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The bipartisan infrastructure bill passed the House of Representatives in a late night vote on November 5 by a 228-206 vote with 13 Republicans crossing the aisle to get the bill across the finish line after 6 Democrats voted the bill down.

The bipartisan infrastructure bill passed the House of Representatives in a late night vote on November 5 by a 228-206 vote with 13 Republicans crossing the aisle to get the bill across the finish line after 6 Democrats voted the bill down. President Biden signed the infrastructure bill into law on November 15 after Congress came back from a week-long recess.

The $1.2 trillion Infrastructure Investment and Jobs Act ( P.L. No. 117-58), includes a few tax provisions mixed in with the spending on to repair and rebuild the nation’s bridges, climate issues and other items. It passed the Senate with a 69-30 vote in August.

Cryptocurrency Reporting And Other Tax Provisions
Among the tax provisions in the bill is an expansion of the reporting requirements available to cryptocurrency, which is one of the revenue generators to help offset the new spending in the bill. It is believed that a significant amount of cryptocurrency gains escape taxation due to underreporting.

The bill also includes a few other tax changes meant to spur private infrastructure investment, raise revenue, and expand the scope and applicability of disaster declarations, in addition to typical extension of highway funding provisions. These other changes include

• An extension of highway taxes to 2028 and highway trust fund expenditure authority to 2026;
• Inclusion of qualified broadband projects and carbon dioxide capture facilities among the other types of projects for which private activity bonds can be issued;
• A return of the exception for water and sewage disposal utilities from the rule requiring a corporation to recognize contributions in aid of construction (removed by the Tax Cuts and Jobs Act of 2017);
• A return of Superfund excise taxes on certain chemicals, last effective in the mid-1990s;
• Termination of the employee retention credit for employers closed due to COVID-19 after September 30, 2021; and
• Changes to the extension of tax deadlines due to declared disasters and service in a combat area, as well as expansion of extension authority to taxpayers impacted by wildfires.

The IRS has released the annual inflation adjustments for 2022 for the income tax rate tables, plus more than 56 other tax provisions.

The IRS has released the annual inflation adjustments for 2022 for the income tax rate tables, plus more than 56 other tax provisions. The IRS makes these cost-of-living adjustments (COLAs) each year to reflect inflation.

2022 Income Tax Brackets
For 2022, the highest income tax bracket of 37 percent applies when taxable income hits:

• $647,850 for married individuals filing jointly and surviving spouses,
• $539,900 for single individuals and heads of households,
• $323,925 for married individuals filing separately, and
• $13,450 for estates and trusts.

2022 Standard Deduction
The standard deduction for 2022 is:

• $25,900 for married individuals filing jointly and surviving spouses,
• $19,400 for heads of households, and
• $12,950 for single individuals and married individuals filing separately.

The standard deduction for a dependent is limited to the greater of:

• $1,150 or
• the sum of $400, plus the dependent’s earned income.

Individuals who are blind or at least 65 years old get an additional standard deduction of:

• $1,400 for married taxpayers and surviving spouses, or
• $1,750 for other taxpayers.

Alternative Minimum Tax (AMT) Exemption for 2022
The AMT exemption for 2022 is:

• $118,100 for married individuals filing jointly and surviving spouses,
• $75,900 for single individuals and heads of households,
• $59,050 for married individuals filing separately, and
• $26,500 for estates and trusts.

The exemption amounts phase out in 2022 when AMTI exceeds:

• $1,079,800 for married individuals filing jointly and surviving spouses,
• $539,900 for single individuals, heads of households, and married individuals filing separately, and
• $88,300 for estates and trusts.

Expensing Code Sec. 179 Property in 2022
For tax years beginning in 2022, taxpayers can expense up to $1,080,000 in section 179 property. However, this dollar limit is reduced when the cost of section 179 property placed in service during the year exceeds $2,700,000.

Estate and Gift Tax Adjustments for 2022
The following inflation adjustments apply to federal estate and gift taxes in 2022:

• the gift tax exclusion is $16,000 per donee, or $164,000 for gifts to spouses who are not U.S. citizens;
• the federal estate tax exclusion is $12,060,000; and
• the maximum reduction for real property under the special valuation method is $1,230,000.

