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Series 7 > Unit 5 > Flashcards

Unit 5 Flashcards

Direct Participation Programs

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Series 7 Top-off Exam flashcards
1
Q

Limited Partnerships

A

unitque investment opportunities that permit economic consequences to flow through investors

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

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2
Q

Limited Partners IN DPP advantage

A

An investment managed by others

Limited Liability

Flow through of income and certain expenses

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3
Q

Greatest disadvantage for LP IN DPP

A

Lack of liquidity

Secondary market is very limited

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4
Q

Master Limited Partnerships

A

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

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5
Q

DPP features

A

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

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6
Q

Passive income

A

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

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7
Q

Earned Income

A

salary, bonuses, income derived from active participation

General Partners report earned income on LP

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8
Q

Profit motive

A

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

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9
Q

No profit motive penalties include

A

Back taxes
Recapture of tax credit
Interest penalties
Prosecution for fraud

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10
Q

Partnerships

A

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

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11
Q

Partnerships tenor

A

Must have a predetermined stop date

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12
Q

What characteristics of partnerships is most difficult to avoid

A

Centralized management - no business can function without it

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13
Q

What characteristics of partnership is easiest to avoid

A

Continuity of life - predetermined time which partnership must dissolve

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14
Q

Two characteristics most likely to be avoided by DPP

A

Continuity of life and freely transferable interests

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15
Q

DPP tax shelter

A

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

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16
Q

Forming LP

A

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)

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17
Q

Syndicator in LP

A

oversees the selling and promotion of partnership.

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

Fees limited to 10%

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18
Q

Required Documentation for LP

A

Certificate of LP
Partnership agreement
Subscription Agreement

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19
Q

Certificate of Limited Partnership

A

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
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20
Q

Partnership Agreement

A

describes roles of GP and LP and guidelines for partnerships operation

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21
Q

Rights of GP (in partnership agreement)

A

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

22
Q

Subscription Agreement

A

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
23
Q

Dissolving a LP

A

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)

24
Q

General Partner vs Limited Partner

A

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

25
Q

Allowed Activities GP vs LP

A 
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
26
Q

Prohibited activities GP vs LP

A

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

27
Q

Real estate partnerships benefits

A

Capital growth
cash flow income
Tax deductions
Tax credits

28
Q

Raw Land Partnership

A 
Objective: Purchase undeveloped land
Advantage: Appreciation of property 
Disadvantage: No income distributions
Tax: No tax deductions
Degree of risk: MOST SPECULATIVE
29
Q

New Construction Partnership

A 
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
30
Q

Existing Property Partnership

A

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

31
Q

Government Assisted Housing Partnership

A 
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
32
Q

Historic Rehab Partnership

A

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

33
Q

Oil and Gas Partnershps

A

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

34
Q

Intangible Drilling Costs (IDC)

A

Write-offs for expenses of drilling usually 100% deductible in FIRST YEAR

Expenses include: wages, supplies, fuel, insurance.

NO SALVAGE VALUE

35
Q

Tangible Drilling Costs (TDC)

A

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

Deducted over time

36
Q

Depletion allowances

A

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

37
Q

Types of O&G Partnerships

A

Income
Developmental
Income

38
Q

Sharing Arrangments with OG Programs

A 
Overriding Royalty Interest
Revisionary Working Interest
Net Operating Profits Interest
Disproportionate Sharing 
Carried Interest
Functional Allocation
39
Q

Overriding Royalty Interest

A

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

40
Q

Revisionary Working Interest

A

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

41
Q

Net Operating Profit Interest

A

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

42
Q

Carried Interest

A

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.

43
Q

Functional Allocation

A

MOST COMMON SHARING ARRANGEMENT.

LP receives IDCs, GP receives tangible drilling costs. Revenues are shared.

44
Q

Deductions for partnerships

A

Expenses of partnerships are deductions to LP

Depreciation write offs

Depletion allowances - only claimed when income is being produced

45
Q

Crossover point

A

when program begins to generate taxable income instead of losses.

46
Q

Tax basis of LP

A

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

47
Q

Blind pool

A

non-specific porgram

Less than 75% of assets are specified as to use

Specified - more than 75% are specified

48
Q

Basis formula

A

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

49
Q

Cost Basis example: Initial investment and recourse note

A

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

50
Q

Depreciation recapture

A

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

Series 7 (4 decks)

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