Unit 5

Question 1

Limited Partnerships

Answer 1

unitque investment opportunities that permit economic consequences to flow through investors

Investors share in income, gains , losses, deductions and tax credits

Question 2

Limited Partners IN DPP advantage

Answer 2

An investment managed by others

Limited Liability

Flow through of income and certain expenses

Question 3

Greatest disadvantage for LP IN DPP

Answer 3

Lack of liquidity

Secondary market is very limited

Question 4

Master Limited Partnerships

Answer 4

Where LP interests are actually negotiable and trade on OTC and exchanges

Question 5

DPP features

Answer 5

Structured as limited partnership / S-corp

Entity does not pay taxes
Investors share all income and losses on Form K-1
No double taxation on distributions

Question 6

Passive income

Answer 6

Income and losses which come from rental property, limited partnerships and enterprises where individual is not actively involved

Question 7

Earned Income

Answer 7

salary, bonuses, income derived from active participation

General Partners report earned income on LP

Question 8

Profit motive

Answer 8

DPP without a profit motive or intention of generating income could be determined abusinve

Question 9

No profit motive penalties include

Answer 9

Back taxes
Recapture of tax credit
Interest penalties
Prosecution for fraud

Question 10

Partnerships

Answer 10

Two or more individuals and cannot be two OR MORE of the following:

Org formed under federal or state law that refers to itself as incorporation, corporation, or corporate body
Organizations formed under state law that refers to itself as joint-stock company
Insurance company
Certain banks
Organization wholly owned by state or local government
Certain foreign organizations
Tax exempt orgs
REITS
Trusts

Question 11

Partnerships tenor

Answer 11

Must have a predetermined stop date

Question 12

What characteristics of partnerships is most difficult to avoid

Answer 12

Centralized management - no business can function without it

Question 13

What characteristics of partnership is easiest to avoid

Answer 13

Continuity of life - predetermined time which partnership must dissolve

Question 14

Two characteristics most likely to be avoided by DPP

Answer 14

Continuity of life and freely transferable interests

Question 15

DPP tax shelter

Answer 15

Only allows passive losses to shelter only passive income. NOT ORDINARY INCOME.

Question 16

Forming LP

Answer 16

LP may be sold through private placement OR public offerings

If sold privately - need private placement memorandum. Must be accredited investors

If sold publicly - large amount of relatively small contributions (usually 1 - 5k)

Question 17

Syndicator in LP

Answer 17

oversees the selling and promotion of partnership.

Syndicator is responsible for preparation of any paperwork necessary for registration.

Fees limited to 10%

Question 18

Required Documentation for LP

Answer 18

Certificate of LP
Partnership agreement
Subscription Agreement

Question 19

Certificate of Limited Partnership

Answer 19

Must be filed in home state and includes:

Partnerships name
Partnerships business
Principal place of business
Amount of time the LP expects to be in business
Size of current and future investments
contribution return date
share of profits or other comp

Question 20

Partnership Agreement

Answer 20

describes roles of GP and LP and guidelines for partnerships operation

Question 21

Rights of GP (in partnership agreement)

Answer 21

Charge management fee for making business decisions
Authority to bind partnerships into contracts
Right to determine which partners should be included in partnership
Right to determine if cash distributions are made

Question 22

Subscription Agreement

Answer 22

All investors interested in become LP’s must complete SA. Appoints one or more GP to act on behalf of LP and is only effective when signed.

Must include (along with subscribers money):
Investors net worth
Annual income
Acknowledge risks involved
Power of attorney to GP

Question 23

Dissolving a LP

Answer 23

When dissolution occurs, GP must cancel certificat of LP and settle accounts.

Secured Creditors
Other creditors
LP (first claims to profits, 2nd capital contributions)
GP (first fees, 2nd profits, 3rd capital return)

Question 24

General Partner vs Limited Partner

Answer 24

GP LP
Unlimited Liability Limited Liability
Mngmt Responsibibility No management responsib
Fiduciary responsibility May sue GP over damages

Question 25

Allowed Activities GP vs LP

Answer 25

``` GP Make decisions that are legally binding Buy and sell company property receive compensation per partnership agreement maintain financial interest of company ``` ``` LP vote on changes Vote on sale of property receive cash distributions inspect books exercise partnership democracy ```

Question 26

Prohibited activities GP vs LP

Answer 26

GP Compete against partnership for personal gain borrow from partnership co mingle partnership funds Admit new GPs or LPs or continue the partnership after the loss of GP LP Act on behalf of partnership / management knowingly sign document with false info have names appear as part of partnerships name

Question 27

Real estate partnerships benefits

Answer 27

Capital growth cash flow income Tax deductions Tax credits

Question 28

Raw Land Partnership

Answer 28

