Series 7 Unit 11
All of the following are objectives in a direct participation program (DPP) except A) short-term capital gains. B) deductions against passive income. C) deferment of taxes. D) long-term capital gains.
A) ST capital gains DPPs are used to defer present income into the future and take advantage of time. In doing so, any gains will be taxed at favorable LT rates. The expected losses in the early years may be taken as deductions against passive income from other sources.
All of the following documentation is necessary for a publicly subscribed limited partnership except A) a cash flow analysis. B) a subscription agreement. C) a partnership agreement. D) a certificate of limited partnership.
A) cash flow analysis The certificate gives public information about the partnership and is filed in the home state. The partnership agreement spells out the roles of general and limited partners. The subscription agreement is the instrument by which the limited partners invest.
An investor purchased one unit of a real estate limited partnership. The cost of the unit was $20,000. The investor's allocable share of nonrecourse debt was $50,000. During the first year, the investor received an income distribution of $5,000. What is the investor's current tax basis? A) $25,000 B) $65,000 C) $75,000 D) $15,000
B) $65,000 Because this is a RELP, nonrecourse debt INCREASES basis.
A customer bought a 10% interest in a real estate limited partnership by investing $100,000. The partnership buys a $4 million property with the funds, making a down payment of $800,000 and financing the balance with a nonrecourse mortgage of $3.2 million. Subsequently, the partnership cannot meet the mortgage payment; the lender forecloses when the remaining mortgage balance is $3 million, auctioning off the property for $1 million. How much of the investment will the customer recover? A) $10,000 B) $0 C) $100,000 D) $32,000
B) 0 There is a lot more information in this question than necessary. Simply put, the deal went bankrupt - the asset was sold for less than the mortgage. That means the investor's $100,000 is totally lost.
All of the following are oil and gas program sharing arrangements except A) reversionary working interest. B) all-or-none underwriting arrangement. C) functional allocation. D) disproportionate sharing.
B) all-or-none underwriting arrangement. Function 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.
The document attesting to the formation of a limited partnership, filed with designated authorities, is called A) the offering memorandum. B) the certificate of limited partnership. C) the subscription agreement. D) the registration statement.
B) the certificate of limited partnership. The Uniform Limited Partnership Act requires that 2 or more persons sign and swear to a certificate of limited partnership. It is filed with the state and is a public document available for review.
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) the issuer must redeem certificates on shareholder request. C) investors receive dividends periodically. D) the certificates are publicly traded.
B) the issuer must redeem certificates on shareholder request. - REITs are not deemed by the issuer. - REITs are publicly traded units that represent either in interest in pooled capital for real estate financing or interest in real property that pass through income or capital gains distributions to investors. - Investors who wish to liquidate their shares must do so in the secondary market.
A customer invests $20,000 in a direct participation program and signs a recourse note for $50,000. During the first year of operation, the customer receives a cash distribution of $15,000 from the partnership. At year's 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) $75,000 B) $35,000 C) $55,000 D) $0
C) $55,000 - 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's end, the investor's basis and the amount he can deduct from passive income is $55,000.
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 transfer B) A DPP dissolution C) A DPP rollup D) A DPP cancellation
C) A DPP rollup A DPP rollup is a transaction involving the combination or reorganization or one or more limited partnerships into securities of a successor corporation.
A customer with a moderate income from a secure job is in the 28% tax bracket. She has a small diversified portfolio and has $10,000 she would like to invest in a limited partnership. If she is willing to accept only a moderate amount of risk, which of the following limited partnerships would be the most appropriate recommendation? A) A new-construction real estate limited partnership B) A raw land real estate limited partnership C) An oil and gas income program D) An exploratory oil and gas drilling program
C) An oil and gas income program The customer is not in a high tax bracket and would not be able to take full advantage of the tax benefits produced by an exploratory oil and gas income program or by new construction real estate limited partnerships. - A raw land real estate partnership is usually speculative. - Of the answers listed, the income and moderate risk from an oil and gas income program would be the greatest benefit to this investor.
Which of the following choices would generate the largest first-year deductions in an oil and gas exploratory drilling program? A) Recapture B) Depreciation C) Intangible drilling costs D) Depletion allowance
C) Intangible drilling costs IDCs would be the largest deduction in an oil or gas exploratory drilling program.
Advantages of oil and gas direct participation programs (DPP) do not generally include which of the following? A) Intangible drilling costs (IDC) B) Potential cash flow and/or income C) Potential alternative minimum tax D) Depletion
C) Potential alternative minimum tax Alternative minimum tax is not considered an investment benefit of an oil and gas DPP. - This tax arises from excess IDC that is considered a tax preference item. - An oil and gas limited partnership has the advantages of IDCs, depletion, depreciation, and the potential for cash flow and/or income. - Such a program would also usually have the advantage of teh due
All of the following are redeemable securities except A) variable annuities. B) unit investment trusts. C) real estate investment trusts (REITs). D) mutual funds.
C) REITs A redeemable security has no secondary market. To sell (redeem) a redeemable security, the investor must go back to the issuer or its agent. REITs trade in the secondary markets either on exchanges or OTC.
All of the following statements regarding the risks of investing in an oil and gas limited partnership are true except A) income programs have fewer tax benefits than exploratory programs. B) wells may not have sufficient reserves to return drilling costs. C) development programs have higher risk than exploratory programs. D) development programs may involve acquisition of expensive leases.
C) development programs have higher risk than exploratory programs. Exploratory programs have the highest risks, rewards, and tax benefits. Development wells are drilled to develop a reserve that is already known to be present.
Under FINRA rules, members are prohibited from soliciting votes from limited partners in connection with a proposed rollup unless any compensation to be received by the member A) does not exceed 5% of the value of the securities to be received in the exchange. B) does not exceed 15% of the value of the securities to be received in the exchange. C) does not exceed 2% of the value of the securities to be received in the exchange. D) does not exceed 10% of the value of the securities to be received in the exchange.
C) does not exceed 2% of the value of the securities to be received in the exchange. - In connection with a DPP rollup, member firms may not solicit votes from limited partners unless the compensation is 2% of less. - The 10% limitation is the maximum compensation in the sale of a DPP. - The 15% limitation is the maximum percentage of the gross proceeds of a DPP that may be used for the organization and offering expenses. - The 5% is likely an attempt to trick you.
All of the following would flow through as a loss to limited partners except A) depletion. B) interest payments on recourse debt. C) principal repayment on recourse debt. D) accelerated depreciation.
C) principal repayment on recourse debt. Principal repayments are not deductible for tax purposes. The interest is deductible.
An investor desiring a limited partnership investment with capital gains potential would most likely select one investing in A) equipment leasing. B) shopping centers. C) raw land. D) oil and gas.
C) raw land. Historically, raw land has been a source of appreciation. Shopping centers might appreciate in value, but are oriented more towards current income. Equipment leasing offers income, and the asset ultimately depreciates. Oil and gas provide income as well, and the asset ultimately depletes.
All of the following statements regarding a limited partnership subscription agreement are true except A) the investor's registered representative must verify that the investor has provided accurate information. B) the investor's signature indicates that she has read the offering document. C) the general partner's signature grants the limited partners power of attorney to conduct the partnership's affairs. D) the general partner endorses the subscription agreement, signifying that a limited partner is acceptable.
C) the general partner's signature grants the limited partners power of attorney to conduct the partnership's affairs. - A limited partner's signature on the subscription agreement grants the general partner POA to conduct the partnership's affairs. - The subscription agreement for a limited partnership is deemed accepted when the general partner signs the subscription agreement.
An investor places $100,000 into an oil and gas limited partnership program. To comply with FINRA rules, what is the minimum amount of the investment that must be received by the business? A) $95,000 B) $98,000 C) $90,000 D) $85,000
D) $85,000 - Each of these choices uses a percentage that has some logic. - The meximum in total offering expenses is 15%. - Therefore, at least 85% or $85,000 in this case, must actually be put to work in the program. - There is a maximum compasation of 10% to the member firm selling the program, and that is the largest aprt of the 15% total. - The 5% policy does not apply to DPPs.
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) $100,000. B) $300,000. C) $200,000. D) $0.
D) 0. LPs are not liable for NONrecourse debt.
Which of the following could an analyst use to establish the rate of return on a direct participation program (DPP)? Present value Internal rate of return Yield to maturity First-in, first-out A) I and IV B) II and III C) III and IV D) I and II
D) 1 and 2 Analysts use both present value and internal rate of return to establish a DPP's rate of return. Both involve assumptions based on future cash flows generated by the program.
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 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. B) 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. C) Passive losses may only be used against passive income in the year of occurrence, so the entire $500,000 is taxable this year. 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 neceessary. - 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.
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) Losses disallowed by the at-risk provisions in any one year may be carried over to following taxable years. B) Qualified nonrecourse financing is excluded from tax basis except in the real estate programs. C) Deductions or losses are limited to the investors' invested capital plus their percentage of partnership liabilities for which they are personally liable. D) The at-risk provisions do not apply to oil and gas exploration programs.
D) The at-risk provisions do not apply to oil and gas exploratory programs. The at-risk provisions apply to ALL DPPs.
There are various direct participation program offerings giving investors a range of choices of different types of oil and gas drilling opportunities. All of the following are types of oil and gas direct participation programs except A) income B) developmental. C) exploratory D) functional allocation
D) functional allocation Functional allocation is the most common form of revenue sharing, it is not a type of program. Three type of programs are: 1. Exploratory 2. Income 3. Development
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) interest payments on partnership debt. B) accelerated depreciation taken on the drilling equipment. C) depletion on the sale of oil removed from the ground. D) principal repayment on partnership debt.
D) principal repayment on partnership debt. Interest is a deductible expense, principal repayment is not.
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 the deductible losses taken by the investor. C) the total of tax preference items allocated to the investor. D) the adjusted basis.
D) 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.
