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Series 7 > Chapter 18- Direct Participation Programs > Flashcards

Chapter 18- Direct Participation Programs Flashcards

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Series 7 Top-off Exam flashcards
1
Q

Direct Participation Programs

A

AKA as limited partnerships

Allows investors certain tax advantages

Composed of General and Limited Partners

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2
Q

General Partners

A

AKA- the manager and the Sponsor

Has unlimited liability

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3
Q

Limited Partner

A

Liability is limited to the amount that they have invested

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4
Q

Adjusted Basis

A

investors basis can change based on certain activities. This new basis is referred to as an adjusted basis

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5
Q

Adjusted basis can be increased by

A

additional contributions by the partner
Partnership Income

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6
Q

Adjusted basis can be decreased by

A

Distribution of property (including cash) to the partner by the partnership
Partnership loses
Non-deductible partnership expenses
depletion deduction for oil and gas partnerships

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7
Q

A limited partner can never write off more than

A

Their adjusted basis

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8
Q

At risk investments is

A

any money they invest along with any recourse loans

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9
Q

Recourse loans

A

Loans for which they are personally responsible

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10
Q

Advantages of DPP

A

single tax status- flow through tax
Limited Liability
Depreciation
Flexibility
diversification of financial risks

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11
Q

Limited Partnership and tax returns

A

Must file a tax return but does not pay taxes itself

Form K-1 are issued to limited partners for tax purposes

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12
Q

Disadvantages of DPP

A

Lack of liquidity
Lack of control over Managment
Tax code changes possibility
Losses of investment
Possibly assessment of additional funds
Additional IRS scrutiny
Potential ATM consequences

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13
Q

Considerations when investing in a DPP

A

Possible loss of principal
General Partners ability in the limited partnership
Possible federal tax code changes
The projected Rate of Return

You wouldn’t be concerned with the financial status of the other limited partners

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14
Q

Characteristics of Partnerships

A

Agreement must be in writing
The intent must be to carry on business for profit
profits and losses can be shared in any percentage that is agreed upon
A certificate of limited partnership must be filed with the secretary of state in the state where the partnership is formed to protect the limited partner

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15
Q

Certificate of partnership must include

A

Information of future contributions by the limited partner
The manner in which new partners will be added
The agreement for sharing profits and losses
An explanation of the General partners roll in the venture

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16
Q

Certificate must be amended if

A

there is an increase in contributions from the partners
There is a change in the profit sharing agreement
An error was discovered in the original certificate

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17
Q

A DPP offered to the public must be

A

registered with the SEC

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18
Q

The responsibility for exercising due diligence relating to statements made in the prospectus is borne by

A

The managing underwriter

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19
Q

Maximum Spread for a DPP is

A

10%

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20
Q

Factors used to determine suitability for DPP

A

Income and net worth
investment objectives
intention to hold long term
investment experience and tax bracket
Risk Tolerance
Understanding the risk and benefits
the Need for tax advantaged accounts

The economic viability of the DPP is a major concern in establishing suitability

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21
Q

Subscription agreement must contain

A

A statement saying the investor has read the prospectus and knows the risks
A statement that the general agent will act as an agent of the limited partnership
The investors social security number and tax id number
A statement that the investor has sufficient annual income and net worth for this money to be tied up

does not require a statement of where the investor source of funding came from

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22
Q

Subscription agreement

A

This is a signed application for the investor to become a limited partner

Must be approved and accepted by the general partner

Only becomes final when the general partner signs the agreement

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23
Q

Rights of the limited partner includes

A

Inspect the books and records
Receive a complete accounting of the operation
to demand dissolution by court decree
To sue general manager for good cause
To remove general manager for good cause
To share in profits as stated in participation agreement
Return of capital contribution
To receive agreed upon disposition of proceeds upon death of limited partner if partnership agreement includes a death clause. If none then the estate acquires the interest in the partnership

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24
Q

Limited partner can not

A

Sell partnership assets
Take place in the management of the partnership. (if they do they get reclassified as a general partner and become liable for debts and actions

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25
Q

Limited partner making a loan causes

A

The limited partner to also become a general creditor

But their interest in the partnership does not change

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26
Q

A general partner cannot (without the approval of the limited partners

A

Admit another general partner
Confess a judgement on the partnership
Violate the partnership agreement
Prevent the ordinary business of the partnership
Assign of posses partnership property for other than partnership purposes
Admit another limited partner
Continue the business of the limited partnership on the death, retirement or insanity of a general partner
Compete with the limited partnership

27
Q

Limited Partnerships can be dissolved by

A

The loss of the general partner

Actions by limited partners such as a class action suit for damages

Winding up of the business of the partnership on the agreement of the partners

Bankruptcy of a partner

any event that makes it unlawful to continue the partnership

Cancelation of the Certificate of Limited Partnership by the Secretary of State

28
Q

Claims upon a limited partnership dissolution

A

Creditors - secured then unsecured
Limited partner - profit claims, then capital claims
General partner - Profit claims, then capital claims

29
Q

Characteristics of a corporation

A

If a business contains 3 of these 4 items then it is considered a corporation (and can not be a limited partnership)
1. Continuity of Life (length of life)
2. Centralization of management
3. Limited Liability
4. Free transferability of beneficial interests

30
Q

Ways to avoid corporation status

A

Have a termination date
Make them illiquid investments, requiring general partners approval to sell the asset

