Brainscape's Knowledge GenomeTM


Top Flashcards (Certified)
All Flashcards

Series 7 > Chapter 18- Direct Participation Programs > Flashcards

Chapter 18- Direct Participation Programs Flashcards

(63 cards)

Start Studying
1
Q

Direct Participation Programs

A

AKA as limited partnerships

Allows investors certain tax advantages

Composed of General and Limited Partners

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

General Partners

A

AKA- the manager and the Sponsor

Has unlimited liability

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Limited Partner

A

Liability is limited to the amount that they have invested

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Adjusted Basis

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Adjusted basis can be increased by

A

additional contributions by the partner
Partnership Income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

A limited partner can never write off more than

A

Their adjusted basis

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

At risk investments is

A

any money they invest along with any recourse loans

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Recourse loans

A

Loans for which they are personally responsible

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Advantages of DPP

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

A DPP offered to the public must be

A

registered with the SEC

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

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

A

The managing underwriter

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Maximum Spread for a DPP is

A

10%

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Limited partner making a loan causes
The limited partner to also become a general creditor But their interest in the partnership does not change
26
A general partner cannot (without the approval of the limited partners
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
Limited Partnerships can be dissolved by
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
Claims upon a limited partnership dissolution
Creditors - secured then unsecured Limited partner - profit claims, then capital claims General partner - Profit claims, then capital claims
29
Characteristics of a corporation
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
Ways to avoid corporation status
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
Tax Reform act of 1986
individuals would no longer be allowed to deduct losses on passive activities
32
If the IRS determines that a tax shelter is abusive then
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
Types of Real Estate DPP
Residential Property Commerical Property Industrial Property Government Assisted housing - either low income or subsidized housing Condominium securities - time shares Raw land
34
Deductions available to investors in real estate are
Depreciation (except for raw land) And interest on mortgage payments
35
Advantages of Real Estate DPP
Capital appreciation Tax deductions Flow through of income and expenses Limited Liability
36
Factors to consider when considering Real Estate DPP
Forecast for regional economic conditions Changes in interest rates Changes in tax law Qualifications of general partner
37
Sale and Leaseback
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
Triple net lease
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
Condominiums sold to investors with the purpose of renting them out is considered
condominium securities
40
To qualify as an investment the condominium must
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
Finding a limited partners loss in real estate
revenue - all deductions = loss
42
Finding a limited partners cash flow from real estate
Revenue - all deductions except depreciation = cash flow
43
An investor in oil and gas partnerships will general bear
more risk than those in a real estate program
44
An investor in oil and gas can generally write off
more in the early years then someone investing in a real estate program
45
Advantages of Oil and Gas DPP
Intangible drilling costs Depletion allowances - based on oil sold (not drilled or mined) Tax deductions flow through tax benefits Deprecation deductions on equipment
46
Intangible Drilling
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
Equipment costs
Equipment costs are considered capital expenditures and must be depreciated over time
48
Drilling costs on a well that does not produce oil are considered
dry hole costs and are listed as intangible costs
49
4 main types of drilling programs
Exploratory drilling (wildcatting) Developmental drilling Balanced Drilling program oil and gas income program (not a tax shelter)
50
Exploratory Drilling
Drilling for oil in areas without proven reserves, higher return potential
51
Developmental Drilling
Drilling in areas with proven reserve Probability of finding oil is higher Leasing costs in these areas are higher Returns are lower
52
Balanced Drilling program
Drills both Exploratory and developmental wells
53
Oil and Gas income program
Buy properties with proven oil and gas reserves that are already producing no or few intangible drilling costs Lowest capital risk
54
Program assessments
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
Sharing arrangement
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
Functional Allocation sharing arrangiment
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
Equipment leasing partnerships
formed to buy equipment such as computers, railroad cars and airplanes, and then lease them to businesses
58
Advantages of Equipment leasing partnerships
Depreciation deduction interest deduction Limited Liability for limited partner NEVER depend of appreciation in value of the leased equipment
59
Blind pool
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
Return on investment analysis
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
S Corporations
treated like a partnership flow through of income and expenses
62
Requirements for an S Corp
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
LLCs
Companies treated like partnership for tax purposes no limit to the number of member/owners to an LLC

Series 7 (20 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions