QBank unit 11
One of your customers invests $20,000 in an oil and gas limited partnership program. The Schedule K-1 she receives at year-end from the partnership indicates that operating revenues and operating expenses were exactly the same. In addition, her share of the year's depletion allowance is $6,000. During the year, she received a cash distribution of $8,000. What is her basis as of year-end? A) $6,000 B) $8,000 C) $16,000 D) $12,000
A) $6,000 She began with a basis of $20,000 (her original investment). During the year, she received a distribution of $8,000. That lowered her basis (the amount of money "at risk") to $12,000. In addition, the depletion represents a nonoperating expense that can be taken as a loss. That brings the basis down to $6,000.
From time to time, an investor's situation arises where they may need to liquidate a portion of the portfolio. It could be a medical need, an emergency repair, or a joyous event such as a wedding. Getting the necessary cash would be most difficult from which of the following holdings? A) A DPP B) A unit investment trust C) A mutual fund D) A listed option
A) A DPP When it comes to liquidity, at least for the exam, DPPs rank near the bottom of the list. Mutual funds and UITs are redeemable by the issuer, and closing a position in an option contract settles the next day.
Which of the following types of oil and gas limited partnership programs is the most risky? A) Exploratory B) Income C) Developmental D) Existing property
A) Exploratory For oil and gas partnerships, exploratory programs are considered the riskiest because they involve drilling new wells in areas where oil has not yet been discovered. These programs would be followed by developmental, with income programs being the least risky. Existing property is a type of real estate program.
Which of the following are part of the depreciable basis of a limited partner in a real estate direct participation program? Land Buildings Supplies used for cleaning and maintenance Air conditioning equipment A) II and IV B) II and III C) I and III D) I and IV
A) II and IV Only fixed plant (buildings) and equipment can be depreciated. Land, as well as any up-front costs charged to the limited partners, cannot be depreciated. Those nondepreciable costs, however, are part of the limited partner's beginning basis but not part of the depreciable basis.
A married couple both hoping to retire within the next five to seven years have expressed having a low-risk tolerance regarding the stock market. They have a combined income of $350,000. Given this information, which of the following portfolio mixes would be most suitable? A) Treasury notes, municipal bonds, GNMAs B) Direct participation programs, real estate investment trusts, preferred stock C) Treasury bills, corporate bonds, preferred stock D) Treasury bills, common stock, options
A) Treasury notes, municipal bonds, GNMAs In light of their low risk tolerance, U.S. government securities would certainly be suitable, and the time frame noted for retirement allows for middle term T-notes to be useful. Given their higher income level, tax-free municipal bonds could also have a place in the portfolio. Longer term GNMAs would accommodate monthly income, should that be desirable upon retirement. The remaining product suggestions are either illiquid (DPPs) or do not align with their risk aversion (common, preferred, options, and REITs).
A taxpayer's most advantageous tax benefit is A) a tax credit. B) a tax deduction. C) straight-line depreciation. D) a depletion allowance.
A) a tax credit. A tax credit reduces a person's tax liability dollar for dollar. Deductions, depreciation, and depletion reduce taxable income.
An individual who invests in an undeveloped land limited partnership would be most interested in A) appreciation. B) depreciation. C) operating expense deductions. D) depletion.
A) appreciation. Investors seek appreciation when investing in undeveloped land limited partnerships.
A general partner may do all of the following except A) borrow money from the partnership. B) make general management decisions regarding the partnership. C) sell property to the limited partnership. D) act as an agent for the partnership in managing partnership assets.
A) borrow money from the partnership. All these situations offer the potential for conflicts of interest. However, the general partner is not forbidden by law to engage in any of these acts, except for borrowing money; the general partner may never borrow money from the partnership.
When analyzing a direct participation program investment, a method that takes into account the revenues and expenses is A) cash flow analysis. B) fundamental analysis. C) technical analysis. D) liquidity analysis.
A) cash flow analysis. Revenues and expenses are cash items and would be analyzed by cash flow analysis.
One of the key requirements in offering a DPP to a customer is that the program must be suitable. FINRA has some specific suitability requirements for DPPs. Among those is the investor A) has a net worth sufficient to sustain the risks of the DPP, including loss of investment. B) does not own a DPP that will compete with the program being offered. C) has sufficient net worth to be deemed an accredited investor. D) has sufficient experience in the type of business the program is undertaking.
