Cards #11
A municipal bond "tax swap" is the:
purchase and sale of similar, but not identical bonds, to incur a tax deductible loss for that year
Question:All expenses associated with holding municipal bonds are:
0% tax deductible Because municipal interest income is not taxable by the Federal government, all expenses associated with keeping municipal bonds are not tax deductible. These expenses include interest on loans used to finance the purchase of municipal bonds, safe deposit box charges for holding the bonds, etc.
FINRA's guideline for the maximum compensation that a member can take for participating in the distribution of a direct participation program is:
10% of the Public Offering Price Under FINRA rules, the maximum compensation that an underwriter can take for selling a new direct participation program is 10% of the offering price. Contrast this with the 8 1/2% maximum sales charge for mutual fund offerings and the 5% mark-up guideline for OTC and exchange transactions not involving a prospectus.
Which of the following will increase the tax basis of a limited partnership interest?
Assumption of recourse debt by the partner
Which of the following can affect the holding period of a stock held short term?
Buy a put If a customer buys stock and does not buy a put on the same day, then the put is not married to the stock. The worry of the IRS is that the customer might attempt to buy a put on stock that has appreciated in value to lock in a gain while the holding period is short-term, and then simply wait until the holding period is long term to sell the stock (either in the market or by exercising the put and be taxed at the lower 15% rate) without having been at risk. So if the put is purchased when the stock is held short-term, the IRS wipes out the holding period and it does not start counting again until the put expires (and it starts from day 1 at this point). Note that if the put is married to the stock on the same day, the stock's holding period counts normally; and if the stock was already held long term when the put was purchased, then the investor was not trying to stretch a short term capital gain to a long term capital gain without being at risk, and the holding period counts normally.
Which of the following is NOT defined as "portfolio income" under IRS guidelines?
Distributive share of income from limited partnership holdings
Which of the following will increase the tax basis of a limited partnership interest?
I Cash contribution III Distributive share of partnership income The "basis" is the theoretical value of the investment in the partnership. The "basis" amount establishes the limit of tax deductions that may be taken by the partner - so the larger the basis, the better it is for the partner.Cash contributions and assumption of debt will increase the basis (more money going into the partnership investment). In addition, each partner's "distributive" share of income increases the basis (this is income that is retained in the partnership that has not physically been sent to the partner).Cash distributions and pay down of debt by the partnership reduce the basis (this is cash being paid out of the partnership). In addition, each partner's "distributive" share of losses decreases the basis (these are losses that are retained in the partnership that have not physically been sent to the partner).
Which of the following corporate distributions are taxable to the recipient?
I Cash dividend III Product dividend Stock dividends and stock splits are not "taxable," the recipient reduces his or her cost basis per share for the additional shares received. Cash dividends and product dividends received, are taxable. Review
Which of the following items are included as deductible passive losses on the income tax returns of limited partnership investors?
I Interest payments on secured debt III Intangible drilling costs IV Depletion allowances
A customer buys a municipal bond in the primary market at a discount. Which of the following statements are TRUE regarding the discount and the tax consequence?
I The discount must be accreted IV The discount is not taxable
If a security was held for more than one year and it is donated to a charity by the investor, which of the following statements are TRUE about the tax consequence of the event?
I The investor gets to deduct the fair market value of the security as a donation III The investor has no tax liability on the appreciation
Which of the following statements are TRUE regarding a managed limited partnership offering?
I The underwriter takes on financial liability in selling the issue IV The offering is effected on a firm commitment basis
If the certificate of limited partnership is found to be defective, the:
I limited partner can be considered a general partner, assuming unlimited liabilityII limited partner can renounce his interest to avoid general liability
Which statements are TRUE regarding dividend and capital gain distributions made by mutual funds?
II Capital gains are taxable regardless of being reinvested in additional mutual fund shares IV Dividends are taxable regardless of being reinvested in additional mutual fund shares
hich of the following statements are TRUE regarding the taxation of a municipal security?
II Capital gains from selling municipal bonds are subject to Federal and State tax III Interest income received from municipal bonds is exempt from Federal and State tax if the bond is owned by a resident of that State
Which of the following will decrease the tax basis of a limited partnership interest?
II Cash distribution from the partnershipIII Repayment of partnership loan principalIV Distributive share of partnership loss
Interest income from which of the following municipal issues would likely be included as a tax preference item in the Alternative Minimum Tax computation?
II Industrial Revenue Bond IV Redevelopment Bond The interest income from non-essential private use municipal bond issues is included as a "tax preference" item in the Alternative Minimum Tax. Both School District Bonds and Public Housing bonds are considered to be "essential public uses" and are not subject to AMT. Industrial Revenue Bond issues are used to finance construction of plants for corporate lessors and are "private use." Redevelopment bond issues are used to finance rehabilitation of plant and offices, typically for corporate use, and also are considered to be "private purpose."
