Series 7 Unit 13 Direct participation partnerships

DPP tax concepts

-DPPS were formerly known as tax shelters because investors used losses to reduce or shelter ordinary income. (By writing off passive loss against ordinary income.) -tax laws revision now classify income and loss from theses investments as passive income and loss. Passive losses can only shelter passive income. -this made a lot of investors super sad. But the goal of a DPP shouldn't be tax shelter it should be making those mother ****in GAINS!

Quiz

1. C 2.A 3.Dx(A) The certificate creates the partnership's limited nature; until the document is properly filed, the partnership is a general partnership. 4.C 5.A x(C)The agreement is the contract between the partners and contains each entity's rights and duties. 6.B 7. C 8. Bx(d)the LP signature on the subscription agreement grants the general partner POA to conduct the partnership affairs . Deemed acceptable when the general partner signed the agreement.

Quiz

1.D 2.Passive investors only 3.Provides creditors with information regarding an LP's terms dnd 4. B

partnership agreement

A copy of the agreement is given to partner. It describes the roles of the general and limited partners and guidelines for the partnerships operation. Rights of GP as defined in the partnership agreement include the -right to charge a management fee for making business decisions for the partnerships -authority to bind the partnership into contracts. -right to determine which partners should be included in the partnership -right to determine whether cash distributions will be made.

Subscription Agreement

All investors interested in becoming limited partners must complete a subscription agreement. The agreement appoints one or more GP's to act on behalf of the limited partner and is only effective when the GP's sign it. Along with the subscribers money, the subscription agreement must include. -investor's net worth -investors annual income -a statement attesting that the investor understands the risk involved -a power of attorney appointing the GP as the agent of partnership

organization classified as partnerships

And UNINCORPORATED org with two or more member is generally classified as partnership for federal tax purposes if its members engage in a trade, business, financial operation. Or venture and divide its profits. HOWEVER a joint undertaking is merely to share expenses is not a partnership Organizations classified as partnerships for federal tax purposes if it has two or more members THESE ARE NOT PARTNERSHIPS -an organization formed under a federal or state law that referees to it as incorporated or as a corporation, -an organization formed under a state law that referees to it as a joint stock company -an insurance company -certain banks -an organization wholly owned by a state or local government -and organization specifically required to be taxed as a corporation by the IRC -certain foreign organizations -a tax-exempt organization -a real estate investment trust -an organization classified as a trust or otherwise subject to special treatment under the IRC -any other organization that elects to be classified as a corporation by filing form 8832

Depreciation write offs

Apply to cost recovery of expenditures for equipment and real estate.

Depletion allowances

Apply to the using up of natural resources such as oil and gas May only be claimed when income is being produced by the partnership. Also recognize that some assets are not depreciable nor can they be depleted. Depreciation and be take straight line or accelerated. Accelerated is increases deductions in the early years and they go down over time.

limited partnership

Are unique investment opportunities that permit the economic consequence of a business to flow through to investors. These programs offer investors a share in the income gains losses deductions and tax credits of the business entity. Advantages: -an investment managed by others -limited liability -Flow-through of income and certain expenses. The greatest disadvantage to limited disadvantage to limited partners is their lack of liquidity. The secondary market for limited partnerships interests is extremely limited; investors who with to sell their interest frequently cannot locate buyers. Small number of them do and trade on the OTC and exchanges. these partnerships are known as Master Limited Partnerships

CORP vs DPPS

CORP -Tax-paying entity -shareholders receive dividend distributions -dividend distributions are subject to double taxation DPPS -Tax-reporting entity(entity doesn't pay taxes) -Investors receive a share of income and losses of the business reported on form K-1 -No Double taxation on distribution

Cash flow analysis

Compares income to expenses

Equipment leasing programs

Created when DPP's purchase equipment leased to other businesses. Investors receive income from lease payments and also a proportional share.

Partnership Tax reporting

DPP's are generally structured as Limited partnerships or sub chapters S corporations. these business forms are not tax paying entities like corporations; instead, they only report income and losses to the IRS, and then the partners or shareholders have responsibility to report income and losses individually and pay taxes due. So in ******* evan terms every the partnerships is made up of dudes who each have a literal piece and every piece pays its own slice of taxes? Maybe? Yeah that's what it means pass through numb nuts. You god dam street rat

Internal rate of return

Determines the present value of estimated future revenues and sales proceeds to allow comparison to other programs.

