Chapter 13 - Direct Participation Programs

Question 1

What are some characteristics of Direct Participation Programs/Limited Partnerships?

Answer 1

Unique investment opportunities that pass through economic consequences to investors, gains and losses. It is an investment managed by others, there is limited liability for the investor, and a flow through of income and certain expenses. Main disadvantage is lack of liquidity.

Question 2

True or False, all income and losses and corresponding tax responsibilities go directly to investors with no taxation to the business entity?

Answer 2

True, Double taxation is avoided since the business does not pay taxes like a regular corporation would. Also losses shelter passive income, not ordinary income.

Question 3

For partnerships which characteristic is most difficult to avoid for federal tax purposes?

Answer 3

Centralized management, no business can function without it, but it is not allowed in a partnership.

Question 4

For DPP’s what characteristic is easiest to avoid as not to be recognized as some other entity?

Answer 4

Continuity of life, most partnerships have a predetermined date of dissolution when established.

Question 5

What two corporate characteristics are most likely to be avoided by a DPP?

Answer 5

Continuity of life and freely transferable interests. Interests can’t be freely transferred, general partner approval is required to transfer shares.

Question 6

What are the important documents for a limited partnership to exist?

Answer 6

Certificate of limited partnership, partnership agreement, and subscription agreement.

Question 7

What does the partnership agreement explain?

Answer 7

The roles of the general and limited partners. The guidelines for operation.

Question 8

What does the Certificate of Limited Partnership explain?

Answer 8

Filed in the home state, has the partnership name, business, place of business, amount of time for partnership, share of profits, contribution return date…

Question 9

What are some of the rights of the General Partner as defined in the partnership agreement?

Answer 9

A general partner acts on behalf of the limited partners. Charge a management fee, go into contracts, determine which partners are included in the partnership, and if cash distributions will be made.

Question 10

What does the Subscription Agreement explain?

Answer 10

An investor interested in becoming a limited partner signs this, and appoints a GP, general partner. It includes the investor’s net worth, their annual income, understanding of risk involved, and power of attorney for the GP.

Question 11

Who promotes and offers partnership interests to potential LP’s

Answer 11

The Syndicator, is also the person that organizes and registers the partnership.

Question 12

When dissolution occurs for a limited partnership what order are the accounts settled in?

Answer 12

Secured Lenders, General Creditors, Limited Parnters profit then principal, and General Partners fees, profits, and principal

Question 13

What are the most common types of limited partnerships?

Answer 13

Real estate, oil and gas, equipment leasing businesses

Question 14

For real estate limited partnerships what are some of the benefits?

Answer 14

Capital growth potential in the appreciation of the properties. Cash flow income from rents. Tax deductions from mortgage interest and depreciation. Tax credits from government assisted housing and historic rehabilitation.

Question 15

What is an intangible drilling cost?

Answer 15

Any cost that after being incurred has no salvage value, wages, fuel, supplies etc. The opposite of this would be a tangible drilling cost which does have salvage value and depreciated over several years

Question 16

What are the three types of oil and gas programs?

Answer 16

Exploratory to discover new reserves, developmental which drills near existing fields for new reserves, and income which provides income from sale of existing oil.

Question 17

Explain an equipment leasing program.

Answer 17

Partnership purchases equipment and leases it to other businesses. Income is received from lease payments, and can write off operation and interest expense and depreciation. Primary objective is tax sheltered income.

Question 18

What is economic viability?

Answer 18

Potential for returns from cash distributions and capital gains.

Question 19

How is economic viability measured?

Answer 19

Cash flow analysis which compares income to expenses, and internal rate of return which determines the present value of future revenues and sales to other programs.

Question 20

What is cash flow?

Answer 20

Net income or loss plus non cash changes (depreciation)

Question 21

In a limited partnership what is basis?

Answer 21

The liability assumed by the LP. The LP cannot lose more than his basis, and cannot deduct more than his basis either.
Basis = investment in partnership + share of recourse debt - cash distribution.

Question 22

A customer invests $10,000 and signs a recourse note of $40,000. He receives a cash distribution of $5,000 and a statement showing $60,000 in losses. Of the $60,000 how much can he deduct?

Answer 22

Investment = $10,000
Recourse note = $40,000
$10k + $40k = $50k
Cash Dist. = $5,000
$50k - $5k = $45k
$45k = Year end basis, tax deduction
He may carry forward $15,000 into next year

Question 23

What is maximum commission for a selling partnership offering? How do the commissions affect basis?

Answer 23

10% selling commission is maximum. Commissions taken are not deducted from original investment to determine beginning basis.