Limited Partnerships

Which of the following has the last claim to assets in the event that a limited partnership dissolves? A. General partners B. Limited partners C. General creditors D. Secured creditors

A. General partners Since general partners manage DPPs, general partners have the last claim to partnership assets when the partnership dissolves.

All of the following are advantages to being a limited partner in a DPP EXCEPT: A. Liquidity B. Pass through of business tax deductions C. Voting power D. Unlimited disclosure to records

A. Liquidity Partnerships do not offer liquidity since they have the strictest suitability requirements of all investments. Investors may be forced to contribute additional money at any time.

Non-recourse debt adds to the cost basis of limited partners in: A. Real estate DPPs B. Oil and gas DPPs C. Both A and B D. Neither A not B

A. Real estate DPPs Non-recourse debt is debt owed by the business where repayment of the debt is only the responsibility of the partnership, not the partners. Non-recourse debt only adds to the cost basis for limited partners of real estate DPPs.

In which of the following partnership documents are the rights of limited partners disclosed? A. Subscription agreement B. Certificate of limited partnership C. Prospectus D. Agreement of limited partnership

D. Agreement of limited partnership The rights and responsibilities of limited and general partners are found in the agreement of limited partnership.

What is the most similar feature of corporations and limited partnerships? A. Liquidity B. Continuous life C. Unlimited liability D. Centralization of management

D. Centralization of management Corporations and partnerships have centralized management. Each corporation has a board of directors while partnerships have general partners.

Even if a customer in unsuitable for an investment, brokerage firms may accept unsolicited orders for any of the following securities EXCEPT: A. Options B. Investment companies C. Municipal bonds D. DPPs

D. DPPs If a customer is unsuitable for a DPP (Direct Participation Program or limited partnership), a brokerage firm cannot accept an unsolicited order for the security since investors can be forced to invest more money at any time.

Which of the following documents must be signed by general partners to accept new investors as limited partners? A. Agreement of limited partnership B. Certificate of limited partnership C. Partnership resolution D. Subscription agreement

D. Subscription agreement The subscription agreement is an application that an investor must complete to become a limited partner. The investor becomes a limited partner when the general partner signs the subscription agreement.

Limited partners have all of the following rights EXCEPT: A. The right to receive assets prior to general partners in the event of dissolution of the partnership. B. Voting rights C. The right to determine which partnership assets to liquidate D. Unlimted access to financial statements

Limited partners cannot make management decisions for partnerships if wishing to retain limited liability status. Determining which assets to liquidate is a management decision.

Which of the following corporate characteristics is easiest to avoid for a limited partnership? A. Limited liability B. Perpetual life C. Centralization of management D. Free transferability of shares

Limited partnerships do not have perpetual life since partnerships are easier to start and dissolve than partnerships. Partnerships are easier to start and dissolve since the partners and the business are liable for each other whereas corporations and owners are not liable for each other.

An investor deposits $100,000 to become a limited partner in an oil and gas DPP. The partner's share generates $50,000 in revenues, $30,000 in depreciation, $10,000 in depletion, and $20,000 in operating expenses. What is the net income of the partner? A. $10,000 B. -$10,000 C. $20,000 D. -$20,000

B. -$10,000 To determine the net income of a limited partner, start with net income and subtract all tax-deductible expenses. Therefore, $50,000 - $30,000 - $10,000 - $20,000 = -$10,000

Which of the following depreciation deductions may be affected by the AMT? A. Straight line B. Accelerated C. Straight line and accelerated D. Neither straight line nor accelerated

B. Accelerated AMT is the Alternative Minimum Tax that affects certain tax that affects certain tax preference items (tax deductions) for high income investors. In limited partnerships, AMT takes away the excess deductions for accelerated write-offs compared to straight line deductions.

Which of the following oil and gas limited partnerships extracts natural resources from proven but underdeveloped areas? A. Income B. Developmental C. Exploratory D. Wildcatting

B. Developmental Developmental oil and gas DPPs drill in proven areas where resources have been discovered, but the areas have not been drilled.

All of the following oil and gas DPPs have IDCs EXCEPT: A. Developmental B. Income C. Exploratory D. Combination

B. Income IDCs are intangible drilling costs that are required to be spent before drilling begins. Oil and gas income DPPs have no IDCs since they purchase areas where resources have already been produced.

Which of the following is the safest real estate DPP? A. Raw land B. Section 8 C. Condominium D. Rental properties

B. Section 8 Section 8 housing is low income housing where the US Gov. provides subsidies (assistance) in paying rent.

In a limited partnership, the maximum loss for limited partners is: A. The original cost basis B. The adjusted cost basis C. The accreted cost basis D. Unlimited

B. The adjusted cost basis The maximum loss for limited partners is the adjusted cost basis. After making an investment to become a limited partner, an investor may voluntarily or be forced to deposit additional money. In addition, the limited partner may receive income from the partnership in addition to special tax deductions such as depreciation or depletion.

