Chapter 8: Direct Participation Programs Flashcards
1
Q
______ are entities that pass all income and expenses directly to the owners. Consequently, the ______ itself is not taxed.
A
Direct Participation Programs (DPPs)
2
Q
Since the Tax Reform Act of 1986, ______ losses generated by DPPs can only be offset against ______ income. ______ losses may NOT offset ______ income.
A
- Passive
- Passive
- Passive
- Earned
3
Q
When investors own stock, they experience ______. First, the corporation is taxed on its earnings. When those earnings are then distributed to the shares, the shareholders are taxed a second time. DPPs don’t experience this ______.
A
Double Taxation
4
Q
No more than ______ of the money raised can be used for start-up costs, such as distribution, attorney fees, accounting fees, and filing fees.
A
15%
5
Q
In a(n) ______, all partners are general partners, and are fully liable for all activities and obligations of the partnership.
A
General Partnership [DPP]
6
Q
A(n) ______ has at least one general partner (GP) who is fully liable and at least one limited partner (LP) who has limited liability.
A
Limited Partnership [DPP]
7
Q
The ______ is chosen based on their expertise in the field in which they are investing.
A
General Partner
8
Q
______ are only liable to the amount they’ve invested and to the extent of any recourse financing to which they have agreed.
A
Limited Partners
9
Q
______ are silent partners and can make no management decisions. If the ______ has any management input, the ______ has changed status, and becomes a(n) ______ with full liability.
A
- Limited Partners
- Limited Partner
- Limiter Partner
- General Partner
10
Q
A limited partnership gives the LPs two important advantages: ______ and avoidance of ______ on distributions from the limited partnership.
A
- Limited Liability
2. Double Taxation
11
Q
A(n) ______ is a small company, usually family-owned and operated. It is a closely held corporation and all income and expenses pass through to the individual shareholders.
A
Subchapter S Corporation (Sub S) [DPP]
12
Q
Because a(n) ______ is a corporation, it has some limited liability characteristics for the investors.
A
Subchapter S Corporation (Sub S) [DPP]
13
Q
The maximum permissible number of shareholders in a Sub S is ______.
A
100
14
Q
______ also function as conduits; the entity avoids taxation by passing income and expenses through to the owners. A(n) ______ also exposes the owners to limited liability.
A
Limited Liability Company (LLC) [DPP]
15
Q
______ provide venture capital to small companies and allow investment from a larger pool of investors.
A
Business Development Companies (BDCs)
16
Q
______ allow anyone to participate in small start-up businesses.
A
Business Development Companies (BDCs)
17
Q
A(n) ______ is not considered a DPP, or pass-through vehicle. Though ______ must pass through 90% of their investment income, they do not pass through losses. A(n) ______ owner’s liability is limited to the amount invested.
A
Real Estate Investment Trust (REIT)
18
Q
If the IRS concludes that a limited partnership’s primary goal is ______, the IRS will deem the limited partnership to be abusive. The IRS will consequently assess back taxes and penalties, and might even prosecute for fraud.
A
Tax Advantages
19
Q
Direct participation programs themselves do not pay ______. All gains and losses pass through to the ______. Therefore, all ______ are paid by the ______.
A
- Taxes
- Individual Investors
- Taxes
- Investors
20
Q
DPP investors are at a higher risk for ______ because the IRS regularly verifies the authenticity of DPPs as pass through vehicles.
A
IRS Audit
21
Q
Corporations share 6 common characteristics shown below. To maintain its unique status, a DPP must avoid at least ______ of the six.
- A group of ______: People must be involved whether it’s a corporation or partnership, so this is a difficult corporate characteristic to avoid.
- Gathered to achieve a(n) ______: The entity’s primary purpose must be economic viability. This characteristic cannot be bypassed.
- Centralized ______: A corporation has a management team, typically led by the CEO and board of directors. In a limited partnership, the general partner is this centralized management. This necessity for centralized management cannot be avoided.
- Freely transferable ______: Unlike a corporation’s stock, which freely trades in the secondary market, limited partnership interests are difficult, if not impossible, to transfer. There is a very limited secondary market for limited partnership interests. Also, the general partner must approve the new LP if a partnership interest is sold. Therefore, this characteristic is easy to avoid.
- Limited ______: In a corporation, all shareholders have limited liability. In a partnership, this characteristic is easily avoided. The GP has unlimited liability for all partnership activities and debt. The GP is said to be jointly and severally liable.