2022 Inflation Adjustments for Other Tax Items
The maximum foreign earned income exclusion amount in 2022 is $112,000.

The IRS also provided inflation-adjusted amounts for the:

• adoption credit,
• lifetime learning credit,
• earned income credit,
• excludable interest on U.S. savings bonds used for education,
• various penalties, and
• many other provisions.

Effective Date of 2022 Adjustments
These inflation adjustments generally apply to tax years beginning in 2022, so they affect most returns that will be filed in 2023. However, some specified figures apply to transactions or events in calendar year 2022.

The 2022 cost-of-living adjustments (COLAs) that affect pension plan dollar limitations and other retirement-related provisions have been released by the IRS.

The 2022 cost-of-living adjustments (COLAs) that affect pension plan dollar limitations and other retirement-related provisions have been released by the IRS. In general, many of the pension plan limitations will change for 2022 because the increase in the cost-of-living index due to inflation met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged.

The 2022 cost-of-living adjustments (COLAs) were released for:

• pension plan dollar limitations, and
• other retirement-related provisions.

Highlights of Changes for 2022
The contribution limit has increased from $19,500 to $20,500 for employees who take part in:

• 401(k),
• 403(b),
• most 457 plans, and
• the federal government’s Thrift Savings Plan.

The catch-up contribution limit for employees aged 50 and over in the plans above remains $6,500.

The annual limit on contributions to an IRA remains unchanged at $6,000. The $1,000 IRA catch-up contribution amount is not subject to inflation adjustments.

The income ranges increased for determining eligibility to make deductible contributions to:

• IRAs,
• Roth IRAs, and
• to claim the Saver's Credit.

Phase-Out Ranges
Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. The deduction phases out if the taxpayer or their spouse takes part in a retirement plan at work. The phase out depends on the taxpayer's filing status and income.

• Single taxpayers covered by a workplace retirement plan, the phase-out range is $68,000 and $78,000, increased from between $66,000 and $76,000.
• Joint filers, when the spouse making the contribution takes part in a workplace retirement plan, the phase-out range is $109,000 and $129,000, increased from between $105,000 and $125,000.
• An IRA contributor, who is not covered by a workplace retirement plan but their spouse is, the phase out is between $204,000 and $214,000, increased from between $198,000 and $208,000.
• For a married individual filing a separate return who is covered by a workplace plan, the phase-out range remains $0 to $10,000.
• The phase-out ranges for Roth IRA contributions are:
• $129,000 to $144,000, for singles and heads of household,
• $204,000 to $214,000, for joint filers, and
• $0 to $10,000 for married separate filers.

Finally, the income limit for the Saver' Credit is:

• $68,000 for joint filers,
• $51,000 for heads of household, and
• $34,000 for singles and married filing separately.

The IRS has released additional Paycheck Protection Program (PPP) loan forgiveness guidance.

The IRS has released additional Paycheck Protection Program (PPP) loan forgiveness guidance. The guidance addresses (1) timing issues; (2) partner and consolidated group member basis adjustments; and (3) filing of amended partnership returns and information statements.

Timing of Tax-exempt Income
A taxpayer that received a PPP loan may treat tax-exempt income resulting from the partial or complete forgiveness of the PPP loan as received or accrued as follows:

• As the taxpayer pays or incurs eligible expenses. Under the safe harbor that allows certain taxpayers who relied on prior guidance and did not deduct certain PPP-related expenses on a tax return filed before the COVID Tax Relief Act was enacted, to deduct the expenses in the next tax year. A taxpayer that has elected to use the safe harbor will be treated as paying or incurring the eligible expenses during the taxpayer’s immediately subsequent tax year following the taxpayer’s 2020 tax year in which the expenses were actually paid or incurred, as described in Rev. Proc. 2021-20;
• When the taxpayer files an application for forgiveness of the PPP loan; or;
• When the PPP loan forgiveness is granted.

The timing treatment also applies to the extent tax-exempt income resulting from the partial or complete forgiveness of a PPP loan is treated as gross receipts under a federal tax provision.

If a taxpayer received PPP loan forgiveness of less than the amount that the taxpayer previously treated as tax-exempt income, the taxpayer must file an amended return, information return, or administrative adjustment request as applicable.

