Unit 13 - Direct Participation Programs

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) 1,850. B) 18,000. C) 2,000. D) 4,000.

Your answer, 2,000., was correct!. The FINRA rules for limited partnership offerings limit underwriting compensation to 10% of the total money raised (10% of $20,000 is $2,000). Reference: 13.1.2 in the License Exam Manual.

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

Your answer, Oil well casing and piping., was correct!. Casing and piping are materials used in oil and gas well drilling programs. Reference: 13.2.3 in the License Exam Manual.

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.

Your answer, Syndicator., was correct!. A syndicator handles the registration of the limited partnership units. Reference: 13.1.2 in the License Exam Manual.

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) original basis. C) total of the deductible losses taken by the investor. D) adjusted basis.

Your answer, adjusted basis., was correct!. 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. Reference: 13.2.6 in the License Exam Manual.

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

Your answer, appreciation., was correct!. Investors seek appreciation when investing in undeveloped land limited partnerships. Reference: 13.2.1 in the License Exam Manual.

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

Your answer, borrow money from the partnership., was correct!. 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. Reference: 13.1.4 in the License Exam Manual.

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) 33,000. B) 100,000. C) 10,000. D) 0.

Your answer, 0., was correct!. The limited partner will not receive any return of his investment. In a failed program, the partnership's creditors are paid first with any sale proceeds, before the limited partners receive any money. Because the limited partners had not signed a recourse agreement, even though the partnership still owes $2 million on the mortgage, the limited partners are not liable for any money beyond their original investments. Reference: 13.1.3 in the License Exam Manual.

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) 100,000. B) 32,000. C) 10,000. D) 0.

Your answer, 0., was correct!. The real estate limited partnership raised only $1,000,000 (10% interest equals $100,000). The partnership incurred excess liabilities. While the customer isn't liable for any of the excess liabilities, as a limited partner the customer is liable for the entire $100,000 invested. Because the customer is liable for the entire $100,000 invested, none of it will be recovered. Reference: 13.2.6 in the License Exam Manual.

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) 35,000. B) 75,000. C) 0. D) 55,000.

Your answer, 0., was incorrect. The correct answer was: 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. Reference: 13.2.4.2.1 in the License Exam Manual.

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) 200,000. B) 100,000. C) 0. D) 300,000.

Your answer, 200,000., was incorrect. The correct answer was: 0. Limited partners are liable for their investments and any shares of recourse debt. They are not liable for nonrecourse debt. Because the limited partner received the full amount of his original investment at the liquidation of the partnership, he has no loss to declare. Reference: 13.2.6 in the License Exam Manual.

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

Your answer, 50,000., was incorrect. The correct answer was: 70,000. Generally, nonrecourse debt does not add to basis because the limited partner is not responsible (at risk) for the repayment of the debt. However, in real estate partnerships, the at-risk rules do not apply, and therefore, add to basis in this type of partnership. Reference: 13.2.6 in the License Exam Manual.

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

Your answer, A real estate investment trust., was correct!. DPPs include any form of business that allows for the direct pass-through of tax consequences to participants. REITs do not allow for the pass-through of losses. Reference: 13.2 in the License Exam Manual.

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

Your answer, Historic rehabilitation., was correct!. Raw land partnerships seek appreciation. Existing property and new construction partnerships seek passive income and tax deductions from business operations. Historic rehabilitation partnerships allow not just deductions but actual tax credits. Reference: 13.2.1 in the License Exam Manual.

Which of the following govern(s) the sale of a publicly offered direct participation program? FINRA Securities Act of 1933. Blue-sky laws. A) II only. B) I only. C) I and II. D) I, II and III.

Your answer, I, II and III., was correct!. The sale of a publicly registered DPP, like any other newly issued nonexempt security, is governed by the Securities Act of 1933, FINRA, and any applicable blue-sky laws. Reference: 13.1.1.2 in the License Exam Manual.