- Continuity of ______: Corporations are ongoing concerns. They can run in perpetuity, generation after generation. However, a limited partnership easily avoids this by setting a future liquidation date. On this date, operations cease, all assets are sold, and each owner is given their share. Also, the partnership frequently has a policy of automatic liquidation upon the GP’s death, illness or removal.
A
- Two
- Associates
- Profit
- Management
- Interest
- Liability
- Life
22
Q
As manager of the partnership, the ______ has a fiduciary responsibility to act in the best interest of the ______. Therefore, the ______ must avoid activities which present a conflict of interest.
A
- General Partner (GP)
- Limited Partner (LP)
- General Partner (GP)
23
Q
The ______ has a fiduciary responsibly and may not borrow from or compete with the partnership (though the ______ may be paid not to compete). Also, the ______ may not sell personally owned assets to the partnership.
A
General Partner (GP)
24
Q
As owners of the partnership, the ______ have the right to regularly inspect the books. The ______ may also sue the ______ if the ______ willfully mismanages partnership assets or breaches the partnership agreement.
A
- Limited Partners (LPs)
- Limited Partners (LPs)
- General Partner (GP)
- General Partner (GP)
25
There are many risks associated with investing in a limited partnership:
1. Higher ______ risk.
2. No ______ that the partnership will meet its objectives.
3. Interests are very ______.
4. Investor might lose entire ______.
5. The GP is the sponsor of numerous programs at the same time, creating potential ______.
1. IRS Audit
2. Guarantees
3. Illiquid
4. Investment
5. Conflicts of Interest
26
Limited partnerships do file a(n) ______ with the IRS. From their informational filing, partnerships determine each investor's reportable share of gains and losses and provide this information to each limited partner on a(n) ______ for tax filing.
1. Informational Tax Form
| 2. Form K-1
27
Income which flows to the LPs through limited partnerships is classified as ______, or ______.
1. Passive Income
| 2. Passive Income Generators (PIGs)
28
Losses which flow through to LPs are classified as ______, or ______.
1. Passive Losses
| 2. Passive Activity Losses (PALs)
29
Under the current tax code, ______ may only be offset against ______. ______ may NOT be offset against ordinary income.
1. Passive Activity Losses (PALs)
2. Passive Income Generators (PIGs)
3. Passive Activity Losses (PALs)
30
______ are accounting methods whereby enterprises recognize the cost of capital assets against their revenues. The enterprise first purchases a major asset, such as computer equipment or machinery, and then recognizes a portion of that purchase price in each year of the asset's life.
Cost Recovery Systems
31
______ is not a cash flow item. It is simply an accounting system to systematically spread an asset's purchase price over its lifespan.
Depreciation
32
______ (or ______, ______) allow the enterprise to write off large portions of the asset's cost during early years of the asset's life. This is advantageous to the entity due to the time value of money.
1. Accelerated Cost Recovery Methods
2. Systems
3. ACRSs
33
These ______ methods typically allow the owner to depreciate the full cost of the asset, leaving no residual value. Certain ______ methods even allow for the write off of more than the cost of the asset.
Accelerated Cost Recovery Systems (ACRS)
34
The process of selling an asset that has been depreciated using ACRS and paying a capital gain on the difference being book value (or cost basis) and market value is known as "______".
Recapture
35
Limited partnerships also ______ improvements to land, such as buildings like office towers, apartment complexes, or shopping centers. Though these improvements are ______, it is important to remember that the land itself is not.
1. Depreciate
| 2. Depreciated
36
Depreciation reduces the investors' ______.
Cost Basis
37
Depreciation for real property improvements is usually done on a(n) ______. Under ______ depreciation, an equal amount of the asset's cost is expensed during each year of the asset's life.
1. Straight Line Basis
| 2. Straight Line
38
Another type of cost recovery system is ______, which is taken on irreplaceable natural resources.
Depletion
39
There are two types of resource depletion: ______ depletion and ______ depletion.
1. Percentage
| 2. Cost
40
______ depletion benefits small oil and gas producers.
Percentage
41
Several factors contribute to an investor's cost basis in a limited partnership. The LP's cost basis is first established by the LP's ______. Next, any ______ which the LP has assumed is added to the LP's cost basis. Finally, ______ and ______ reduce the LP's cost basis.
1. Initial Investment
2. Recourse Debt
3. Depreciation & Depletion
42
______, or ______, is potential debt for which the LP is liable upon partnership liquidation.
1. Recourse Debt
| 2. Recourse Financing
43
A limited partnership assumes ______ when it needs financing, and lenders will only provide financing with ______ to the LPs. The LPs must consent before the GP may obligate them with this ______.