Partnership Allocations and Basis Adjustments
If covered partnerships meet certain requirements, the IRS will treat the covered taxpayer’s allocation of amounts treated as tax exempt income and allocation of deductions as determined in accordance with Code Sec. 704(b). A partner's basis in its interest is increased by the partner’s distributive share of tax exempt income and is decreased by the partner’s distributive share of deductions. If certain conditions are met, the treatment generally applies in connection with:

• deductions and amounts treated as tax exempt income arising in connection with the forgiveness of a PPP loan;
• deductions and amounts treated as tax exempt income arising in connection with payments made by the SBA on behalf of the taxpayer with respect to a covered loan under § 1112(c) of the CARES Act; and
• the allocation of deductions and amounts treated as tax exempt income arising in connection with the taxpayer receiving a Supplemental Targeted EIDL Advance or a Restaurant Revitalization Grant.

Consolidated Group Members
For consolidated group members, the IRS will treat any amount excluded from gross income under § 7A(i) of the Small Business Act, § 276(b) of the COVID Tax Relief Act, or § 278(a)(1) of the COVID Tax Relief Act, as applicable, as tax exempt income for purposes of Reg. §1.1502-32(b)(2)(ii) investment adjustments. For the treatment to apply, the consolidated group must attach a signed statement to its consolidated tax return.

Amended Returns
Eligible partnerships subject to the centralized partnership audit regime (BBA partnerships) that filed a Form 1065 and furnished all required Schedules K-1 for tax years ending after March 27, 2020 and before Rev. Proc. 2021-50 was issued may file amended partnership returns and furnish amended Schedules K-1 on or before December 31, 2021. The amended returns must take into account tax changes under Rev. Proc. 2021-48 or Rev. Proc. 2021-49, but eligible BBA partnerships may make any additional changes on their amended returns.

The amended return applies to any partnership tax year ending after March 27, 2020 and before the issuance of Rev. Proc. 2021-48 and Rev. Proc. 2021-49. The BBA partnership must clearly indicate the application of this revenue procedure on the amended return and write "FILED PURSUANT TO REV PROC 2021-50" at the top of the amended return and attach a statement with each amended Schedule K-1 furnished to its partners with the same notation.

Special rules apply to pass-through partners. A partnership under examination that wishes to use this amended return procedure must notify the revenue agent coordinating the partnership’s examination.

The IRS issued guidance related to the application of the per diem rules under Rev. Proc. 2019-48 to the temporary 100-percent deduction for business meals provided by a restaurant.

The IRS issued guidance related to the application of the per diem rules under Rev. Proc. 2019-48 to the temporary 100-percent deduction for business meals provided by a restaurant. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 ( P.L. 116-260) temporarily increased the deduction from 50 percent to 100 percent for a business’s restaurant food and beverage expenses for 2021 and 2022.

Application of Per Diem Rules
Under Rev. Proc. 2019-48, taxpayers using the per diem rules to substantiate deductible food and beverage expenses must still apply the 50-percent limitation. According to the IRS guidance, taxpayers that follow Rev. Proc. 2019-48 may treat the entire meal portion of a the per diem or allowance as being attributable to food or beverages provided by a restaurant.

Effective Date
This IRS guidance is effective for the meal portion of per diem allowances for lodging and M&IE, or for M&IE only that are paid or incurred by an employer after December 31, 2020, and before January 1, 2023.

The IRS has released guidance which addresses the federal income tax treatment and information reporting requirements for payments made to or on behalf of financially distressed individual homeowners by a state with funds allocated from the Homeowner Assistance Fund (HAF).

The IRS has released guidance which addresses the federal income tax treatment and information reporting requirements for payments made to or on behalf of financially distressed individual homeowners by a state with funds allocated from the Homeowner Assistance Fund (HAF). The fund was established under section 3206 of the American Rescue Plan Act of 2021, P.L. No. 117-2, in response to the coronavirus disease (COVID-19) pandemic. This guidance is effective on November 8, 2021, and would apply to qualified expenses paid after January 21, 2020.

Disaster Relief Payments
The IRS guidance provides that any HAF payment made to or on behalf of a homeowner is qualified disaster relief payment within the meaning of Code Sec. 139(b)(4) since COVID-19 is a qualified disaster. As a result, such payments are not included in the homeowner’s gross income. However, a homeowner that receives a HAF payment, or on whose behalf a HAF payment is made, for qualified expenses cannot take a deduction or credit with respect to such expenses. Qualified expenses under the HAF program include assistance payments for mortgage payments, utilities, and insurance.