When amortizing a bond premium, which of the following statements are TRUE?
II The bond's cost basis is reduced each year III Any potential gain of the sale of the bond increases each year
Amortization of a bond premium will:
II decrease the bond's cost basis IV decrease annual reported interest income
Underwriter's compensation in a direct participation program is:
II limited to 10% of the offering price IV non-deductible to the investor To be fair and reasonable, under FINRA rules, the maximum spread that can be taken by underwriters in limited partnership offerings is 10% of the purchase price. This is part of the "up front" cost of the investment and is included in the investor's cost basis; this amount is not deductible.
I The alternative minimum tax computation is required for all taxpayer
If the alternative minimum tax amount is greater than the regular income tax amount, the larger amount must be paid
Which statement is TRUE about selling short against the box?
It "locks-in" a gain on the stock When an individual sells stock short which he owns, this is termed "short against the box." This locks in a capital gain, however, under 1997 tax law revisions, any gain is taxable at this point. Thus this strategy generally cannot be used to defer taxation of a gain; nor does it reduce or eliminate taxation.
Limited partnership investors are subject to which of the following risks? I Tax audit riskII Marketability riskIII Legislative riskIV Management risk
Limited partnership investors suffer from marketability risk, since such securities are illiquid. They also suffer from the risk of further tax law changes, and increased chances of tax audits; and the risk of poor management by the general partner.
All of the following are needed to determine the annual accretion amount on an original issue municipal discount bond EXCEPT:
Market value
There is no real benefit for the manager of a pension plan to invest in which of the following securities?
Municipal Bonds Pension plans are "tax qualified" retirement plans. Earnings on securities held are tax deferred; so there is no benefit to investing in municipals, which have lower rates because their interest income is exempt from Federal income tax. Investments would be made in corporate, government, and agency bonds, all of which have higher rates because their interest income is taxable by the Federal government.
Where would an investor in a private placement direct participation program find the cash flow projections over the program's life?
Offering memorandum The Offering Memorandum is the disclosure document that is given to potential investors in a private placement direct participation program. Another name is the Private Placement Memorandum. Note that if the offering were registered with the SEC, then the disclosure document would be the prospectus. The offering memorandum describes the business of the partnership, the management of the partnership, the assets to be purchased by the partnership, the minimum investment amount, fees paid to the underwriter, etc. It also includes an important section that gives a projection of the revenues and expenses, along with the annual cash flow, that the partnership expects to generate. This is evaluated to find the "cross-over" point in the partnership - the point where the partnership "crosses over" from generating losses to actually generating income.
For tax purposes, cash dividend payments by issuers to securities holders are taxable as of which date?
Payable date
All of the following are needed to determine the annual accretion amount on an original issue municipal discount bond EXCEPT:
Sale price The annual accretion amount on an original issue discount bond is based on the difference between the original acquisition cost of the bond and par value at maturity. The sale price is used to compute gain or loss, but is not needed to compute the annual accretion amount. The dated date is needed since accretion starts from this date. The maturity date is needed since accretion stops at this date. Review question # 10-4-10-2 Taxes & Tax Shelters : Taxation of Municipal Bonds : Municipal Bonds : Items Needed for Accretion / Amortization Copyright 1989-2021 Pass Perfect, LLC All Rights Reserved
Under IRS rules, if a customer selling shares of stock wishes to use specific identification instead of FIFO for cost basis reporting, the broker-dealer effecting the trade must be notified of this no later than:
Settlement Date
Under IRS rules, if a customer selling shares of stock wishes to use specific identification instead of FIFO for cost basis reporting, the broker-dealer effecting the trade must be notified of this no later than:
Settlement date If a customer says nothing at the time of a stock sale, IRS rules requires that FIFO be used to determine which shares are sold. If the customer wishes to use specific identification instead, this must be chosen by the customer no later than settlement date.
The individual who sponsors the limited partnership offering is the:
Syndicator The syndicator of a limited partnership is the person who handles the organization of the partnership and the registration of the partnership securities.
Modified Accelerated Cost Recovery System (MACRS) deductions are available for all of the following assets EXCEPT:
Tangible property, such as equipment, aircraft, and oil rigs, qualifies for accelerated depreciation deductions under MACRS.
A municipal bond is purchased in the secondary market at a discount and the bond is held to maturity. If the discount has not been accreted, what is the tax consequence at maturity?
