section 593. (4) For special rule for bad debt reserves of banks, small business investment-companies, etc., see sections 585 and 586. (Aug. 16, 1954, ch. 736, 68A Stat. 50; Sept. 2, 1958, Pub. L. 85-866, title I, § 8, 72 Stat. 1608; Nov. 2, 1966, Pub. L. 89-722, § l(a), 80 Stat. 1151; Dcc. 30, 1969, Pub. L. 91-172, title IV, § 431(c)(1), 83 Stat. 619; Oct. 4, 1976, Pub. L. 94- 455, title VI, § 605(a), title XIV, § 1402(b)(1)(A), title XIX, § 1906(b)(13)(A), 90 Stat. 1575, 1731, 1834.) TAXABLE YEARS AFTER 1977 Subsec. (d)(1)(B) of this section amended by Pub. L. 94-455, Title XIV, § 1402(b)(2), Oct. 4, 1976, 90 Stat. 1732, effective for tax- able years beginning after Dec. 31, 1977, by substituting "1 year"for "9 months". AMENDMENTS 1976-Subsec. (a)(2). Pub. L. 94-455. § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (c). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (d)(1)(B). Pub. L. 94-455, § 1401(b)(1)(A). provided that "6 months" would be changed to "9 months" for taxable years beginning in 1977. Subsec. (f). Pub. L. 94-455, §§ 605(a), 1906(b)(13)(A). redesignated former subsec. (g) as (f), and as so rede- signated, struck out in pars. (1), (3) and (4)(D) "or his delegate" following "Secretary". Former subsec. (f), which related to treatment of pryments made by guar- antors of certain noncorporate obligations, was struck out. Subscc. (g). Pub. L. 94-455, § 605(a), redesignated former subsec. (h) as (g). Former subsec. (g) redesig- nated f). 1969-Subsec. (h). Pub. L. 91-172 added par. (4). 1966-Subsec. (g). Pub. L. 89-722 added subsec. (g) and redesignated former subsec. (g) as (h). Subsec. (h). Pub. L. 89-722 redesignated former subsec. (g) as (h). Page 151 § 166