Safe Harbor for Tax Deductions
For tax years beginning in 2021 through 2025, a homeowner may deduct as qualified mortgage interest expenses or qualified real property tax expenses on the homeowner’s federal income tax return for the lesser of:

• the sum of all payments the homeowner actually makes from the homeowner’s own sources during the taxable year to the mortgage servicer; or
• the sum of amounts shown on Form 1098, for qualified housing payment expenses.

A homeowner may first allocate the HAF payments to qualified expenses that are not qualified housing payment expenses before allocating the remaining portion of the HAF payments to qualified housing payment expenses. A qualified housing payment a payment for a mortgage or taxes that would be eligible to be deducted on the taxpayer’s return.

Eligible Homeowners
A homeowner is eligible to claim relief under the IRS guidance if:

• the homeowner receives a payment from, or a payment is made on the homeowner’s behalf by, a State;
• the payment is made with funds from the HAF;
• the payment is used to pay qualified expenses of the homeowner, and at least one of the expenses is a qualified housing payment expense;
• the homeowner has also paid a portion of the qualified housing payment expense from their own sources;
• the homeowner itemizes deductions on their federal income tax return;
• the homeowner would meet the requirements of Code Sec. 163(h)(3) to deduct qualified mortgage interest expenses, if they paid the qualified mortgage interest expenses from the homeowner’s own sources; and
• the homeowner would meet the requirements of Code Sec. 164(a)(1) to deduct qualified real property tax expenses if the homeowner paid the qualified real property tax expenses from the Homeowner’s own sources.

Reporting Requirements
Since HAF payments made to or on behalf of homeowners are excluded from the gross income of the homeowners, they are not fixed or determinable income under Code Sec. 6041 and information reporting for such payments is not required. HAF payments that are made directly to third parties on behalf of homeowners, such as payments made to insurance companies and homeowners associations, are generally reportable to those third parties if they constitute fixed or determinable income to the third party and the aggregate payments meet the $600 reporting threshold. Moreover, the interest received from a governmental unit or an agency or instrumentality of a governmental unit is not interest received on a mortgage. Lenders who receive a homeowner’s mortgage payments directly from a State should not report the interest received from the State on Form 1098 as interest received on the homeowner’s mortgage.

If a lender files and furnishes a Form 1098 that includes mortgage interest received directly from the State, thereby reporting an incorrect amount of interest on the information return, the lender will not be subject to penalties under Code Secs. 6721 and 6722 so long as the lender notifies the homeowner that the amounts reported on the Form 1098 are overstated because they include payments from a governmental unit or an agency or instrumentality of a governmental unit, and sets forth the amount of the overstatement. Such notification to the homeowner should be made at the time the Form 1098 is furnished or within 30 days thereafter, and can be provided in a separate statement (written or electronic), or included on Form 1098 in Box 10 labeled "Other".

The IRS has urged taxpayers, including ones who received stimulus payments or advance Child Tax Credit payments, to follow some easy steps for accurate federal tax returns filing in 2022.

The IRS has urged taxpayers, including ones who received stimulus payments or advance Child Tax Credit payments, to follow some easy steps for accurate federal tax returns filing in 2022.

Organized tax records
Taxpayers can easily prepare complete and accurate tax returns with the help of organized tax records. Organized tax records also help avoid errors that lead to processing and refund delays. Taxpayers must have all tax information available before filing their tax returns. Taxpayers must inform the IRS of any address changes and the Social Security Administration of a legal name change.

Recordkeeping for individuals includes the following:

• Forms W-2 from employer(s),
• Forms 1099 from banks, issuing agencies and other payers, including unemployment compensation, dividends, distributions from a pension, annuity or retirement plan,
• Form 1099-K, 1099-MISC, W-2 or other income statement for workers in the gig economy,
• Form 1099-INT for interest received, and
• other income documents and records of virtual currency transactions.

Individuals can determine if they are eligible for deductions or credits with the help of income documents. Further, taxpayers will need their related 2021 information to reconcile their advance payments of the Child Tax Credit and Premium Tax Credit. People will also need their stimulus payment and plus-up amounts to figure and claim the 2021 Recovery Rebate Credit if they received third Economic Impact Payments and think they qualify for an additional amount.

Further, taxpayers must secure the end of year documents, including the following:

• Letter 6419, 2021 Total Advance Child Tax Credit Payments, to reconcile advance Child Tax Credit payments,
• Letter 6475, Your 2021 Economic Impact Payment, to determine eligibility to claim the Recovery Rebate Credit, and
• Form 1095-A, Health Insurance Marketplace Statement, to reconcile advance Premium Tax Credits for Marketplace coverage.