Taxable interest income equal to the discount The discount on market discount municipal bonds is treated as taxable interest income earned. This is nothing more than a "tax grab" by the Federal government - the idea being that wealthy people buy municipal bonds, so if there is a way that they can be taxed without jeopardizing their basic Federal income tax-free status, why not? The holder can either accrete the discount annually as taxable interest income earned and adjust the cost basis of the bond upwards by this amount; or can wait until the bond is sold or matures to report the accumulated "earned" discount as taxable interest income at that point (this is the better choice from a tax standpoint).
Which of the following statements are TRUE about capital gains taxes for investors who are not extremely high earners?
The maximum tax rate on a short term capital gain is 37% he maximum tax rate on a long term capital gain is 15%
Which of the following are "front end" fees that are deducted from the gross investment made in a limited partnership? I Legal and accounting fees II Organization costs III Cost of selling partnership units
The "up-front" costs that are incurred in a limited partnership are the selling fees; organization costs; and legal and accounting expenses for establishing the partnership. For example, assume a prospectus for a $10,000 partnership interest shows the following: $10,000Unit$ 1,000Selling Expenses$ 500Organizational Costs$ 500Legal and Accounting Costs$ 8,000Net Proceeds Invested in Partnership Assets Of the $10,000 invested, $2,000 of expenses were incurred to establish the partnership, while only $8,000 was invested productively. Please note that these items are not deductible for tax purposes from the partner's income as an expense. Rather, they are incorporated into the beginning partnership basis. Any operating expenses incurred during that year would be deductible at the end of the year against the beginning basis. They are not an "up-front" cost.
A customer has invested $100,000 in a CMO. In the first year, the customer receives $12,000 of payments, which consist of $9,000 of interest and $3,000 of principal. Which statement is TRUE?
The $3,000 of principal is not taxable and the $9,000 of interest is taxable A CMO (Collateralized Mortgage Obligation) passes-through the monthly mortgage payments to the certificate holders. The monthly mortgage payment is a combined payment of principal and interest, and the principal received reduces the outstanding principal (debt) amount. Only the interest component received is taxable; the principal component is a return of original investment.
Which statements are TRUE regarding dividend and capital gain distributions made by mutual funds that have been reinvested in additional fund shares?
The dividend distribution is taxable The capital gain distribution is taxable
In an oil and gas program which has a disproportionate sharing arrangement, which statement is TRUE?
The general partner agrees to bear some costs in return for a greater percentage of oil revenue
Which of the following would be described as an oil and gas program functional allocation sharing arrangement?
The general partner bears the tangible costs; and the limited partner bears the intangible drilling costs
In an oil and gas program which has an overriding royalty interest arrangement, which statement is TRUE?
The general partner takes a percentage from the first barrel of oil produced, without regard to costs
Which of the following would be described as a blind pool limited partnership?
The partnership investments are not known at the time of the offering
What would be disclosed in the Offering Memorandum prepared for an Equipment Leasing Limited Partnership that has a life of 7 years?
The partnership's projected returns over the upcoming 7 years he Offering Memorandum is the disclosure document that is given to potential investors. It describes the business of the partnership, the management of the partnership, the assets to be purchased by the partnership, the minimum investment amount, fees paid to the underwriter, etc. It also includes an important section that gives a projection of the revenues and expenses, along with the annual cash flow, that the partnership expects to generate. This is evaluated to find the "cross-over" point in the partnership - the point where the partnership "crosses over" from generating losses to actually generating income. Note that there is no past performance shown because each partnership is a newly formed entity. Also, the names and percentage participation of the limited partners is not known until the deal is sold out.
When a stock and a put option on that stock are purchased on the same day, which of the following statements are TRUE? I The put option is said to be "married" to the stock
The put option is said to be "married" to the stock The premium paid for the put option is treated as part of the cost basis of the stock When a put is purchased on a stock on the same day that the stock is bought, the put is said to be "married" to the stock position. The only reason the option was purchased was to protect the customer against loss if the market for the stock fell. It was not purchased to speculate in the market. The IRS treats a "married" put as part of the cost basis of the stock. Notice that, therefore, the put premium cannot be deducted as a capital loss if the put expires worthless; instead, it has increased the stock's cost basis and will reduce any potential capital gain, when, and if, the stock is sold. As one would expect, this is the tax treatment that is most beneficial to the IRS and least beneficial to the investor.
When is a customer accepted as a limited partner in a Direct Participation Program (DPP)?
When the DPP's general partner signs the subscription agreement submitted by the customer To become a limited partner in a DPP, the customer must complete a suitability questionnaire and, since most of these are private placements open only to wealthy investors, an accredited investor questionnaire must be completed as well. Both of these are included in the subscription agreement that is signed by the customer and submitted to the DPP's general partner, along with a check for the investment amount. The general partner reviews the subscription agreement and signs it, accepting the customer as a limited partner (and, of course, deposits the check!).