1. Recourse Debt
2. Recourse
3. Recourse Debt
44
Because each LP is responsible for a share of this recourse debt, it is added to each LP's ______.
Cost Basis
45
______ is the most commonly used measure when determining the value of a limited partnership. ______ considers current value or net present value, tax deductions, and cash flow from the investment.
Internal Rate of Return (IRR)
46
The LP's cost basis can never decrease below ______. In order words, depreciation and depletion cannot exceed the LP's initial investment plus any recourse debt.
Zero
47
______ is actually money left over after all expenses are paid. To calculate ______, only money that was actually paid out is deduced from revenues.
Cash Flow
48
Taxable income is typically ______ than cash flow during the early years of a limited partnership, due to these depreciation and depletion deductions.
Lower
49
The LP often has positive cash flow and yet reports a loss to the IRS because of these ______.
Accelerated Cost Recovery Systems (ACRSs)
50
After several years, the limited partnership often experiences the ______, which is the point at which taxable income exceeds cash flow. This is called ______, which is income that the investor is taxed on, but that was not received in cash flow.
1. Crossover Point
| 2. Phantom Income
51
The maximum permissible sales charge on limited partnership interests is ______ plus ______ for due diligence expenses.
1. 10%
| 2. 1/2%
52
The broker/dealer that forms the selling syndicate is sometimes called the ______ and is responsible for securities registration. A general partner may also act as a(n) ______ when organizing and establishing a partnership.
Syndicator
53
The syndicate may be separately reimbursed for expenses such as printing costs and regulatory filing fees. However, if the syndicate is reimbursed for any ______ expenses, this is considered part of its ______ compensation.
1. Solicitation
| 2. 10%
54
A limited partnership might change its status through an offering called a(n) ______. In a(n) ______, the limited partnership changes its status to a master limited partnership (MLP) or possible a corporation.
Roll Up
55
The roll up requires a vote of the ______.
Limited Partners (LPs)
56
Frequently, this roll up benefits the ______. If so, this conflict of interest must be disclosed to the ______.
1. General Partner (GP)
| 2. Limited Partners (LPs)
57
A(n) ______ is a limited partnership that is freely transferable, either on an exchange or OTC.
Master Limited Partnership (MLP)
58
The broker/dealer's fee for structuring a roll up is limited to ______.
2%
59
______ are complex, illiquid investments designed for sophisticated, affluent investors. They are not suitable for investors without substantial net worth or those who are not in high-tax brackets.
Limited Partnerships
60
The "trade ticket" for a limited partnership purchase is called the ______. This document contains a detailed financial questionnaire which the investor must complete and sign. Written verification of ______ is required. This document is carefully reviewed, approved, and signed by the ______ before the investor is accepted as an LP.
1. Subscription Agreement
2. Net Worth
3. General Partner (GP)
61
A(n) ______ was filed with the Secretary of State when the partnership was started. This is an important document because this is what creates limited liability for the limited partners and unlimited liability for the GP.
Certificate of Limited Partnership
62
A(n) ______ is signed by the general partner and the limited partner when the LP enters the partnership. Both the GP and the LP are required to sign the ______.
1. Subscription Agreement
| 2. Subscription
63
Limited partnership interests are distributed through ______ and ______ offerings.
1. Public
| 2. Private
64
In a public offering, the LP disclosure document is called a(n) ______. However, in a private placement or private offering, the disclosure document is called a(n) ______.
1. Prospectus
| 2. Offering Memorandum
65
Most DPPs are sold through ______. DPPs may also be sold through ______.
1. Reg D Private Placements
| 2. Public Offerings
66
Limited partnerships are organized by syndicating general partners, and are typically sold on a(n) ______ basis using an escrow account. The majority invest in ______, ______, or ______ ventures.
1. Best Efforts
2. Real Estate
3. Oil and Gas
4. Equipment Leasing
67
______ emphasize either depreciation deductions, income from existing rental properties, or growth from new development.
Real Estate Partnerships [Limited Partnerships]
68
______ vary from risky wildcat or exploratory deals, to less profitable but more reliable developmental programs, to more conservative income programs.
Oil and Gas Ventures [Limited Partnerships]
69
______ are structured to provide income because there is little or no capital appreciation potential.
Equipment Leasing Programs [Limited Partnerships]
70
The type of real estate limited partnership with the highest risk and greatest potential return is a(n) ______.
Raw Land Partnership
71
The ______ partnership has a long investment time horizon, provides no expenses since ______ doesn't depreciate, and there is no resource depletion. However, if the ______ is purchased at the right price and is held for a long time, it can appreciate substantially.