A) has a net worth sufficient to sustain the risks of the DPP, including loss of investment. FINRA's Rule 2310 lists a few suitability standards necessary for recommending DPPs. Among those is the need for the investor to have a net worth sufficient to sustain the risks of the DPP, including loss of the investment. Although many DPPs, but not all, are limited to accredited investors, that is not a FINRA suitability standard; that is an SEC requirement. It is the general partner who cannot be in a business that competes with the DPP.
An investor desiring a limited partnership investment with capital gains potential would most likely select one investing in A) raw land. B) shopping centers. C) oil and gas. D) equipment leasing.
A) raw land. Historically, raw land has been a source of appreciation. Shopping centers might appreciate in value but are oriented more toward current income. Equipment leasing offers income, and the asset ultimately depreciates. Oil and gas provide income as well, and the asset ultimately depletes.
Once the IRS determines that a tax shelter is abusive, it may do all of the following except A) sentence the abuser to a prison sentence. B) charge the taxpayer with intent to defraud. C) disallow all deductions. D) charge interest on back taxes.
A) sentence the abuser to a prison sentence. The IRS does not have the authority to hand out prison sentences. It can bring you to court, and the court can sentence you to jail.
FINRA Rule 2310 defines a direct participation program as "a program which provides for flow-through tax consequences regardless of the structure of the legal entity or vehicle for distribution including, but not limited to, oil and gas programs, real estate programs, agricultural programs, cattle programs, condominium securities, Subchapter S corporate offerings and all other programs of a similar nature, regardless of the industry represented by the program, or any combination thereof." The rule places limits on the overall expenses and amount of broker-dealer compensation considered fair and reasonable. That limit is A) 10% of the gross proceeds. B) 15% of the gross proceeds. C) 2% of the gross proceeds. D) 5% of the gross proceeds.
B) 15% of the gross proceeds. If the organization and offering expenses exceed 15% of the gross proceeds, FINRA considers that too high. The 10% limitation is on the amount of compensation received by a member firm for selling interests in the DPP. The 2% is the maximum charge in a DPP rollup if the firm wishes to solicit votes from the limited partners. The 5% is the FINRA markup policy and that does not apply to DPPs.
Which of the following is not generally associated with an existing real estate direct participation program? A) Immediate income stream B) Appreciation potential C) Lower risk than other types of real estate programs D) Known history of income and expenses
B) Appreciation potential Appreciation potential is generally not associated with existing real estate programs because most appreciation occurs in the earliest years for real estate assets.
A direct participation program (DPP), organized as a limited partnership, must avoid at least two characteristics of a corporation. Which two characteristics are easiest to avoid? A) Centralized management and continuity of life B) Continuity of life and freely transferable interests C) Freely transferable interests and centralized management D) Continuity of life and centralized management
B) Continuity of life and freely transferable interests Continuity of life and freely transferable interests are the easiest to avoid. The limited partnership is formed to exist for a limited time, and general partner (GP) must approve any transfer of interests. Centralized management is the hardest characteristics to avoid because management of the program is the responsibility of the general partner (GP), so management is centralized.
Which of the following would not be a valid use of the partnership democracy? A) Consenting to an action of a general partner that is contrary to the agreement of limited partnership B) Deciding which partnership assets should be liquidated to pay creditors C) Removing the general partner D) Consenting to a legal judgment against the partnership
B) Deciding which partnership assets should be liquidated to pay creditors Deciding which partnership assets should be liquidated to pay creditors involves limited partners in the active management of partnership affairs. This would result in being treated as general partners with respect to liability and possible loss of limited partner status.
Which of the following is least likely to be a risk concern to an investor in an oil and gas DPP? A) Legislative risk B) Deductions for intangible drilling costs C) Lack of liquidity D) Risk of an IRS audit
B) Deductions for intangible drilling costs The deductions for intangible drilling costs are a benefit rather than a risk. If the choice said excess intangible drilling costs, then the investor might be subject to the alternative minimum tax (AMT). On the exam, you can count on DPPs having liquidity risk. It is generally believed that tax returns showing ownership of a DPP have a greater audit risk. Because one of the features of a DPP is the tax treatment, a potential change to the tax laws by the Congress constitutes legislative risk.
