Series 7 Chapter 13

All of the following are characteristics of both oil and gas, and real estate limited partnerships, EXCEPT: A) depreciation. B) limited liability. C) depletion. D) deferral of benefits.

Your answer, limited liability., was incorrect. The correct answer was: depletion. A depletion allowance makes up for the using up of a natural resource. Real estate limited partnerships do not have depletion allowances. Both real estate and oil and gas partnerships offer limited liability, depreciation allowances, and deferred receipt of income and capital gains.

A customer buys a real estate limited partnership interest by contributing $20,000 and signing a nonrecourse note for $50,000. The customer's beginning basis is: A) 30,000. B) 20,000. C) 50,000. D) 70,000.

Your answer, 30,000., was incorrect. The correct answer was: 70,000. Generally, nonrecourse debt does not add to basis because the limited partner is not responsible (at risk) for the repayment of the debt. However, in real estate partnerships, the at-risk rules do not apply, and therefore, add to basis in this type of partnership.

Which of the following is least likely to be part of an equipment leasing partnership? A) Oil well casing and piping. B) Computers. C) Aircraft. D) Railroad cars.

Your answer, Computers., was incorrect. The correct answer was: Oil well casing and piping. Casing and piping are materials used in oil and gas well drilling programs.

Which of the following could an analyst use to establish the rate of return on a direct participation program? Present value. Internal rate of return. Yield to maturity. First in, first out. A) I and IV. B) III and IV. C) II and III. D) I and II.

Your answer, III and IV., was incorrect. The correct answer was: I and II. 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.

Which of the following oil and gas programs would be associated with the least risk? A) Raw land. B) Exploratory. C) Developmental. D) Income.

Your answer, Income., was correct!. For oil and gas programs, ranking from least to most risk would be as follows: Income, Developmental and Exploratory. Raw land is a type of real estate program.

All of the following would flow through as a loss to limited partners EXCEPT: A) depletion. B) principal repayment on recourse debt. C) accelerated depreciation. D) interest payments on recourse debt.

Your answer, accelerated depreciation., was incorrect. The correct answer was: principal repayment on recourse debt. Principal repayments are not deductible for tax purposes. The interest is deductible.

The rights and liabilities of general and limited partners are listed in the: A) Uniform Limited Partnership Act. B) agreement of limited partnership. C) certificate of partnership. D) partnership title.

Your answer, certificate of partnership., was incorrect. The correct answer was: agreement of limited partnership. The agreement is the contract between the general and limited partners, and contains each entity's rights and duties.

All of the following are oil and gas program sharing arrangements EXCEPT: A) disproportionate sharing. B) functional allocation. C) all or none underwriting arrangement. D) reversionary working interest.

Your answer, disproportionate sharing., was incorrect. The correct answer was: 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.

An investor wanting to know about the tax consequences of a direct participation program (DPP) should know which asset types can be depleted or depreciated. All of the following asset types can be depleted or depreciated EXCEPT: A) oil. B) gas. C) crops. D) buildings.

Your answer, gas., was incorrect. The correct answer was: crops. Oil and gas are examples of asset types that can be depleted, whereas buildings are a depreciable asset. Farm crops are considered to be renewable assets.

In a DPP, a general partner is all of the following EXCEPT A) one who buys and sells the program's property B) a key executive who makes day to day business decisions C) one who appoints the property manager D) one who has limited liability

Your answer, one who has limited liability, was correct!. 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.

Written verification of the financial status of the customer is needed for all of the following EXCEPT: A) real estate investment trusts. B) real estate limited partnerships. C) equipment leasing limited partnerships. D) oil and gas limited partnerships.

Your answer, real estate limited partnerships., was incorrect. The correct answer was: real estate investment trusts. Real estate investment trusts (REITs) do not require proof of financial status for investment. Limited partnerships and other DPPs do.

An investor in an oil and gas limited partnership program is subject to the economic consequences of all of the following EXCEPT: A) nonrecourse loans. B) depreciation on tangible assets. C) recourse loans. D) operating losses.