Can not avoid centralization of management and limited liability

31
Q

Tax Reform act of 1986

A

individuals would no longer be allowed to deduct losses on passive activities

32
Q

If the IRS determines that a tax shelter is abusive then

A

The deduction is disallowed
the taxpayer is charged interest on back taxes
the taxpayer is charged penalties on back taxes
the taxpayer may be charged with intent to defraud

33
Q

Types of Real Estate DPP

A

Residential Property
Commerical Property
Industrial Property
Government Assisted housing - either low income or subsidized housing
Condominium securities - time shares
Raw land

34
Q

Deductions available to investors in real estate are

A

Depreciation (except for raw land)
And interest on mortgage payments

35
Q

Advantages of Real Estate DPP

A

Capital appreciation
Tax deductions
Flow through of income and expenses
Limited Liability

36
Q

Factors to consider when considering Real Estate DPP

A

Forecast for regional economic conditions
Changes in interest rates
Changes in tax law
Qualifications of general partner

37
Q

Sale and Leaseback

A

When the owner of a real estate property sells a property and then leases that property from the new owner.
New owner can depreciate the property and old owner can deduct the lease payments

38
Q

Triple net lease

A

tenant is responsible for:
property taxes
insurance
operating and maintenance expenses related to the property

Debt service is paid by the owner, not the tenant

39
Q

Condominiums sold to investors with the purpose of renting them out is considered

A

condominium securities

40
Q

To qualify as an investment the condominium must

A

Not be able to be considered a residence and have a unit deed that specifies areas which the owner will have exclusive rights and shared rights

41
Q

Finding a limited partners loss in real estate

A

revenue - all deductions = loss

42
Q

Finding a limited partners cash flow from real estate

A

Revenue - all deductions except depreciation = cash flow

43
Q

An investor in oil and gas partnerships will general bear

A

more risk than those in a real estate program

44
Q

An investor in oil and gas can generally write off

A

more in the early years then someone investing in a real estate program

45
Q

Advantages of Oil and Gas DPP

A

Intangible drilling costs
Depletion allowances - based on oil sold (not drilled or mined)
Tax deductions
flow through tax benefits
Deprecation deductions on equipment

46
Q

Intangible Drilling

A

Costs that can not be recaptured or have salvage value

Such as fuel, labor, supplies, and repairs

deductible as they are incurred and paid and represent a large portion of first years deductions

47
Q

Equipment costs

A

Equipment costs are considered capital expenditures and must be depreciated over time

48
Q

Drilling costs on a well that does not produce oil are considered

A

dry hole costs and are listed as intangible costs

49
Q

4 main types of drilling programs

A

Exploratory drilling (wildcatting)
Developmental drilling
Balanced Drilling program
oil and gas income program (not a tax shelter)

50
Q

Exploratory Drilling

A

Drilling for oil in areas without proven reserves, higher return potential

51
Q

Developmental Drilling

A

Drilling in areas with proven reserve
Probability of finding oil is higher
Leasing costs in these areas are higher
Returns are lower

52
Q

Balanced Drilling program

A

Drills both Exploratory and developmental wells

53
Q

Oil and Gas income program

A

Buy properties with proven oil and gas reserves that are already producing

no or few intangible drilling costs

Lowest capital risk

54
Q

Program assessments

A

provide assessment of investors for additional capital contributions

demand to investors for additional cash contributions for additional drilling or completion costs

If investor does not meet demand their share in revenue plus expenses and ownership will be automatically reduced

55
Q

Sharing arrangement

A

Over riding royalty sharing arraignment - GP (sponsor) does not pay any costs for the well but shares in the profits as soon as they begin. (may be the property owner)

Disproportionate - GP (sponsor) receives a higher percentage then their financial contribution (contributed 10% of the investment but receives 20% of the income)

Subordinate working interest- GP doesn’t contribute anything financially but does not receive income until investors have recouped their investment

Functional allocation - most common

56
Q

Functional Allocation sharing arrangiment

A

GP (sponsor) bears the capital or tangible costs that will be depreciated over time

Limited partners bear the intangible costs that will be immediately deductible as they are incurred

57
Q

Equipment leasing partnerships

A

formed to buy equipment such as computers, railroad cars and airplanes, and then lease them to businesses

58
Q

Advantages of Equipment leasing partnerships

A

Depreciation deduction
interest deduction
Limited Liability for limited partner

NEVER depend of appreciation in value of the leased equipment

59
Q

Blind pool

A

the investor does not know the identity of the asset until after the partnership is formed.

Typically they know the plan but the partnership hasn’t finished all the paper work on the property

60
Q

Return on investment analysis

A

payback - how long it will take to have the after tax income to equal the after tax expenditure

Internal rate of return - discounts future returns on an investment to see how much you should invest today

Present value - measures future returns in relation to todays dollars

Cash on cash - annual return/amount invested. effects of taxes are disregarded

IRR and present value consider the time value of money

61
Q

S Corporations

A

treated like a partnership

flow through of income and expenses

62
Q

Requirements for an S Corp

A

100 or fewer shareholders
Issues only 1 class of stock
Other corporations can not be shareholders
Non-resident aliens are prohibited from being share holders

63
Q

LLCs

A

Companies treated like partnership for tax purposes
no limit to the number of member/owners to an LLC

Series 7 (20 decks)

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