If near-term liquidity were the only objective for a client, which of the following pairs of investments would represent the most/least liquid? A) 10-year corporate bonds/U.S. T-bills B) Exchange-listed equities/direct participation program C) Variable annuity/money market mutual funds D) Variable annuity/direct participation programs
B) Exchange-listed equities/direct participation program Of the pairings offered to choose from, exchange-listed equities are considered liquid, as they could be easily divested of, and direct participation programs, which all have predetermined (scheduled) end dates, would be the least liquid.
Which of the following real estate limited partnerships allows tax credits to the investor? A) Existing property B) Historic rehabilitation C) New construction D) Raw land
B) Historic rehabilitation Raw land partnerships seek appreciation. Existing property and new-construction partnerships seek passive income and tax deductions from business operations. Historic rehabilitation partnerships allow not just deductions, but actual tax credits.
An investor in a limited partnership generating passive losses can offset these against passive income from other partnerships. rental income from direct investments in real estate. dividends received from listed securities. capital gains from the sale of unlisted securities. A) I and III B) I and II C) II and III D) III and IV
B) I and II Passive losses can be deducted from passive income and income from certain real estate investments; it cannot be deducted from active or portfolio (investment) income.
Which of the following is least likely to be part of an equipment leasing partnership? A) Aircraft B) Oil well casing and piping C) Computers D) Railroad cars
B) Oil well casing and piping Casing and piping are materials used in oil and gas well-drilling programs.
The price paid for a listed REIT is most similar to the pricing of A) a real estate limited partnership. B) a closed-end investment management company. C) a collateralized mortgage obligation. D) an open-end investment management company.
B) a closed-end investment management company. Pricing of a listed REIT (real estate investment trust) is based on supply and demand. In this respect, they trade similarly to a closed-end investment management company. Open-end investment management companies are mutual funds and their pricing is based on the net asset value as computed daily. On the exam, unless stated otherwise, all real estate limited partnership offerings are offered through private placements. This means that they are not publicly traded and have limited liquidity.
All of the following are characteristics of a direct participation program (DPP) except A) its revenue, deductions, and tax credits are reported to the IRS. B) it pays federal income taxes. C) the most common structure used for a direct participation program is the limited partnership. D) its revenue, deductions, and tax credits are proportionally given to investors.
B) it pays federal income taxes. As long as a direct participation program avoids at least two of the four characteristics of a corporation, it can remain a reporting-only entity to the IRS. That means it does not pay federal income taxes. Revenue, deductions, and tax credits (if any) are reported the IRS on Form 1065 and distributed proportionally to the investors on the Schedule K-1. The typical business organization of a DPP is a limited partnership having at least one general partner and at least one limited partner.
One of your customers owns a limited partnership interest in an oil and gas drilling program. The program was successful in finding oil and is expected to operate at a loss for the next year. The loss flowing through to the limited partner is generated by all of these except A) accelerated depreciation taken on the drilling equipment. B) principal repayment on partnership debt. C) depletion on the sale of oil removed from the ground. D) interest payments on partnership debt.
B) principal repayment on partnership debt. Losses occur when expenses exceed revenues. Principal repayments are not an expense. Interest on debt is a deductible expense. Natural resources deplete and the depletion allowance is an expense similar in concept to depreciation, another expense. From a personal standpoint, compare this to your home mortgage−the interest is a deductible expense, but the portion representing payment of principal is not.
All of the following would flow through as a loss to limited partners except A) depletion. B) principal repayment on recourse debt. C) interest payments on recourse debt. D) accelerated depreciation.
B) principal repayment on recourse debt. Principal repayments are not deductible for tax purposes. The interest is deductible.
Depletion allowances apply to all of the following except A) copper mining. B) real estate. C) timber. D) oil and gas.
B) real estate. Depletion is applicable to natural resources such as mining or timber. It is not applicable to real estate. However, buildings can be depreciated.
Depletion allowances in oil and gas programs are based on the amount of oil A) in reserve. B) sold. C) lost to shrinkage. D) extracted.
B) sold. Depletion allowances are allowed to compensate for a mineral resource, which is considered accomplished when it is sold.
Under Subchapter M of the IRC, a REIT can avoid taxation if it receives at least ____ of its taxable income from real estate and distributes at least ____ of that income to shareholders. A) 50%, 90% B) 75%, 25% C) 75%, 90% D) 90%, 10%
C) 75%, 90% To avoid taxation as a corporation, at least 75% of the taxable income of a real estate investment trust (REIT) must be generated from real estate and at least 90% of that income is distributed to shareholders.