Online Account
Taxpayers can securely gain entry to the Child Tax Credit Update Portal to see their payment dates and amounts through their Online Account. This information will be required to reconcile taxpayers’ advance Child Tax Credit payments with the Child Tax Credit they can claim when filing their 2021 tax returns.

Eligible individuals claiming a 2021 Recovery Rebate Credit can view their Economic Impact Payment amounts in their online account to accurately claim the credit when they file.

Those who have an Online Account may:

• see the amounts of their Economic Impact Payments,
• access Child Tax Credit Update Portal for information regarding their advance Child Tax Credit payments,
• approve or reject authorization requests from their tax professional, and
• update their email address and opt-out/in for selected paper notice preferences.

Tax Withholding
The IRS has informed that individuals may want to consider adjusting their withholding if they owed taxes or received a large refund the previous year. Individuals can help avoid a tax bill or let individuals keep more money every payday by changing withholding. Some reasons for adjusting withholding might be marriage or divorce, childbirth or taking on a second job. Taxpayers may complete a new Form W-4, Employee’s Withholding Certificate, every year and when personal or financial situations change.

Further, individuals should make quarterly estimated tax payments if they receive a substantial amount of non-wage income like self-employment income, investment income, taxable Social Security benefits and in some instances, pension and annuity income. The due date for 2021 is January 18, 2022.

ITINs
An Individual Taxpayer Identification Number (ITIN) will expire on December 31, 2021 if it was not included on a U.S. federal tax return at least once for tax years 2018, 2019 and 2020. The IRS has reminded taxpayers that ITINs with middle digits 70 through 88 have expired. Further, ITINs with middle digits 90 through 99, IF assigned before 2013, have expired. Individuals are not required to renew again if they previously submitted a renewal application that was approved.

Direct Deposit
Individuals can access their refund faster than a paper check with the help of direct deposit. Taxpayers without a bank account can learn how to open an account at an FDIC-Insured bank or through the National Credit Union Locator Tool. Veterans can visit the Veterans Benefits Banking Program to access financial services at participating banks.

IRS Certified Volunteers
The IRS has encouraged people to join the Volunteer Income Tax Assistance and Tax Counseling for the Elderly programs to prepare a free tax return for eligible taxpayers.

All members of the G20 on October 30 endorsed a global corporate minimum tax rate of 15 percent in an effort to eliminate countries slashing corporate tax rates and creating tax shelters to attract large multinational corporations.

All members of the G20 on October 30 endorsed a global corporate minimum tax rate of 15 percent in an effort to eliminate countries slashing corporate tax rates and creating tax shelters to attract large multinational corporations.

The agreement comes on the heels of an international agreement in October among 136 of the 140 Organization for Economic Cooperation and Development (OECD) members, that featured two pillars. Under Pillar One, taxing rights will be reallocated to market jurisdictions to ensure that market economies receive tax revenue even in locations where large multinational enterprises (MNEs) lack a physical presence. MNEs with global sales above 20 billion euro and profitability above 10 percent will be covered by the new rules, with 25 percent of profit above the 10 percent threshold to be reallocated to market jurisdictions.

Pillar Two introduces the global minimum corporate tax rate set at 15 percent, which applies to companies with revenue above 750 million euro.

Each country will need to ratify the tax within its own governing structure.
"The final political agreement as set out in the Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy and in the Detailed Implementation Plan, released by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) on October 8, is a historic achievement through which we will establish a more stable and fairer international tax system," the final Rome Declaration states. "We call on the OECD/G20 Inclusive Framework on BEPS to swiftly develop the model rules and multilateral instruments as agreed in the Detailed Implementation Plan, with a view to ensure that the new rules will come into effect at global level in 2023."

Tax To Generate $60 Billion Annually for U.S.
A White House spokesperson said October 29 ahead of the formal G20 endorsement that the 15 percent global corporate minimum tax would generate at least $60 billion annually. The tax has been proposed as part of the current version of the Build Back Better Act ( H.R. 5376) as a key revenue generator that will help offset the $1.75 trillion in new spending that is included in the legislation. The House Rules Committee is in the process of reviewing that legislation as the last stop before the bill advances to the lower chamber of Congress for consideration, something that could happen as early as the week of November 1.