1. Raw Land Partnership
2. Land
3. Land
72
The second riskiest real estate partnership is ______. Its objective is capital appreciation through purchasing land, developing it, and then hopefully selling it for a profit.
New Construction
73
Commercial property's value is largely determined by ______, which is produced by quality tenants. Because there are no tenants at the beginning of a(n) ______, the ultimate market value of the property is uncertain. Therefore, the probability of a profitable sale is also uncertain.
1. Rental Income
| 2. New Construction Partnership
74
A safer real estate partnership seeks ______. This partnership buys and manages existing property for its ______.
Rental Income
75
The ______ is the safest type because it invests in an established real asset with an existing rental income stream, historical occupancy rate, and known tenant base.
Rental Income Partnership
76
Real estate partnerships may take advantage of ______, including the historical rehabilitation credit and the low-income housing credit.
Tax Credits
77
A partnership uses the ______ credit by purchasing and restoring an old property. This property must be listed on a national registry, and at least ______ of the original structure must exist before the partnership starts restoration.
1. Historical Rehab
| 2. 75%
78
______ offer very limited capital appreciation because there is no potential to improve the rental income stream; the rents are fixed at a low rate. Consequently, the ______ is designed to attract investor capital to this otherwise unattractive market sector.
1. Low-Income Housing Projects
| 2. Low-Income Housing Credit
79
______ are modest but tend to be steady because the Department of Housing and Urban Development (HUD) typically subsidies these rents. The ______ tends to provide the best credit.
1. Low-Income Housing Rents
| 2. Low-Income Housing Credit
80
Debt in limited partnerships consists of _______ (at risk) and ______ (mortgages).
1. Recourse
| 2. Nonrecourse
81
______ debt increases the LP's cost basis in the partnership. ______ debt does not typically get added to an LP's cost basis; however, the exception is with real estate programs.
1. Recourse
| 2. Nonrecourse
82
______ debt through a qualified lender increases investor basis in a real estate program, without the investor being legally at risk.
Nonrecourse
83
Both a cash distribution and any repayment of principal on the debt ______ the limited partner's basis.
Decreases
84
If the drilling is in an unproven area, this is called a(n) ______ program.
Wildcat
85
The ______ program is the riskiest of all oil and gas programs because of the high percentage of dry wells. However, ______ programs also offer the greatest potential return if successful.
Wildcat
86
In a(n) ______ program, drilling is done in an area with proven reserves. ______ these proven reserves is less risky than exploratory drilling.
1. Developmental
| 2. Developing
87
______ wells are in unproven areas and are primary sites. ______ wells are in proven areas.
1. Exploratory
| 2. Developmental
88
______ sites use supplemental means of surfacing the oil, ______ drilling is water and steam, and ______ is chemicals and gas.
1. Secondary
2. Secondary
3. Tertiary
89
A(n) ______ program combines exploratory and developmental drilling.
Combination
90
The ______ programs are less risky than pure exploratory drilling and also offer better potential returns than pure developmental.
Combination
91
A(n) ______ program purchases and manages producing wells. This is the safest type of program because it invests in established, measurable production.
Income
92
Energy programs have high ______ write-offs, which is the cost recovery system for wasting natural resources.
Depletion
93
Energy programs also incur ______, which are expenses for consumables such as labor and equipment rental.
Intangible Drilling Costs (IDCs)
94
______ are immediate expenses of drilling programs and provide high early write-offs for the LPs.
Intangible Drilling Costs (IDCs)
95
Intangible drilling costs (IDCs) are more closely associated with ______ because of the relatively higher upfront labor costs.
Exploratory Wells
96
If an investor looking for high first- and second-year write-offs, a(n) ______ is the best answer, due to high initial ______.
1. Drilling Program
| 2. Intangible Drilling Costs (IDCs)
97
______ programs are specifically designed to provide income to investors.
Equipment Leasing
98
An example of a(n) ______ is a partnership that owns and leases planes to an airline. Airlines frequently lease, rather than own, their planes. The objective of this partnership is to generate rental income for the partners.
Equipment Leasing Program
99
______ typically use accelerated depreciation methods, which create larger expense write-offs in the early years of the partnership. While these ACRSs provide great advantages, they also increase the risk of ______ / ______, and possible future recapture. Another risk is ______, which happens when the equipment is no longer useful.
1. Equipment Leasing Partnerships
2. Crossover / Phantom Income
3. Recapture
4. Equipment Obsolescence