A customer is considering adding a real estate investment trust (REIT) to her portfolio. She lists all of the following as advantages. You correct your customer and point out that one of them is not an advantage of investing in REITs. Which of the following is not an advantage of investing in REITs? A) Being able to divest of the shares easily B) Having a professionally managed portfolio of commercial real estate assets C) Dividend treatment D) Using real estate as a potential hedge against the movement of other equity securities the customer owns
C) Dividend treatment Of those listed, only dividend treatment can be identified as not being an advantage. While the expectation of receiving dividends is inherently good, dividends paid by REITs to their shareholders are not recognized as qualified and are therefore taxable to the investor at their full ordinary income tax rate. The shares are traded on exchanges or over the counter and are considered liquid, and having professionally managed assets should be a plus. While real estate valuation and price movements are subject to many forces, historically, real estate has provided some hedge against the movements of other equity securities.
Which of the following best describes the advantages of an oil and gas income program, as compared to other types of oil and gas programs? A) No depletion allowances B) Greatest risk of capital C) Lowest risk of capital D) Highest tax write-off
C) Lowest risk of capital Oil and gas income programs own producing wells and pass through their depletion allowances. There is little risk compared to other programs such as exploration.
Which of the following is not a correct statement in respect to the at-risk provisions when investing in a direct participation program (DPP)? A) Qualified nonrecourse financing is excluded from tax basis except in the real estate programs. B) Deductions or losses are limited to the investors' invested capital plus their percentage of partnership liabilities for which they are personally liable. C) The at-risk provisions do not apply to oil and gas exploration programs. D) Losses disallowed by the at-risk provisions in any one year may be carried over to following taxable years.
C) The at-risk provisions do not apply to oil and gas exploration programs. The at-risk provisions (you can only deduct what you can lose) apply to all DPPs. Real estate has one unique feature in that nonrecourse financing is part of the investor's tax basis.
The term wildcatting refers to A) small-cap mutual fund diversification. B) buying new-construction real estate for speculative appreciation value. C) drilling for oil or gas where none has occurred previously. D) limiting your investment portfolio to initial public offerings.
C) drilling for oil or gas where none has occurred previously. In an oil and gas drilling program, the term wildcatting is used to describe the most speculative type of program, which is drilling where none has occurred before (i.e., in an unproven location). This is the riskiest of the oil and gas programs.
When recommending the purchase of a DPP to a client, as with all other investments, the recommendation must be suitable. FINRA adds some extras requirements in the case of DPPs. Among those is the requirement that the investor is A) in need of a liquid investment. B) able to emotionally handle the ups and downs of the market. C) in a position to take full advantage of any tax benefits generated by the DPP. D) an accredited investor.
C) in a position to take full advantage of any tax benefits generated by the DPP. FINRA's Rule 2310 lists a few suitability standards necessary for recommending DPPs. Among those is the ability of the investor to make use of any potential tax benefits. Although DPPs are frequently sold as private placements, even then not all of the investors have to be accredited. DPPs are considered illiquid investments, and without a secondary market, there are no "roller coaster" ups and downs.
The general partner of an oil and gas drilling program might be considered to have a conflict of interest for all of the following reasons except A) commingling the funds of several different programs. B) owning mineral rights on undeveloped adjacent land. C) managing the partnership. D) borrowing funds from the partnership.
C) managing the partnership. Managing the partnership is what the general partner's job is, so there would not be a conflict of interest. Owning a potentially competing project could be a conflict of interest. Commingling (combining) investor funds from different programs is not legal and would certainly present a conflict, as would borrowing money from the partnership.
To qualify for favorable tax treatment, real estate investment trusts (REITs) must do all of the following except A) be organized as trusts. B) distribute at least 90% of their investment income to shareholders. C) pass through losses to shareholders. D) invest at least 75% of their assets in real estate-related activities.
C) pass through losses to shareholders. REITs engage in real estate activities and can qualify for favorable tax treatment if they invest at least 75% of their assets in real estate-related activities and pass through at least 90% of their net investment income to their shareholders. Although they can pass through income, they cannot pass through any losses.