Treasury Secretary Janet Yellen said at a November 1 press conference that while the agreed upon global corporate minimum tax rate was set at 15 percent, it could conceivably go higher, although she does not expect it to.

Individual countries "may choose themselves to establish a higher tax, but I expect many countries to adopt a 15 percent tax," Yellen said, adding that there is nothing that makes 15 percent represents a fixed percentage, a minimum or even a ceiling. " I don't think that there's broad agreement on that. It works for many countries, and I don't think that that's something that is going to be reconsidered as a as a global minimum."

In a case of first impression, the Tax Court retained jurisdiction over a petition for redetermination with respect to a whistleblower's claim for an award after the petitioner’s death.

In a case of first impression, the Tax Court retained jurisdiction over a petition for redetermination with respect to a whistleblower's claim for an award after the petitioner’s death. The informant filed a claim for an award with the IRS Whistleblower Office (WBO) for naming multiple target taxpayers. The WBO denied the claim and the informant appealed the determination to the Tax Court under Code Sec. 7623(b)(4). The informant died after filing the petition, but before the trial. Moreover, the informant's claim with respect to two of the target taxpayers was pending before the Tax Court prior to the petitioner’s death.

Litigation Post-Death of Informant
The counsel for the informant filed a motion to substitute the informant's estate in order to continue to prosecute the informant's claim after his death. At trial, the Tax Court stated that its jurisdiction over a petition filed under Code Sec. 7623(b)(4) was not extinguished by the death of the informant because the WBO reached a final determination and a petition was filed. Further, the informant's claim survived his death and his estate had standing to be substituted as the petitioner.

An S corporation’s disposition of a major league baseball team was a disguised sale to a newly formed partnership.

An S corporation’s disposition of a major league baseball team was a disguised sale to a newly formed partnership. The taxpayer had formed the partnership, with a renowned family, where the taxpayer contributed the major league baseball team and related assets and the family contributed cash. Subsequently, the partnership then distributed cash to the taxpayer (the transaction) which represented a "disguised sale" which was taxable under Code Sec. 707. Further, the IRS had issued a notice of deficiency to the taxpayer and a notice of final partnership administrative adjustment (FPAA) as to the partnership for the tax year at issue. The IRS claimed that since the debt funded by the family was not bona fide debt, it was supposed to be disregarded for purposes of the debt-financed distribution rule. The taxpayer argued that the transaction was a disguised sale but that the distribution to the taxpayer was not taxable because it was a debt-financed distribution. Moreover, the taxpayer contended that it should be allocated to the debt because it bore the economic risk of loss on account of its guaranties. However, the IRS contended that the possibility of the taxpayer being called on to fulfill the guaranties was so remote it they should be disregarded.

Whether the Sub Debt was Bona Fide Debt or Equity
The parties disputed whether the amount of sub debt which the partnership borrowed from a finance company was bona fide debt and therefore a partnership liability. The factors which determined the same (the Dixie Dairies factors), such as: 1) presence or absence of a fixed maturity date; (2) names given to the certificates evidencing the indebtedness; (3) source of payments; (4) right to enforce payments; (5) participation rights; (6) status of the advances in relation to regular corporate creditors; (7) intent of the parties weighs strongly toward equity; (8) identity of interest between creditor and stockholder; (9) ‘thinness’ of capital structure in relation to debt; (10) ability of the corporation to obtain credit from outside sources; (11) use to which the advances were put; (12) failure of the debtor to repay; and (13) risk, all strongly favored that the sub-debt was equity. Because the sub debt was equity, it was not allowed to be allocated to the taxpayer as recourse debt.

Allocation of Partnership Liabilities
The economic substance of the transaction was a disguised sale with a debt-financed distribution, a structure contemplated by both the statute and the regulations. Moreover, under the constructive liquidation test, the taxpayer bore the risk of economic loss for the senior debt. According to the terms of the taxpayer’s guaranty of the senior debt, the taxpayer was obligated to pay when the partnership failed to make a payment and the debt was accelerated, the creditors had exhausted their remedies, and the creditors had failed to collect the full amount of the debt. Therefore, the senior debt guaranty was a nontaxable debt-financed distribution. Finally, the amount of expenses, in the form of legal expenses, paid by the taxpayer to a group of potential buyers, was required to be capitalized.