Chapter 11: Direct Participation Programs Flashcards
Direct Participation Program
Limited partnership
Limited partnership must avoid 3 of the following corporate characteristics
- Having centralized management 2. Providing limited liability 3. Having perpetual life 4. Having free transferability of partnership interest
Limited partner’s cost basis
Max potential loss for investor
Recourse debt
If a limited partner signs a recourse loan, the creditors can pursue personal assets if the partnership defaults on loan
Dissolution of partnership (3 ways)
- Limited partners vote to terminate partnership (GP can’t) 2. Partnership reaches objectives 3. IRS determines partnership is abusive
Limited partnership liquidation order
- Secured creditors 2. General creditors 3. Limited partners 4. General partners
Rep requirements for Oil and gas investment
- Prescreen customers to see if good match for partnership 2. Determine the economic soundness of the program 3. Explain the risks of investing in limited partnerships
Intangible drilling costs
-Write offs for drilling expenses -Not actual equipment: wages, fuel, repairs, insurance, etc. -Only when still drilling, once producing this is not applicable -Fully deductible in current year
Equipment leasing partnership (2 types)
- Operating lease = purchases equipment and leases for a short period of time, riskier of the two 2. Full payout lease = purchases equipment and leases for long period of time, income from first lease is enough to cover cost of equipment and financing costs
What are the 4 real estate partnership types?
- Public housing
- safest
- Existing properties
- New construction
- Raw land
- riskiest, goal is appreciation, fewest write offs, even more risky than oil and gas exploratory
Tangible drilling costs
-Write offs on items purchased that have salvage value such as storage tanks, well equipment, etc -Straight line basis or accelerated basis -Depreciated (deducted) over several years
Depletion
-Tax deduction that allows partnerships that deal with natural resources (such as oil and gas) for decreasing supply of the resource -Only applies to resources sold, not taken out of the ground
Oil and gas partnerships (4 types)
- Exploratory (Wildcatting) = riskiest 2. Developmental 3. Income = safest 4. Combination
Subscription agreement
-An application form that potential limited partners must complete -Used by GP to determine if investor is suitable (signs when accepts new partner) -Usually sent with some form of payment
All of the following statements are TRUE regarding the subscription agreement EXCEPT
- A. a general partner must sign the agreement to officially accept a limited partner
- B. a registered rep must first examine the subscription agreement to make sure that the investor has provided enough information
- C. after the general partner has signed the subscription agreement, it gives the limited partner power of attorney to conduct business on behalf of the partnership
- D. the subscription agreement is usually sent to the general partner with some form of payment
C. after the general partner has signed the subscription agreement, it gives the limited partner power of attorney to conduct business on behalf of the partnership
- The subscription agreement is a form that the potential limited partner fills out.
- Then the registered rep reviews the document before sending it (with the investor’s payment) to the general partner, who signs to accept the terms.
- The subscription agreement gives the general partner, not the limited partner, power of attorney to make decisions for the partnership.