Real estate investment trusts (REITs) offer investors an opportunity to pool their money with others to receive professional management of real estate. Generally available types of REITs include all of the following except A) hybrid REITs. B) equity REITs. C) preferred REITs. D) mortgage REITs.
C) preferred REITs. While some corporations may issue preferred stock, there is no such term as a preferred REIT. Equity REITs take ownership positions in real estate properties. Mortgage REITs make loans to real estate properties. Hybrid REITs do both.
All of the following characteristics are advantages of a real estate investment trust (REIT) except A) diversification. B) liquidity. C) tax deferral. D) professional management.
C) tax deferral. A REIT is a professionally managed company that invests in a diversified portfolio of real estate holdings. REITs are traded on exchanges and over the counter, which provides liquidity. The IRS does not permit tax deferrals on REIT investments.
If a limited partnership interest is sold, the gain or loss in the sale is the difference between the sales proceeds and A) the original basis. B) the total of tax preference items allocated to the investor. C) the adjusted basis. D) the total of the deductible losses taken by the investor.
C) the adjusted basis. The adjusted basis is a limited partner's cost basis at any point in time. Gain or loss on the sale of the partnership is determined by comparing the sales proceeds to the adjusted basis.
A limited partner (LP) invests $100,000 in a movie production limited partnership with a nonrecourse note for $300,000. The partnership liquidates, and the LP receives $100,000. His loss, for tax purposes, is A) $200,000. B) $300,000. C) $100,000. D) $0.
D) $0. LPs are liable for their investments and any shares of recourse debt. They are not liable for nonrecourse debt. Because the LP received the full amount of his original investment at the liquidation of the partnership, he has no loss to declare.
FINRA Rule 2310 defines a direct participation program as "a program which provides for flow-through tax consequences regardless of the structure of the legal entity or vehicle for distribution including, but not limited to, oil and gas programs, real estate programs, agricultural programs, cattle programs, condominium securities, Subchapter S corporate offerings and all other programs of a similar nature, regardless of the industry represented by the program, or any combination thereof." The rule places limits on the amount of broker-dealer sales compensation considered fair and reasonable. That limit is A) 5% of the gross proceeds. B) 15% of the gross proceeds. C) 2% of the gross proceeds. D) 10% of the gross proceeds.
D) 10% of the gross proceeds. FINRA limits the amount of the sales compensation to 10% of the gross proceeds of the offering. If the organization and offering expenses exceed 15% of the gross proceeds, FINRA considers that too high. The 2% is the maximum charge in a DPP rollup if the firm wishes to solicit votes from the limited partners. The 5% is the FINRA markup policy and that does not apply to DPPs.
A tool used by investment banking firms to combine several unsuccessful limited partnership programs into one new entity is A) a DPP rescue. B) a multiprogram partnership. C) a merger. D) a DPP rollup.
D) a DPP rollup. A DPP rollup is a transaction involving the combination or reorganization of one or more limited partnerships into securities of a successor entity. In general, this involves DPPs that have not been successful. The attraction to investors is the possibility of turning an illiquid DPP into a security with greater liquidity.
A major risk associated with investing in DPPs is the lack of liquidity. What steps could the program sponsor take that could have the effect of increasing the liquidity of an existing program? A) A DPP cancellation B) A DPP transfer C) A DPP dissolution D) A DPP rollup
D) A DPP rollup A DPP rollup is a transaction involving the combination or reorganization of one or more limited partnerships into securities of a successor corporation. The securities of the successor corporation would likely have greater liquidity. This would have the effect of turning the illiquid DPP into more liquid securities. Disclosure documents must be provided to investors prior to the transaction disclosing risk, the GPs opinion regarding fairness of transaction, and reports and appraisals in connection with the transaction.
Regarding the use of the term direct participation programs (DPPs) when referring to tax-sheltered investments, which of the following is not a DPP? A) An equipment leasing limited partnership B) An oil and gas limited partnership C) A real estate limited partnership D) A real estate investment trust (REIT)
D) A real estate investment trust (REIT) DPPs include any form of business that allows for the direct pass-through of tax consequences to participants. REITs do not allow for the pass-through of losses.