``` Objective: Purchase undeveloped land Advantage: Appreciation of property Disadvantage: No income distributions Tax: No tax deductions Degree of risk: MOST SPECULATIVE ```

Question 29

New Construction Partnership

Answer 29

``` Objective: build new property Advantage: appreciation of property Disadvantage: Potential cost overruns Tax: Deprecation and expense deductions Degree of risk: Less risky than new land, still risky ```

Question 30

Existing Property Partnership

Answer 30

Objective: Generate income from property Advantage: Immediate cash flow, history of expenses Disadvantage: greater maintenance or repairs Tax: deduction for mortgage interests/depreciation Degree of risk: Relatively low-risk

Question 31

Government Assisted Housing Partnership

Answer 31

``` Objective: Develop low income housing Advantage: Tax credits and rent subsidiaries Disadvantage: Low appreciation potential Tax: Tax credits/losses Degree of risk: Relatively low-risk ```

Question 32

Historic Rehab Partnership

Answer 32

Objective: Develop historic sites for commercial use Advantage: Tax credits Disadvantage: Cost overruns; no track record Tax: Tax credits for expenses and depreciation Degree of risk: Similar risk to new construction

Question 33

Oil and Gas Partnershps

Answer 33

include speculative drilling programs and income programs that invest in producing wells

Question 34

Intangible Drilling Costs (IDC)

Answer 34

Write-offs for expenses of drilling usually 100% deductible in FIRST YEAR Expenses include: wages, supplies, fuel, insurance. NO SALVAGE VALUE

Question 35

Tangible Drilling Costs (TDC)

Answer 35

Costs incurred that have salvage value (storage tanks wellhead equipment) Deducted over time

Question 36

Depletion allowances

Answer 36

Tax deduction that compensate the partnership for decreasing supply of oil and gas

Question 37

Types of O&G Partnerships

Answer 37

Income Developmental Income

Question 38

Sharing Arrangments with OG Programs

Answer 38

``` Overriding Royalty Interest Revisionary Working Interest Net Operating Profits Interest Disproportionate Sharing Carried Interest Functional Allocation ```

Question 39

Overriding Royalty Interest

Answer 39

Holder of interest receives royalties but has no partnership risk. Landowner selling mineral rights

Question 40

Revisionary Working Interest

Answer 40

Bears no cost of the program and receives no revenue until LP have recovered their capital

Question 41

Net Operating Profit Interest

Answer 41

GP bears none of programs cost but is entitled to percent of profits

Question 42

Carried Interest

Answer 42

GP shares intangible drilling costs with LP but receives no IDC. LP receives immediate deduction, GP receives write offs from depreciation over the life of property.

Question 43

Functional Allocation

Answer 43

MOST COMMON SHARING ARRANGEMENT. | LP receives IDCs, GP receives tangible drilling costs. Revenues are shared.

Question 44

Deductions for partnerships

Answer 44

Expenses of partnerships are deductions to LP Depreciation write offs Depletion allowances - only claimed when income is being produced

Question 45

Crossover point

Answer 45

when program begins to generate taxable income instead of losses.

Question 46

Tax basis of LP

Answer 46

amount at risk used to determine their gain or loss upon the sale of partnership interest. Subject to adjustment periodically for events such as: Cash distributions and additional investments

Question 47

Blind pool

Answer 47

non-specific porgram Less than 75% of assets are specified as to use Specified - more than 75% are specified

Question 48

Basis formula

Answer 48

Basis = Investment in partnership + Share of recourse debt - cash distribution Up front consts incurred by LP will not effect beginning basis. 50k investment - $3K BD commish = $75 beginning basis LIKE MUTUTAL FUND LOAD

Question 49

Cost Basis example: Initial investment and recourse note

Answer 49

LP invests $10K and signs $40K recourse note. During 1st year investor receives $5K dividend. At year end, statement of share of LP losses is $60K, how much is deductible? $50K initial investment - $5K dividend = $45K deductible

Question 50

Depreciation recapture

Answer 50

If a partnership is sold and was using accelerated depreciation, the difference between straight line and what was actually deducted could be subject to income tax