Corporation characteristics

Difficult to avoid-Centralized Management-no business can function without it. Easiest to avoid -Continuity of life-there is a predetermined time at which the partnership interest is dissolved. Most likely to avoid by a DPP- continuity of life and freely transferable interest- interests cannot be freely transferred; general partner approval is required to transfer shares.

Partnership agreement

Document must be filed in the home state of the partnership. Includes -Partnerships name -partnerships business -principal place of business -amount of time the partnership expects to be in business -size of each LP's current and future expected investments -contribution return date if set -share of profits or other compensation -conditions for LP assignment of ownership interest; -whether LP's may admit other LP's -Whether business can be continued by remaining general partners at death or incapacity If material information on certificate has changed an update must be made within 30 days of the event.

Tax Credit

Dollar for dollar reductions of taxes due and are the greatest tax benefit available to tax payers. Currently there are few available. The LP programs that offer them currently are government assisted housing programs. And historic rehabilitation programs. Formerly, tax credits were available through equipment leasing programs but the tax law changes discontinued the credit. The Partnership repo

Most important this to consider with a limited partnership is

ECONOMIC VIABILITY

Deductions

Expenses you can deduct like salary management fees, interest payment etc what you can't deduct is principal payments on property and stuff like that.

Carried Interest

GP shares tangible drilling costs with the LP's but receives no IDC's the LP receives the immediate deductions where as the GP receives write off from depreciation over the life of the property.

Dissolving limited partnerships

Generally limited partnerships are liquidated on the date specified in the partnership agreement. Early shutdown may occur if the partnership sells or disposes of its assets or if a decision is made to dissolve the partnership by the LP's holding the majority interest. When dissolution occurs the GP must cancel the certificate of limited partnership and settle the accounts in the following order. -Secured Lenders -Other creditors -Limited partners -fist for their claims to shares of profit - Second for their claims to a return of contributed capital -General Partners -first for fees and other claims not involving profits. -second for a share of profits -third for capital return IN SUM -Secured Lenders -other creditors -Limited partners -General Partners

Profit Motive

If the DDPP bones the investors by not having profit motive the DPP will be subject to -Back taxes -recaptured of tax credits -Interest penalties -prosecution for fraud.

Recourse and Non-recourse loans

In addition to a cash contribution, subscribers may assume responsibility for the repayment of a portion of a loan made to the partnership. This type of loan is called a resource loan. Partnerships borrow money through a non recourse loans the GP's have responsibility for repayment of non recourse loans not LP's

Forming a limited partnership

LP's may be sold through private placements or public offerings. If sold privately, investors receive a private placement memorandum for disclosure. Generally such private placements involve a small group of limited partners, each contributing a large sum of money. These investors must be accredited. Investors. That is they must have substantial investment experience. There general public doesn't meet this description. In a public offering limited partnerships are sold with prospectus to a large number of limited partners each making a relatively small capital contribution such as $1000 to $5000. The syndicator oversee the selling and promotion of the partnership. The syndicator is responsible for the preparation of any paperwork necessary for the registration of the partnership. Syndication or finders fees are limited to 10% of the gross dollar amount of securities sold.

Functional allocation

Most common. The LP receives the IDX which allow immediate deductions. The GP receives the tangible drilling costs which are depreciated over several years

Analysis of limited partnerships

Must match investments objectives and has economic viability.

Oil and Gas partnerships

Oil and Gas programs include speculative drilling programs and income programs that invest in producing wells. Unique tax advantages associated with these programs include intangible drilling costs and depletion allowances.

Real Estate Partnership

Provide investors with the following benefits -capital growth potential- achieved through appreciation of property -cash flow(income)- collected from rents -Tax deductions-from mortgages interest expense and depreciation allowance -Tax credits- for government-assisted housing and historic rehabilitation

Required Documentation

TOP 3 documents -The Certificate of Limited Partnership -The Partnership agreement -The subscription agreement

Disproportionate sharing

The GP bears a relatively small % of expenses but receives a relatively large percentage of the revenues.

Reversionary working interest

The GP bears no costs of the program and receives no revenue until the LP has recovered their capital. LP bears all deductible and non deductible cost

Net Operating profit interest

The GP bears none of the program costs but is entitled to a percentage of the net profits. The LP bears all the deductible and non deductible costs this arrangement is available only in private placements.

Overriding Royal interest

The holder of this interest receives royalties but has no partnership risk. An example of this arrangement is a loan downer that sells mineral rights to a partnership

Working Interest

This operating interests in a mineral-bearing partnership entitles a partner to a share of the income or revenues from production but also carries the obligation to bear a corresponding share of all costs to extract the minerals.