The certificate of limited partnership contains the: limited partnership's name. liability for future additional contributions. limited partners' power to assign. conditions of dissolution. A) I and II. B) I and III. C) II and IV. D) I, II, III and IV.

Your answer, I, II, III and IV., was correct!. The certificate contains the limited partnership's name, the liability for future additional contributions, the limited partner's powers to assign, and the conditions of dissolution. Reference: 13.1.2.1.1 in the License Exam Manual.

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

Your answer, II and IV., was correct!. Exploratory oil and gas direct participation programs drill in areas where there are no proven oil reserves. While the chances of success are relatively small, successful exploratory wells provide large returns to investors. Developmental programs drill in areas adjacent to sites where proven oil reserves exist; while the probability of success is favorable, the returns will not be as great as a successful exploratory program. Reference: 13.2.2.5 in the License Exam Manual.

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

Your answer, II and IV., was incorrect. The correct answer was: I and II. A working interest is a right to revenues from production, but it also carries the responsibility for extraction costs. A royalty interest carries no responsibility for extraction costs. Reference: 13.2.2.7 in the License Exam Manual.

From first to last, which of the following sequences reflects the priority of payments made when a limited partnership is liquidated? General partners. Limited partners. General creditors. Secured creditors. A) I, II, III, IV. B) IV, III, II, I. C) IV, III, I, II. D) I, IV, III, II.

Your answer, IV, III, II, I., was correct!. Creditors are paid first in a liquidation, with priority given to the secured lenders; general partners are the last to get paid. Reference: 13.1.3 in the License Exam Manual.

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

Your answer, Raw land real estate limited partnership., was incorrect. The correct answer was: Oil and gas income program. The customer is not in a high tax bracket and would not be able to take full advantage of the tax benefits produced by an exploratory oil and gas program or by new construction real estate limited partnerships. A raw land real estate partnership is usually speculative. Of the answers listed, the income and moderate risk from an oil and gas income program would be of greatest benefit to this investor. Reference: 13.2.2.6 in the License Exam Manual.

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

Your answer, a tax credit., was correct!. A tax credit reduces a person's tax liability dollar for dollar. Deductions, depreciation and depletion reduce taxable income. Reference: 13.2.4.2.2 in the License Exam Manual.

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) loans money to the business. C) acts as agent for the business. D) manages the business.

Your answer, borrows money from the business., was correct!. The general partner manages the business and acts as agent for the business. The general partner may loan money to the partnership at a reasonable rate of interest, but may not borrow from the partnership. Reference: 13.1.4 in the License Exam Manual.

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

Your answer, crops., was correct!. Oil and gas are examples of asset types that can be depleted, whereas buildings are a depreciable asset. Farm crops are considered to be renewable assets. Reference: 13.2.4.2.1 in the License Exam Manual.

A blind pool offering: A) is connected with oil and gas leases. B) 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. D) generates nonallocated income.

Your answer, is one in which 25% or more of the properties are not specified., was correct!. 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. Reference: 13.2.4.3 in the License Exam Manual.

All of the following are oil and gas program sharing arrangements EXCEPT: A) overriding depletion allowance. B) disproportionate sharing. C) reversionary working interest. D) functional allocation.

Your answer, overriding depletion allowance., was correct!. Functional allocation, disproportionate sharing, and reversionary working interest are oil and gas sharing arrangements. An overriding depletion allowance does not exist. Reference: 13.2.2.7 in the License Exam Manual.

An investor acquires limited partner status in a direct participation program when: A) the certificate of limited partnership is filed in its home state. B) he submits a signed copy of the subscription agreement. C) he and the general partner have both signed the subscription agreement. D) his money is received by the general partner.

Your answer, the certificate of limited partnership is filed in its home state., was incorrect. The correct answer was: he and the general partner have both signed the subscription agreement. The investor must sign a copy of the subscription agreement, but he is not considered a limited partner until the agreement is also signed by the general partner indicating acceptance of the limited partner. Reference: 13.1.2.1.3 in the License Exam Manual.