A high-net-worth investor with substantial annual income likes real estate as a potential investment. The investor notes that any investment potentially offering tax credits would be most interesting to consider first. Which of the following would be suitable investments to discuss? A) Real estate investment equity trusts (REITs) and new-construction direct participation programs (DPPs) B) Raw land and existing property direct participation programs (DPPs) C) Real estate investment trusts (REITs) D) Historic rehabilitation and government-assisted housing direct participation programs (DPPs)
D) Historic rehabilitation and government-assisted housing direct participation programs (DPPs) REITs, either equity or mortgage, should be eliminated, as they offer no tax credits. Given the customer's high net worth and income, a discussion of DPPs is suitable. Of those DPPs shown here, only historic rehabilitation and government-assisted housing offer tax credits, and either should be suitable for discussion.
Income from which of the following investments is passive income? Real estate direct participation programs (DPPs) Vacation cottage rentals Real estate investment trusts (REITs) Collateralized mortgage obligations (CMOs) A) II and IV B) II and III C) I and III D) I and II
D) I and II Passive income results from DPPs and personal real estate rentals. REITs and CMOs are securities, and income from securities is considered portfolio income.
Some limited partnership programs provide potential tax credits to partners. Which of the following typically provide potential tax credits? Rehabilitation of historic properties Equipment leasing Developmental oil and gas programs Government-assisted housing programs A) III and IV B) I and II C) II and III D) I and IV
D) I and IV Historic rehabilitation and government-assisted housing are two programs that offer potential tax credits. Tax credits are no longer available for equipment leasing, and while developmental oil and gas programs offer high intangible drilling costs, these are not investment tax credits.
Which of the following statements describes an oil and gas blind pool offering? A) An unknown number of representatives participate in the sale of known partnership units. B) The income from producing wells is purchased at a discount from the present value of the projected future flows. C) The oil exploration occurs in an area that is not adjacent to any known oil reserves. D) Money is raised without a specific property being stated, and the general partner selects the investments.
D) Money is raised without a specific property being stated, and the general partner selects the investments. A blind pool offering, also known as a nonspecified program, involves an investment in a program without specific prospects or properties being identified.
One of your wealthier clients invests $100,000 into a real estate limited partnership (RELP) investing in shopping centers. During the first three years, the partnership makes no distributions. The Schedule K-1s received over that period total passive losses of $50,000. The client then invests $75,000 into an exploratory oil and gas DPP. Six months later, the program strikes the largest pool of oil in the United States. The K-1 for that partnership declares $500,000 of reportable income for the year. Which of the following statements is true? A) The $50,000 may be claimed, but because it was generated over a three-year period, one-third of the amount may be used for the three forward years. B) Passive losses may only be used against passive income in the year of occurrence, so the entire $500,000 is taxable this year. C) The carryover loss can be added to the $75,000 cost basis of the new program, with the difference between the $500,000 income and the $125,000 cost being treated as capital gain. D) Passive losses may be carried over indefinitely, so the $50,000 can be used to offset the passive income generated by the new program.
D) Passive losses may be carried over indefinitely, so the $50,000 can be used to offset the passive income generated by the new program. This is an example of a question that contains far more information than is necessary. The simple answer is that passive losses may be used against passive income. There is no time limitation—there just has to be passive income.
An experienced investor wants to allocate 10% of an existing portfolio to owning real estate but does not want to maintain properties, be a landlord, or wait if cash is needed. Which of the following choices would be suitable, given the investor's objectives? A) Purchase shares of mortgage companies B) Purchase shares of a mortgage REIT C) Purchase property and assign a management company D) Purchase shares of an equity REIT
D) Purchase shares of an equity REIT Equity real estate investment trusts (REITs) are a way to have an ownership interest in real estate without having to manage properties or worry about collecting rents. REITs trade on exchanges and over the counter; therefore, they are liquid investments. Both of these characteristics meet the investor's objective and make equity REITs the most suitable recommendation of those offered here. A mortgage REIT does not own real estate, so it will not meet the investor's objective.
Which of the following registers the securities and packages the program for a limited partnership? A) Limited partners B) Property manager C) General partner D) Syndicator
D) Syndicator A syndicator handles the registration of the limited partnership units.
All of the following are oil and gas program sharing arrangements except A) functional allocation. B) reversionary working interest. C) disproportionate sharing. D) all-or-none underwriting arrangement.
D) all-or-none underwriting arrangement. 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.
Intangible drilling costs would include all of the following except A) fuel. B) wages. C) land surveys. D) casing.
