Unit 13 Quiz

A nonleveraged direct participation program has all of the following risks EXCEPT: A) rate risk. B) legislative risk. C) management risk. D) liquidity risk.

A) rate risk.

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) oil and gas limited partnerships. D) equipment leasing limited partnerships.

A) real estate investment trusts.

What are the advantages of oil and gas direct participation programs? A) IDC. B) Depletion. C) All of these. D) Potential cash flow and/or income.

C) All of these.

Depletion allowances in oil and gas programs are based on the amount of oil: A) extracted. B) lost to shrinkage. C) sold. D) in reserve.

C) sold.

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

D) 0.

If a customer subscribes to a $20,000 public limited partnership interest, which of the following is the maximum underwriting compensation that may be charged? A) 18,000. B) 1,850. C) 4,000. D) 2,000.

D) 2,000.

Intangible drilling costs would include all of the following EXCEPT: A) land surveys. B) fuel. C) wages. D) casing.

D) casing.

The principal tax benefit of investing in an exploratory oil and gas drilling program is derived from: A) depreciation expenses. B) capital appreciation. C) recapture. D) intangible drilling costs.

D) intangible drilling costs.

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

I and II

An investor in a limited partnership generating passive losses can offset these against: I. passive income from other partnerships. II. rental income from direct investments in real estate. III. dividends received from listed securities. IV. capital gains from sale of unlisted securities.

I and II

An investor purchased an interest in a limited partnership, paying $10,000 in cash and signing a recourse note to the partnership under a letter of credit for $40,000. Which of the following statements are TRUE? I. The investor's tax basis will be $10,000. II. The investor's tax basis will be $50,000. III. The investor's maximum loss will be $10,000. IV. The investor's maximum loss will be $50,000.

II and IV

Which statements regarding oil and gas limited partnerships are TRUE? I. Developmental programs are more risky than exploratory programs. II. Exploratory programs are more risky than developmental programs. III. Successful developmental programs provide higher returns than exploratory programs. IV. Successful exploratory programs provide higher returns than developmental programs.

II and IV

A customer invests $20,000 in a DPP and signs a recourse note for $50,000. During the first year of operation, the customer receives a cash distribution from the partnership of $15,000. At year 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) 55,000. B) 0. C) 35,000. D) 75,000.

A) 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 end, the investor's basis and the amount he can deduct from passive income is $55,000.

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

A) Oil and gas income program.

All of the following statements are true of the risks of investing in an oil and gas limited partnership EXCEPT: A) development programs have higher risk than exploratory programs. B) income programs have fewer tax benefits than exploratory programs. C) development programs may involve acquisition of expensive leases. D) wells may not have sufficient reserves to return drilling costs.

A) development programs have higher risk than exploratory programs.

The term "wildcatting" refers to: A) drilling for oil or gas where none has occurred previously. B) buying new-construction real estate for speculative appreciation value. C) limiting your investment portfolio to IPOs. D) small-cap mutual fund diversification.

A) drilling for oil or gas where none has occurred previously.

In the case of a real estate direct participation limited partnership program, nonrecourse financing will: A) increase a limited partners original cost basis. B) be added to a limited partners sales proceeds at the time the partnership is dissolved. C) decrease a limited partners original cost basis. D) have no effect on a limited partners original cost basis.

A) increase a limited partners original cost basis.

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) $1.4 million. B) $1.6 million. C) a loss. D) $3 million.

B) $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.

Regarding the use of the term" direct participation programs" when referring to tax-sheltered investments, which of the following is NOT a DPP? A) A real estate limited partnership. B) A real estate investment trust. C) An oil and gas limited partnership. D) An equipment leasing limited partnership.

B) A real estate investment trust.

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

B) Oil well casing and piping.

Programs allowing for the direct pass-through of losses and income to investors include all of the following EXCEPT: A) new construction real estate direct participation programs. B) REITs. C) oil and gas drilling direct participation programs. D) S corporations.

B) REITs.

All of the following documentation is necessary for a publicly subscribed limited partnership EXCEPT: A) Certificate of Limited Partnership. B) cash flow analysis. C) subscription agreement. D) partnership agreement.

B) cash flow analysis.

Limited partners have the right to do all of the following EXCEPT A) inspect and copy partnership records B) choose the assets for the partnership C) sue the GP for damages if he acts outside of his authority D) vote to remove the GP

B) choose the assets for the partnership

Once the IRS determines that a tax shelter is abusive, it may do all of the following EXCEPT: A) charge interest on back taxes. B) sentence the abuser to a prison sentence. C) charge the taxpayer with intent to defraud. D) disallow all deductions.

B) sentence the abuser to a prison sentence.

In the partnership agreement of a limited partnership, all of the following would be disclosed EXCEPT: A) what matters the limited partners can vote on under the democracy provisions. B) the procedures for the annual election of general partners. C) how the general partners will be compensated. D) how the operating profits will be distributed.

B) the procedures for the annual election of general partners.

Which of the following real estate limited partnerships allows tax credits to the investor? A) Existing property. B) New construction. C) Historic rehabilitation. D) Raw land.

C) Historic rehabilitation.

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

C) Income.

A general partner may do all of the following EXCEPT: A) sell property to the limited partnership. B) act as an agent for the partnership in managing partnership assets. C) borrow money from the partnership. D) make general management decisions regarding the partnership.

C) borrow money from the partnership.

When analyzing a DPP investment, a method that takes into account the revenues and expenses is: A) technical analysis. B) liquidity analysis. C) cash flow analysis. D) fundamental analysis.

C) cash flow analysis.

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

C) depletion.

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

C) is one in which 25% or more of the properties are not specified.

The managing partner of a limited partnership has responsibility for all of the following EXCEPT: A) managing the operations. B) organizing the business. C) providing unlimited capital for the partnership business. D) paying partnership's debts.

C) providing unlimited capital for the partnership business.

All of the following statements are true with respect to a limited partnership subscription agreement EXCEPT: A) the general partner endorses the subscription agreement, signifying that a limited partner is acceptable. B) the investor's signature indicates that he 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 investor's registered representative must verify that the investor has provided accurate information.

C) the general partner's signature grants the limited partners power of attorney to conduct the partnership's affairs.

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) 50,000. B) 30,000. C) 20,000. D) 70,000.

D) 70,000.

An investor with a large salary as well as unearned investment income is two years from retirement. If he wants to shelter a portion of his income, which of the following programs would provide him with substantial initial write-offs? A) Existing housing. B) Raw land. C) An oil and gas income program. D) An oil and gas drilling program.

D) An oil and gas drilling program.

All of the following are required by limited partnerships EXCEPT: A) certificate of limited partnership. B) subscription agreement. C) partnership agreement. D) SEC approval.

D) SEC approval.

An individual who invests in an undeveloped land limited partnership would be most interested in: A) operating expense deductions. B) depreciation. C) depletion. D) appreciation.

D) appreciation.

A limited partner assisting the general partner to solicit new investors. A) is permitted if no compensation is paid. B) is permitted if done within 90 days of his acceptance as limited partner. C) is permitted if stated in the partnership agreement. D) could jeopardize his limited partner status.

D) could jeopardize his limited partner status.

A sharing arrangement in which only deductible costs are apportioned to the investor with the sponsor bearing all capitalized costs is called a(n): A) overriding royalty arrangement. B) reversionary sharing arrangement. C) carried interest. D) functional allocation.

D) functional allocation.

Depletion allowances apply to all of the following EXCEPT: A) copper mining. B) timber. C) oil and gas. D) real estate.

D) real estate.