The lower 15% tax rate applies to:
cash dividends received from stock investments
The term "cross-over point" in a direct participation program is the time when the:
income from the investment exceeds the tax deductions generated by that investment The term "cross-over point" in a limited partnership program is the point where the program begins to generate taxable income instead of tax losses. This would happen in the later years of a program, as income increases (for example, rent rolls increase in a real estate program), while deductions decrease (for example, accelerated depreciation deductions decrease). When a program "crosses over," the limited partners are no longer getting any tax losses from the program; instead they have taxable income. This is typically not their reason for being in a "tax advantaged" investment. At this point, the general partner will typically increase borrowings against the program's assets. This gives the program bigger interest deductions, in effect "killing" the extra income. The proceeds of the new loan are given to the partners as a cash distribution, which makes them happy. The end result is that the program no longer shows taxable income; and the partners have more cash in their pockets without having to pay any tax on it.
A direct participation program offering which is "unmanaged:"
is offered through sellers on a best efforts basis An unmanaged direct participation program is one which is sold to investors through wholesalers, acting as agents for the issuer. These offerings are sold on a best efforts basis. The wholesalers take no financial responsibility for the issue. Managed direct participation program offerings are firm commitments by underwriters who buy the issue and then sell it to the public through a syndicate - the underwriter is said to be "managing" the sale of the offering.
If a put is purchased on stock that has been held short term, the stock's holding period:
is wiped out
All of the following fees associated with limited partnership syndications are non-deductible from partnership income EXCEPT:
management fees Management fees charged to a limited partnership are deductible from partnership income. Start-up costs are not deductible from partnership income. These are included in the partner's cost basis and remain there without change. These start-up costs include organization costs; the spread paid to underwriters by the issuer; and initial accounting and legal costs.
The discount on market discount corporate and government bonds:
may be accreted annually
Which statement is TRUE for both original issue discount ("OID") municipal bonds and municipal bonds originally issued at par that are now trading at a discount? If held to maturity, there is:
no tax on the discount of the OID bond; while the discount will be taxed as interest income on the market discount bond
The ultimate authority for determining the amount of the discount that must be accreted on a "market discount" bond is the:
nternal Revenue Service
All of the following fees associated with limited partnership syndications are non-deductible from partnership income EXCEPT:
operating costs Operating costs charged to a limited partnership are deductible from partnership income as an "ordinary and necessary business expense." Start-up costs are not deductible from partnership income. These are included in the partner's cost basis and remain there without change. These start-up costs include organization costs; the spread paid to underwriters by the issuer; and initial accounting and legal costs.
A customer has invested in a real estate business that is being managed by a third party. Any income from the investment would be characterized for tax purposes as:
passive income
A written financial statement is required from a customer who wishes to:
purchase a direct participation program interest
All of the following will affect the counting of the holding period of ABC stock, a position that has been held for 6 months, EXCEPT:
selling an "out the money" ABC put contract If a customer goes "short against the box" on a stock position that has been held short term, the holding period of the underlying stock stops counting as of the short sale date. The worry of the IRS is that once the long position has been hedged, the customer will simply wait out the extra time needed to enjoy a long term capital gains holding period, which would be taxed at a lower rate. IRS rules require that if one goes "short against the box," any gain is taxable at that point. Thus, a short term holding period cannot be stretched into a long term holding period. (Note that there is a 15% maximum long term capital gains tax rate if the position is held over 12 months (20% for very high earners); instead of a 37% maximum tax rate for short term capital gains.) If a put is purchased on a stock position that has been held short term, the holding period stops counting and reverts to "0," but no tax is due at that moment. If the stock's price falls, the put will be exercised, and tax is due at that point. If the stock's price rises, the put expires, and the stock is sold in the market. Tax on the resulting higher gain is due at this point. Selling a put has no effect on a long stock position's holding period, since an exercise requires that person to buy more shares (not sell them).
"Selling short against the box" is:
selling stock short (borrowed shares) that the customer owns
A customer is short 1 ABC Jan 90 Call @ $5. The call is assigned when the market price of ABC is $100. The sales proceeds of the shares is:
strike price plus premium
A reversionary oil and gas sharing arrangement where the general partner agrees to defer taking a percentage of revenues is also known as a(n):
subordinated royalty interest In a reversionary working interest (also called a subordinated royalty interest), the general partner agrees not to take a percentage of revenue until all costs are recovered. In an overriding royalty interest, the general partner takes a percentage from the first barrel produced, without regard to costs. In a net profits interest, the general partner gets a percentage of defined "net profits" from the first barrel produced, but "net profits" as defined usually does not deduct all costs. These arrangements are all "carried interests" because the general partner does not contribute to the cost of finding oil. In a disproportionate sharing arrangement, the general partner agrees to bear some costs in return for a greater percentage of oil revenue. This is a "working" interest.
