Unit 13 Quiz 2

A client invests $100,000 in a tax shelter as a limited partner, giving him a 10% interest in the program. However, the general partners cannot meet the program's expenses. A mortgage balance remains of $3 million, and the property of the program is liquidated for $1 million. How much does the investor get back from his original investment? A) 0. B) 33,000. C) 100,000. D) 10,000.

A) 0.

A limited partner (LP) invests $100,000 in a 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) 0. B) 300,000. C) 100,000. D) 200,000.

A) 0.

Which of the following would NOT be a valid use of the partnership democracy? A) Deciding which partnership assets should be liquidated to pay creditors. B) Consenting to an action of a general partner that is contrary to the agreement of limited partnership. C) Removing the general partner. D) Consenting to a legal judgment against the partnership.

A) Deciding which partnership assets should be liquidated to pay creditors.

A registered representative must obtain written verification of an investor's net worth for which of the following investments? A) Direct participation program. B) Mutual fund. C) Real estate investment trust. D) Variable contract.

A) Direct participation program.

Which of the following registers the securities and packages the program for a limited partnership? A) Syndicator. B) Limited partners. C) General partner. D) Property manager.

A) Syndicator.

A general partner is considered to have a conflict of interest with the business of a limited partnership if he: A) borrows money from the business. B) acts as agent for the business. C) loans money to the business. D) manages the business.

A) borrows money from the business.

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) crops. B) oil. C) gas. D) buildings.

A) crops.

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

A) one who has limited liability

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

B) Labor, fuel, or drilling rig rental.

Which of the following best describes the advantages of an oil and gas income program as compared with other types of oil and gas programs? A) Greatest risk of capital. B) Lowest risk of capital. C) No depletion allowances. D) Highest tax write-off.

B) Lowest risk of capital.

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 registration statement. D) the subscription agreement.

B) the certificate of limited partnership.

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

C) all or none underwriting arrangement.

The primary tax benefit of an income oil and gas program is: A) tangible drilling costs. B) depreciation. C) depletion. D) intangible drilling costs.

C) depletion.

A direct participation program shows the following operations results: Revenues: $3 million. Operating expense: $1 million. Interest expense: $200,000. Management fees: $200,000. Depreciation: $3 million. Profit or loss for the year is: A) loss $3 million. B) income $1.6 million. C) loss $1.4 million. D) income $2.7 million.

C) loss $1.4 million. Taxable income for a partnership is determined as follows: Gross revenue $3 million. Less operating expense -$1.2 million. Net revenue $1.8 million. Less interest -$200,000. Less depreciation $3 million. Taxable loss = $1.4 million.

Which of the following statements describes an oil and gas blind pool offering? A) An unknown number of representatives participates in the sale of known partnership units. B) The income from producing wells is purchased at a discount from the present value of the projected future flows. C) The oil exploration occurs in an area that is not adjacent to any known oil reserves. D) Money is raised without a specific property being stated, and the GP selects the investments.

D) Money is raised without a specific property being stated, and the GP selects the investments.

A taxpayer's most advantageous tax benefit is: A) straight-line depreciation. B) a tax deduction. C) a depletion allowance. D) a tax credit.

D) a tax credit.

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

D) short-term capital gains.

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

I and II

Which of the following govern the sale of a publicly offered direct participation program? I. FINRA II. Securities Act of 1933 III. The Investment Company Act of 1940 IV. The Internal Revenue Service

I and II

In a functional allocation oil and gas program, which of the following statements are TRUE? I. The general partner picks up all tangible drilling costs. II. The general partner picks up all intangible drilling costs. III. The limited partners pick up all tangible drilling costs. IV. The limited partners pick up all intangible drilling costs.

I and IV

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

II and III

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

II and IV

When conducting a discussion with a client about the merits of investing in a DPP, all of the following could be tax advantages EXCEPT: I. accelerated depreciation. II. depletion allowances. III. recapture of depreciation. IV. tangible drilling expenses.

III and IV

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) The limited partner's participation is disallowed and the program continues as before, but the remaining partners are required to prorate the remaining unit. B) That limited partner's limited liability is jeopardized. C) There are no adverse consequences if, in performing management functions, the limited partner's expertise benefits the program. D) This is allowed, but only with a majority vote of the other limited partners and written approval of the sponsor.

B) That limited partner's limited liability is jeopardized.

If a limited partnership interest is sold, the gain or loss in the sale is the difference between the sales proceeds and the: A) total of tax preference items allocated to the investor. B) adjusted basis. C) total of the deductible losses taken by the investor. D) original basis.

B) adjusted basis.

As a requirement of investing in a particular business 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. The signed statement, once submitted with the intended investment amount, will either be approved or disapproved. Approval allows the investor to subscribe to the investment. Which of the following investments would have such a requirement? A) A hedge fund B) A collateralized mortgage obligation C) A direct participation program D) A variable annuity

C) A direct participation program

Which of the following types of oil and gas limited partnership programs is the riskiest? A) Income. B) Existing property. C) Exploratory. D) Developmental.

C) Exploratory.

All of the following are types of oil and gas direct participation programs EXCEPT: A) developmental. B) combination. C) minimum guarantee wildcat. D) income.

C) minimum guarantee wildcat.

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

C) principal repayment on recourse debt.