D) casing. Intangible drilling costs are those associated with drilling a well, but do not include the cost of capital equipment (e.g., pumps, casing). They include wages, fuel, repairs, hauling, supplies, surveys, tests, and drilling mud, and they are incidental to and necessary for the drilling activity.
Limited partners assisting the general partner to solicit new investors A) is permitted if done within 90 days of her acceptance as limited partner. B) is permitted if no compensation is paid. C) is permitted if stated in the partnership agreement. D) could jeopardize their limited partner status.
D) could jeopardize their limited partner status. If limited partners—either individually or as a group—become too involved with the business of the partnership, they could be considered general partners and lose their limited liability.
Member firms are required to maintain documentation regarding suitable net worth for investors in A) real estate investment trusts. B) variable life insurance. C) high-yield bonds. D) direct participation programs.
D) direct participation programs. It is FINRA Rule 2310 on DPP suitability that requires documentation maintained on certain aspects of the client. Among those is that the investor has a net worth sufficient to sustain the risks of the DPP, including loss of investment. Although part of dealing with customers is obtaining a financial profile, including net worth, the other choices here do not have a specific requirement to keep records on how the firm based its suitability for the purchase.
In a direct participation program, a general partner is all of the following except A) one who appoints the property manager. B) a key executive who makes day-to-day business decisions. C) one who buys and sells the program's property. D) one who has limited liability.
D) one who has limited liability. A general partner of a limited partnership is a key executive of the program who purchases and sells the property and/or appoints someone to manage the property. The general partner does not have limited liability. By not allowing the general partner to have limited liability, the program is able to rule out limited liability as a corporate characteristic.
Among the differences between a real estate investment trust (REIT) and a real estate limited partnership investment (a DPP) is that A) the DPP takes an ownership interest in the property, while the REIT only makes mortgage loans. B) REITs generally trade on the listed exchanges, while DPPs actively trade OTC. C) the DPP generally has more investors than the REIT. D) only the DPP is a flow-through vehicle.
D) only the DPP is a flow-through vehicle. DPPs are the investment vehicle providing flow-through of income and loss. REITs are required to return at least 90% of their net investment income to investors, but losses do not pass through. Both investments can take equity or debt positions. They can also be hybrid and take both. Because DPPs are almost always private placements, the number of investors is usually small. On the other hand, because most REITs are publicly traded, they can have a large number of investors. As private placements, there is no active secondary market for DPPs.
Your client invests $20,000 to purchase a 10% interest in a movie production limited partnership. At the time of subscribing, the investor signs on an $800,000 recourse loan to the partnership. After completing the first year of operations, the program shows a loss of $1,200,000. All of the following statements are correct except A) the investor has a passive loss deduction of $100,000. B) the investor's basis is now $0.00. C) the investor's original basis was $100,000. D) the investor's original basis was $20,000.
D) the investor's original basis was $20,000. Let's take this step by step. The original check for $20,000 is all cost basis. But, it doesn't stop there. When becoming a limited partner, the investor signed on to the recourse loan. The 10% share of that loan is $80,000, bringing the initial basis up to $100,000. When the end-of-year report shows a loss of $1,200,000, it would appear that the investor takes 10% of that ($120,000) as a passive loss. The problem is that IRS rules do not allow a loss greater than the investor's basis (in this case, $100,000). Once that loss is taken, the basis is wiped out. The extra $20,000 may be carried forward. Unless the investor contributes more money, or the partnership has earnings, this investor cannot use that $20,000 or any further losses.
If a customer holds certificates of beneficial interest in a real estate investment trust (REIT), all of the following statements regarding this investment are true except A) a mortgage REIT represents pooled capital for real estate financing. B) investors receive dividends periodically. C) the certificates are publicly traded. D) the issuer must redeem certificates on shareholder request.
D) the issuer must redeem certificates on shareholder request. REITs are not redeemed by the issuer. REITS are publicly traded units that represent either an interest in pooled capital for real estate financing or an interest in real property that pass through income and capital gains distributions to investors. Investors who wish to liquidate their interests must sell them in the secondary market.
In the partnership agreement of a limited partnership, all of the following would be disclosed except A) how the general partners will be compensated. B) what matters the limited partners can vote on under the democracy provisions. C) how the operating profits will be distributed. D) the procedures for the annual election of general partners.
D) 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.