DPP QBank (3rd)
A limited partner (LP) invests $100,000 in a limited partnership with a nonrecourse note for $300,000. The partnership liquidates and the LP receives $100,000. His loss for tax purposes is what?
0: Limited partners are liable for their investments and any shares of recourse debt. They are not liable for nonrecourse debt. Because the limited partner received the full amount of his original investment at the liquidation of the partnership, he has no loss to declare.
A customer invests $20,000 in a DPP and signs a recourse note for $50,000. During the first year of operation, the customer receives a cash distribution from the partnership of $15,000. At year end, the customer receives a K-1 statement reporting his share of partnership losses of $75,000. How much of the loss may the customer deduct from passive income?
A limited partner can only deduct partnership losses to the extent of his basis. To determine basis, add the original investment ($20,000). to any recourse debt assumed by the investor ($50,000). Recourse debt adds to basis as the partner is liable for this amount. Cash distributions received reduce basis ($15,000). At year end, the investor's basis and the amount he can deduct from passive income is $55,000.
In the partnership agreement of a limited partnership, all of the following would be disclosed EXCEPT: A) the procedures for the annual election of general partners. B) how the operating profits will be distributed. C) what matters the limited partners can vote on under the democracy provisions. D) how the general partners will be compensated.
A) the procedures for the annual election of general partners. Limited partners have limited liability. General partners have unlimited liability. Only in specific situations can the limited partners elect a new general partner. Such situations would include the resignation, death, incapacity, or removal of the general partner.
An investor purchased an interest in a limited partnership, paying $10,000 in cash and signing a recourse note to the partnership under a letter of credit for $40,000. Which of the following statements are TRUE? A) The investor's tax basis will be $10,000. B) The investor's tax basis will be $50,000. C) The investor's maximum loss will be $10,000. D) The investor's maximum loss will be $50,000.
B and D) A recourse note means that the limited partner agrees to pay the note no matter what happens. He is legally liable for the $40,000, which makes both his tax basis and maximum loss potential $50,000.
All of the following are oil and gas program sharing arrangements EXCEPT: A) disproportionate sharing. B) all or none underwriting arrangement. C) reversionary working interest. D) functional allocation.
B) Functional allocation, disproportionate sharing, and reversionary working interest are all types of oil and gas sharing arrangements. All or none is a type of best efforts underwriting agreement.
A limited partner assisting the general partner to solicit new investors. A) is permitted if no compensation is paid. B) could jeopardize his limited partner status. C) is permitted if done within 90 days of his acceptance as limited partner. D) is permitted if stated in the partnership agreement.
B) If limited partners, either individually or as a group, become too involved with the business of the partnership, they could be considered to be general partners and lose their limited liability.
An investor with a large salary as well as unearned investment income is two years from retirement. If he wants to shelter a portion of his income, which of the following programs would provide him with substantial initial write-offs? A) Raw land. B) An oil and gas drilling program. C) Existing housing. D) An oil and gas income program.
B) Oil and gas drilling programs pass through IDCs (intangible drillings costs), which the partners may use to reduce passive income.
Which of the following registers the securities and packages the program for a limited partnership? A) Property manager. B) Syndicator. C) Limited partners. D) General partner.
B) Syndicator.
A registered representative must obtain written verification of an investor's net worth for which of the following investments? A) Real estate investment trust. B) Mutual fund. C) Direct participation program. D) Variable contract.
C) Direct participation program.
If a limited partnership interest is sold, the gain or loss in the sale is the difference between the sales proceeds and the: Original basis or adjusted basis.
C) adjusted basis.
Intangible drilling costs would include all of the following EXCEPT: A) land surveys. B) fuel. C) casing. D) wages.
C) casing.
The primary tax benefit of an income oil and gas program is: A) depreciation. B) intangible drilling costs. C) depletion. D) tangible drilling costs.
C) depletion. In an income program, the partnership is buying producing oil and gas wells. There are no drilling costs involved in these programs. While there may be a small amount of depreciation as a tax benefit, the primary benefit is depletion which is taken once the oil and gas have been sold.
All of the following are primary objectives in a DPP EXCEPT: A) deductions against other income. B) deferment of taxes. C) long-term capital gains. D) short-term capital gains.
D) DPPs are used to defer present income into the future and take advantage of time.
Which of the following is least likely to be part of an equipment leasing partnership? A) Railroad cars. B) Aircraft. C) Computers. D) Oil well casing and piping.
D) Oil well casing and piping. Casing and piping are materials used in oil and gas well drilling programs.
The term "wildcatting" refers to: A) buying new-construction real estate for speculative appreciation value. B) small-cap mutual fund diversification. C) limiting your investment portfolio to IPOs. D) drilling for oil or gas where none has occurred previously.
D) drilling for oil or gas where none has occurred previously.
Depletion allowances in oil and gas programs are based on the amount of oil: A) lost to shrinkage. B) extracted. C) in reserve. D) sold.
D) sold
A sharing arrangement in which only deductible costs are apportioned to the investor with the sponsor bearing all capitalized costs is called a(n)?
Functional allocation
A direct participation program shows the following operations results: Revenues: $3 million. Operating expense: $1 million. Interest expense: $200,000. Management fees: $200,000. Depreciation: $3 million. What is the profit or loss for the year?
Gross revenue $3 million. Less operating expense -$1.2 million. Net revenue $1.8 million. Less interest -$200,000. Less depreciation $3 million. Taxable loss = $1.4 million.
What do both real estate and oil and gas partnerships offer?
Limited liability, depreciation allowances, and deferred receipt of income and capital gains.
All of the following would flow through as a loss to limited partners EXCEPT: A) principal repayment on recourse debt. B) depletion. C) interest payments on recourse debt. D) accelerated depreciation.
Principal repayments are not deductible for tax purposes. The interest is deductible.
What happens if a limited partner in a real estate direct participation program becomes involved in the management of the office building acquired by the partnership?
While the limited partners usually have limited liability, that benefit can be lost if a limited partner engages in certain activities, including (1) the day-to-day management of the property, (2) representing himself as a general partner, and (3) financial control of the partnership.
A working interest in an oil and gas partnership entitles the holder to what?
a portion of the revenue and responsibility for part of the expense of extraction.
The principal tax benefit of investing in an exploratory oil and gas drilling program is derived from: Depreciation expenses or intangible drilling costs?
intangible drilling costs
Analysts use both _____________ and ________________ to establish a DPP's rate of return. Both involve assumptions based on future cash flows generated by the program.
present value, internal rate of return