Your answer, recourse loans., was incorrect. The correct answer was: nonrecourse loans. Nonrecourse loans only have economic consequences for investors in real estate programs.

All of the following statements are true with respect to a limited partnership subscription agreement EXCEPT: A) the general partner's signature grants the limited partners power of attorney to conduct the partnership's affairs. B) the investor's registered representative must verify that the investor has provided accurate information. C) the investor's signature indicates that he has read the offering document. D) the general partner endorses the subscription agreement, signifying that a limited partner is acceptable.

Your answer, the investor's signature indicates that he has read the offering document., was incorrect. The correct answer was: 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 power of attorney to conduct the partnership's affairs. The subscription agreement for a limited partnership is deemed accepted when the general partner signs the subscription agreement.

The document attesting to the formation of a limited partnership, filed with designated authorities, is called: A) the offering memorandum. B) the registration statement. C) the subscription agreement. D) the certificate of limited partnership.

Your answer, the registration statement., was incorrect. The correct answer was: the certificate of limited partnership. The Uniform Limited Partnership Act requires that two 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.

A direct participation program shows the following operation results: Revenues: $3 million Operating expense: $1 million Interest expense: $200,000 Management fees: $200,000 Depreciation: $3 million Cash flow from program operation is: A) $3 million. B) $1.6 million. C) a loss. D) $1.4 million.

Your answer, $3 million., was incorrect. The correct answer was: $1.6 million. Cash flow for a partnership is calculated in the following fashion: Gross revenue $3 million Less operating exp -$1.2 million Less debt interest -$200,000 Less depreciation $3 million = Net income -1.4 million (loss) To complete the cash flow calculation add back in depreciation of $3 million = Cash flow = $1.6 million.

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) 0. B) 32,000. C) 100,000. D) 10,000.

Your answer, 32,000., was incorrect. The correct answer was: 0. The real estate limited partnership raised only $1,000,000 (10% interest equals $100,000). The partnership incurred excess liabilities. While the customer isn't liable for any of the excess liabilities, as a limited partner the customer is liable for the entire $100,000 invested. Because the customer is liable for the entire $100,000 invested, none of it will be recovered.

As a requirement of investing in a particular investment, your customer has just signed a statement attesting to his annual income, net worth and affirming that the risks associated with the investment are understood. Which of the following investments would have such a requirement? A) A collateralized mortgage obligation B) A variable annuity C) A hedge fund D) A direct participation program

Your answer, A direct participation program, was correct!. Investors purchasing limited partnership participations or DPPs are required to sign a subscription agreement. In part the investor would be attesting to annual income, net worth and that they understand the risks associated with the type of program they are investing in. While suitability would be a factor for each of the investments listed, they do not require this type of statement be signed by the customer.

If an investor expects to have a large amount of passive income over the next 2 years, which of the following programs will most likely lead to the largest amount of shelter? A) Real estate income. B) Oil and gas drilling. C) Equipment leasing. D) Undeveloped land purchasing.

Your answer, Equipment leasing., was incorrect. The correct answer was: Oil and gas drilling. Passive income can only be sheltered by passive loss. Oil and gas drilling programs allocate the majority of investment dollars to drilling. These are intangible drilling costs (IDCs), which are 100% deductible when drilling occurs.

Which of the following are part of the depreciable basis of a limited partner in a real estate DPP? Land. Buildings. Architect's fees incurred in designing the buildings. Air conditioning equipment. A) I and IV. B) II and III. C) I and III. D) II and IV.

Your answer, II and III., was incorrect. The correct answer was: 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 non-depreciable costs, however, are part of the limited partner's beginning basis but not part of the depreciable basis.

The certificate of limited partnership contains the market-out clause the amount of time the partnership expects to be in business each investors net worth all conditions of dissolution A) II and III B) II and IV C) I and III D) I and II

Your answer, II and IV, was correct!. The certificate contains, among other information, the limited partnership's name and business, the amount of time the partnership intends to be in business, and the conditions of dissolution. It does not contain each partner's net worth nor is there a market-out clause like those generally associated with underwriting agreements for new issues.