A limited partner receives $100,000 in revenue from a real estate DPP. The investor's share of the partnership also generates $20,000 in operating expenses and $50,000 in depreciation. Which is the limited partner's cash flow? A. $30,000 B. -$30,000 C. $80,000 D. -$80,000

C. $80,000 One way to calculate cash flow of a limited partner is net income + depreciation. The net income is calculated by taking the amount of revenues and subtracting operating expenses and depreciation. Therefore, the net income is $100,000 - $20,000 - $50,000 = $30,000. After adding back depreciation, the cash flow is $30,000 + $50,000 = $80,000. Cash flow can also be calculated by subtracting just the operating expenses from the revenues.

The maximum underwriting spread for a new limited partnership offering is: A. 1% of the offering price B. 5% of the offering price C. 10% of the offering price D. 15% of the offering price

C. 10% of the offering price The maximum spread for a newly issued limited partnership is 10% of the amount invested.

Which of the following can be passed through to investors from RELPs? A. Income B. Write-offs C. Both A and B D. Neither A nor B

C. Both A and B RELPs are real estate limited partnerships. Since partnerships do not pay business taxes, partnerships pass through income and write-offs or deductions to investors.

In which of the following oil and gas DPP sharing agreements are general partners responsible for tangible costs while limited partners are responsible for intangible costs? A. Reversionary working interest B. Overriding royalty C. Functional allocation D. Disproportionate sharing

C. Functional allocation In functional allocation arrangements, general partners have tangible costs (immediately deductible) and general partners have intangible startup costs.

Which of the following is the safest oil and gas DPP? A. Wildcatting B. Developmental C. Income D. Balanced

C. Income An oil and gas income DPP purchases areas that are producing natural resources and startup costs were spent by previous businesses.

All of the following assets can be depreciated EXCEPT: A. Automobiles B. Airplanes C. Land D. Computers

C. Land Land cannot be depreciated since land does not become obsolete over time.

Income received by investors from limited partnerships is classified as: A. Ordinary income B. Earned income C. Passive income D. Dividend income

C. Passive income Income earned from limited partnerships is classified as passive income. Earned income is money received from cash dividends on stocks and interest on bonds. Earned income is money earned from work-related income.

Passive losses may offset which of the following: A. Capital gains B. Ordinary income C. Passive income D. All of the above

C. Passive income Passive losses from limited partnerships may only offset passive income from other limited partnerships. Capital gains and ordinary income must be calculated separately.

What is the minimum percentage of compensation of revenues that general partners must receive as compensation for managing a DPP? A. 1% B. 2% C. 5% D. 7%

A. 1% General partners must earn a minimum of 1% of revenues as compensation for managing limited partnerships.

Which of the following documents includes the rights and responsibilities of limited and general partnerships? A. Agreement of limited partnership B. Certificate of limited partnership C. Subscription agreement D. Loan consent agreement

A. Agreement of limited partnership The agreement of limited partnership is distributed to each partner to explain the rights and responsibilities of the limited and general partners.

When a partnership's revenues exceed deductions, the partnership has reached its: A. Crossover point B. Breakpoint C. Abusive status D. Recapture

A. Crossover point The crossover point of a partnership is the point where the business revenues exceed the business deductions and the partnership becomes profitable.

Transactions in which of the following securities requires written proof of suitability? A. DPPs B. Options C. Corporate bonds D. ETNs

A. DPPs DPPs (Direct Participation Programs) or limited partnerships require written proof of sustainability since investors may be forced to deposit additional funds at any time.

What is the primary advantage for oil and gas partnerships compared to real estate partnerships? A. Depletion B. Depreciation C. Operating expenses D. Tax credits

A. Depletion Since oil and gas are natural resources, oil and gas DPPs can claim depletion deductions for investors whereas real estate DPPs cannot.

Which of the following is not a legitimate use of partnership democracy? A. Determining which partnership assets to sell to raise money B. Determining whether or not to renew the contract of the general partner C. To determine whether or not to dissolve the partnership D. To determine whether or not the objectives of the partnership should change.

A. Determining which partnership assets to sell to raise money Limited partners have voting rights in a DPP. To determine whether or not to sell assets of the partnership is a management decision made by general partners.

Which of the following is the last to be compensated in the event of the dissolution of a partnership? A. General Partners B. General creditors C. Limited partners D. Secured creditors

A. General Partners General partners are last in receiving compensation since they are the managers of the partnership. The order of repayment is: Secured creditors, General creditors, Limited partners, General partners.

In a limited partnership, which of the following have unlimited liability? A. General Partners B. Limited partners C. Both A and B D. Neither A nor B

A. General Partners General partners have unlimited liability since they are the managers of the DPP and may be sued by limited partners for unlimited money. Limited partners have limited liability.