Direct Participation Programs (DPPs)

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

Barrow money from the partnership All these situations offer the potential for conflicts of interest. However, the general partner is not forbidden by law to engage in any of these acts, except for borrowing money-the general partner may never borrow money from the partnership.

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 & 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.

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 & II. Passive losses can be deducted from passive income and income from certain real estate investments; it cannot be deducted from active or portfolio (investment) income.

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 & IV. In a functional allocation program, the general partner picks up all tangible drilling costs while the limited partners pick up all intangible drilling costs. As intangible drilling costs are deductible as incurred, this type of program benefits the limited partners. Tangible drilling costs, however, are deductible pro rata over the estimated life of the well.

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

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.

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

Syndicator A syndicator handles the registration of the limited partnership units.

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

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.

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.

adjusted basis The adjusted basis is a limited partner's cost basis at any point in time. Gain or loss on the sale of the partnership is determined by comparing the sales proceeds to the adjusted basis.

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)An oil and gas drilling program. B)An oil and gas income program. C)Raw land. D)Existing housing.

an oil and gas drilling program. Oil and gas drilling programs pass through IDCs (intangible drillings costs), which the partners may use to reduce passive income.

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)Consenting to a legal judgment against the partnership. D)Removing the general partner.

deciding which partnership assets should be liquidated to pay creditors. Deciding which partnership assets should be liquidated to pay creditors involves limited partners in the active management of partnership affairs. This would result in their being treated as general partners with respect to liability, and possible loss of limited partner status.

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

intangible drilling costs. Intangible drilling costs (IDCs), which are a significant portion of all drilling costs, are a major tax advantage to a limited partner and are tax deductible in the year in which they are incurred. IDCs are costs that, after incurred, hold no salvage or ongoing value. Examples are labor and geological survey.

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.

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

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

providing unlimited capital for the partnership business. The general partner organizes and manages the partnership; he assumes unlimited liability, paying all partnership debts. However, it is the limited partners who provide the bulk of the capital.

An investor in an equipment leasing DPP using straight-line depreciation would probably not be concerned about A)liquidity risk B)the quality of the management C)legislative risk D)the likelihood of recapture

the likelihood of recapture Recapture of deductions is a concern when accelerated, but not straight-line depreciation is used. In any business, there is always concern about the quality of the management. By and large, DPPs are not liquid investments so an investor needing a quick sale may have problems. The nature of DPPs tends to make them more sensitive to legislative risk than most other securities.

An investor in an equipment leasing DPP using straight-line depreciation would probably not be concerned about A)the quality of the management B)liquidity risk C)the likelihood of recapture D)legislative risk

the likely hood of recapture. Recapture of deductions is a concern when accelerated, but not straight-line depreciation is used. In any business, there is always concern about the quality of the management. By and large, DPPs are not liquid investments so an investor needing a quick sale may have problems. The nature of DPPs tends to make them more sensitive to legislative risk than most other securities.