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What is a direct participation program?

-owners directly participate in the income and expenses of the enterprise
-this avoids the double taxation of the corporation becoming taxed and the investor being taxed

1

How did the Tax Reform Act of 1986 affect DPPs?

-it stopped the tax advantage of being able to use your losses against earned income

2

Types of DPPs

1. General Partnership - all partners fully liable
2. Limited Partnership - has at least one general partner (GP)
- at least one limited partner (LP) (limted to
amount invested, silent partners
3. Subchapter S - max shareholders is 100
4. LLC -

3

What IRS criteria must a DPP meet?

Corporations share 6 common characteristics. To maintain its unique status, a DPP Must avoid at least two of the six:
1. A group of associates: People must be involved, so hard to avoid this one
2. Gathered to achieve a profit: Primary purpose must be economic viability, this characteristic cannot be bypassed
3. Centralized Management: cannot be avoided
4. Freely Transferable asset: easy to avoid
5. Limited Liability: easy to avoid, as the GP in a partnership is wholly liable
6. Continuity of Life: easy to avoid as the corp sets a future liquidation date.

4

GP's Fiduciary Responsibilities

1. borrowing from the partnership
2. competing with the partnership
3. may not sell personally owned assets to the partnership

5

LP's rights

1. inspect the books
2. sue the GP if the GO is willfully mismanaging or breaks partnership agreement

6

DPP Taxation

1. File a K1
2. PIGs - Passive income generators
3. PALs - passive activity losses
4. PALs may only be offset by PIGs

7

Depretiation

-ACRS - equipment
-Recapture - when asset is sold, maybe for more than book value, may result in cap gains
-straight line - buildings

8

Depletion

-oil, natural gas, coal reserves are depleted
-percentage and cost depletion
-percentage benefits small oil and gas producers

9

Recourse Debt

-think about the usbank loan on gjs
-would be due if gjs sold

10

Crossover point

-where the partnership experiences taxable income greater than cash flow
-earlier years depreciation is larger than cash flow, typically

11

Phantom Income

when the investor is taxed on income higher than cash flow

12

Distribution of Limited Partnership, shares, etc.

-Max sales charge of 10%,
-1/2% charge for due diligence expense
-may recover printing, filing fees

13

LP Status change through a roll up

-frequently benefits the GP of the LP, must be disclosed to the LPs
-can form MLP
-master limited partnership
-freely transferable, either on exchange or OTC
-or possible a corporation
-b/d fee for structuring a roll up is limited to 2%

14

"Trade Ticket" for an LP purchase

-called the subscription agreement
-contains a detailed financial questionnaire the investor must complete and sign
-GP reviews before investor is accepted into LP

15

Required Docs

-Cert of LP with SOS
-Subscription agreement signed by GP

16

Public and Private Offerings

-prospectus - public
-offering memorandum - private
-most sold through Reg D private placements

17

Types of Limited Partnerships

-Formed by syndicating GP's and sold on a best efforts basis using an escrow account
1. Real Estate Partnership -
2. Oil and gas ventures - from wildcat or exploratory deals, to less profitable but more reliable developmental programs, to more conservative income programs
3. Equipment Leasing Programs - structured to produce income because there is little or no capital appreciation potential

18

Real Estate LP types

1. raw land partnership
2. new construction
3. rental income

19

Real estate LP tax advantage opportunities

1. Historical Rehab Credit - 75% of original structure
2. Low - income housing credit -
-HUD
-provides the best credit

20

Oil and Gas

1. Drilling Program
-wildcat - drilling in an unproven area
-Developmental program - drilling in a proven area
-combination program - wildcat and developmental
-income program - purchases and manages producing wells
-energy programs - have high depletion programs
-depletion is the cost recovery system for wasting nat resource
-incur intangible drilling costs (IDCs)
-ideal for an investor in this arena looking for high first and
second year right offs

21

Non Recourse vs Recourse

1

22

Component depreciations

1

23

What reduces basis?

1. Passive loss
2. Depletion
3. Cash
4. what else?