A working interest in an oil and gas partnership entitles the holder to: a portion of the revenue. responsibility for part of the expense of extraction. royalty interest in the revenue. royalty interest in revenue after deducting certain expenses. A) II and IV. B) I and II. C) I and III. D) III and IV.

Your answer, II and IV., was incorrect. The correct answer was: I and II. A working interest is a right to revenues from production, but it also carries the responsibility for extraction costs. A royalty interest carries no responsibility for extraction costs.

If your client's real estate limited partnership goes bankrupt, which of the following are paid before your client? Fellow limited partners. Bank that holds the mortgage on the property. Bank that holds the unsecured loans on the property. General partner. A) I and III. B) I and II. C) II and III. D) III and IV.

Your answer, III and IV., was incorrect. The correct answer was: II and III. Creditors, both secured and unsecured, have priority over partners. Your client's fellow limited partners are paid at the same time as your client; the general partner receives his money last.

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) Oil and gas income program. B) Exploratory oil and gas drilling program. C) New construction real estate limited partnership. D) Raw land real estate limited partnership.

Your answer, New construction real estate limited partnership., was incorrect. The correct answer was: 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 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 of greatest benefit to this investor.

Which of the following best describes an intangible drilling cost? A) Labor, fuel, or drilling rig rental. B) Proven reserve of oil or gas. C) Exploratory well drilling. D) Tax liability.

Your answer, Proven reserve of oil or gas., was incorrect. The correct answer was: Labor, fuel, or drilling rig rental. Intangible drilling costs are the noncapital costs of putting in a well. They are currently deductible expenses, like fuel, wages, and rent. An intangible drilling cost is one which, after expenditure, has no salvage value.

If a limited partner in a real estate direct participation program becomes involved in the management of the office building acquired by the partnership, which of the following is TRUE? A) That limited partner's limited liability is jeopardized. B) There are no adverse consequences if, in performing management functions, the limited partner's expertise benefits the program. C) This is allowed, but only with a majority vote of the other limited partners and written approval of the sponsor. D) The limited partner's participation is disallowed and the program continues as before, but the remaining partners are required to prorate the remaining unit.

Your answer, That limited partner's limited liability is jeopardized., was correct!. 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.

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 IPOs.

Your answer, drilling for oil or gas where none has occurred previously., was correct!. 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).

A blind pool offering: A) is one in which 25% or more of the properties are not specified. B) is one in which the properties are purchased on a lottery basis. C) generates nonallocated income. D) is connected with oil and gas leases.

Your answer, is one in which 25% or more of the properties are not specified., was correct!. Many times, large real estate or oil and gas programs are offered in the form of a blind pool. In a blind pool, 25% or more of the specific properties (in real estate) or sites (in oil and gas) have not been identified at the time of the offering. When investing in a blind pool, the participants are relying on the expertise of the program sponsor to select locations that will prove profitable.

In real estate limited partnerships, the general partner has: A) unlimited liability and a passive role. B) limited liability and an active role. C) unlimited liability and an active role. D) limited liability and a passive role.

Your answer, limited liability and a passive role., was incorrect. The correct answer was: unlimited liability and an active role. In partnerships, whether real estate or not, the general partner is the active partner managing the business and taking on unlimited liability.

All of the following are primary objectives in a DPP EXCEPT: A) deductions against other income. B) short-term capital gains. C) deferment of taxes. D) long-term capital gains.

Your answer, long-term capital gains., was incorrect. The correct answer was: short-term capital gains. DPPs are used to defer present income into the future and take advantage of time.

An investor acquires limited partner status in a direct participation program when: A) his money is received by the general partner. B) he submits a signed copy of the subscription agreement. C) he and the general partner have both signed the subscription agreement. D) the certificate of limited partnership is filed in its home state.

Your answer, the certificate of limited partnership is filed in its home state., was incorrect. The correct answer was: he and the general partner have both signed the subscription agreement. The investor must sign a copy of the subscription agreement, but he is not considered a limited partner until the agreement is also signed by the general partner indicating acceptance of the limited partner.