Oil and gas partnerships are often presented to consumers as safe, high-yield investments, but they contain risks and complexities that make them appropriate only for the most sophisticated investors. Oil and gas markets are unstable and risky. Brokers and
brokerage firms must ensure that the investments they recommend to clients are suitable, and that their potential risks are clearly explained. Investments must also not be too concentrated in one field such as oil and gas. If you lost money on an oil and gas limited partnership, the losses may be recoverable though a securities litigation
claim. Learn your legal options during a free case review with the Business Trial Group. Oil and gas limited partnerships are investment vehicles for energy projects. Investors in these partnerships provide the capital to acquire, develop, and operate oil and gas wells. In return, the investors are paid cash distributions on a
monthly or quarterly basis. The two major options for retail investors in this sector are private oil and gas limited partnerships and master limited partnerships (MLPs). Although similar, these investment vehicles have important differences. MLPs, for example, are typically publically traded securities, while oil and gas
limited partnerships are sold to a select number of investors. In addition, MLPs are intended to be long-term businesses, while limited oil and gas partnerships are usually only formed for a specific project, and are eventually liquidated. MLPs and oil and gas limited partnerships present similar risks to investors. These risks include: The recent oil and gas boom has made limited partnerships in the energy sector attractive to investors. Unfortunately, many investors who were promised high yields
instead suffered heavy losses. Your investment losses may be recoverable. Brokers and brokerage firms may push oil and gas limited partnerships as a stronger growth investment while failing to disclose their drawbacks. While sophisticated investors with diverse portfolios may benefit from investing in a limited oil and gas partnership, the risk and complexity of such investments make them
unsuitable for most investors. If your broker wrongly advised you to invest in an oil and gas limited partnership or a master limited partnership—and you lost money on the investment—our securities litigation and arbitration attorneys can help. Contact the
Business Trial Group for a free case review. All of the following partnerships would be appropriate for an investor seeking immediate cash flow except: A. Raw land A. Raw land Rationale: All of the following are benefits to limited partners except: A. Depreciation C.
Depreciation recapture Rationale: If the offering circular or prospectus used in conjunction A. Shell offering B. Blind pool offering Rationale: An oil and gas DPP shares all of the following characteristics with a real estate DPP except: A. Proportionate share of expenses/losses B.
Depletion Rationale: Losses from DPP's may be used to offset: A. Ordinary income C. Passive income Rationale: A customer would purchase a limited partnership that buys oil and gas production for all of the following benefits except: A. Depletion allowances C. Liquidity Rationale:
Your customer's real estate limited partnership reports income of $1,000,000, management expenses of $100,000, maintenance expenses of $100,000, and depreciation of $900,000. What is the profit or loss? A. $1,000,000 profit B. $100,000 loss Rationale: Your customer has significant passive income that she would like to shelter. You would most likely recommend which type of limited partnership? A. Raw land B. Oil & gas exploration Rationale: Which of the following documents discloses to the public what the partnership does, who the partners are, the address of the business, etc.? A. Subscription agreement B. Certificate of limited partnership Rationale: Which of the following would be last in line in a limited partnership liquidation? A. IRS B. General partner Rationale: Limited partners are least likely to: A. Receive depreciation deductions D. Decide which assets to sell Rationale: General partners may do which of the following? A. Compete with the partnership B. Lend money to the partnership Rationale: Which of the following partnerships is most speculative? A.
Existing properties C. Exploratory oil & gas program Rationale: The General Partner bears the capitalized or tangible costs for an oil-drilling program, while the Limited Partners bear the IDC's. This sharing arrangement is known as: A. Inconsequential B. Functional allocation Rationale: If the IRS determines that the tax shelter provided through a limited partnership is abusive, they may do all of the following except: A. Charge general partners with intent to defraud D. Sentence partners to life Imprisonment Rationale: Real estate DPP's and REIT share all of the following characteristics except: A. Pass-through of income D. Pass-through of losses Rationale: Which of the following partnerships offers the highest risk/reward ratio? A. Historic rehabilitation B. Oil & gas exploration Rationale: Which of the following is used to determine all benefits offered potentially by an investment in a limited partnership? A. Internal rate of return A. Internal rate of return Rationale: Which of the following is the least liquid investment opportunity? A. Mutual funds D. Direct participation programs Rationale: Which of the following documents authorizes the GP to A. Subscription agreement C. Partnership agreement Rationale: Your customer might invest in a limited partnership for all the following benefits except: A. Tax shelter D. Liquidity Rationale: If the syndicator of a DPP is selling limited partnership interests for $100,000, he/she may keep how much in syndication fees? A. $9,000.00 C. $10,000.00 Rationale: Which of the following parties would be paid ahead of your client a limited partner in an equipment-leasing program, should the partnership go through a bankruptcy liquidation proceeding? A. Unsecured Creditors A. Unsecured Creditors Rationale: Similarities between real estate limited partnerships and real estate investment trusts include all of the following except: A. Flow through of losses A. Flow through of losses Rationale: The General Partner would file an amendment to the certificate of limited partnership for all of the following reasons except: A. Sharing
arrangements have been altered C. The partnership suffers a net loss for the fiscal year Rationale: Intangible drilling costs in an oil & gas limited partnership would not include which of the following? A. Labor B. Casing Rationale: Primary objectives of a DPP investor for purposes of suitability would generally not include: A. Long-termcapitalgains D. Short-term capital gains Rationale: One of your investors is a limited partner in an oil & gas exploration concern. She has inquired if you know the name of the document that the GP would have filed with the state attesting to the formation of the partnership. This document is called the: A. Subscription agreement B. Certificate of limited partnership Rationale: Intangible drilling costs include all of the following in an A. Fuel C. Pumps Rationale: Regarding direct participation programs, which of the following is an accurate statement? A. Real estate limited partnerships and REITS are essentially the same C. Real estate and oil exploration programs both offer depreciation Rationale:
Which of the following is an accurate statement concerning the offering of limited partnership interests? A. Limited partnership interests must be offered via a private placement C. Registered representatives must obtain verification of their investors' net worth when selling limited partnership interests Rationale: An investor purchases a limited partnership interest for $250,000, giving him a 5% interest. The partnership develops 5 of the planned 25 townhouse units but can not keep up with loan payments. The properties are foreclosed and sold by the lending institution for $1 million less than the balance owed. Therefore, the investor will receive: A. 5% of the $250,000 investment C. Nothing Rationale: The main tax advantage received by a limited partner in an oil income program is: A. Depletion A. Depletion Rationale: When a limited partnership is liquidated, the last party to receive any proceeds would be the: A. Unsecured lenders D. General partners Rationale: One of your investing clients wants tax shelter, has low liquidity needs but also wants a lower-risk direct participation program in which to invest. You should recommend: A. That he purchase an oil income program interest A. That he purchase an oil income program interest Rationale: Jerry is a client who wants to invest in long-term capital appreciation opportunities but specifically states he is not interested in current cash flow. Which of the following programs would be most suitable for Jerry? A. New construction program D. Raw land program Rationale: Warren Weeks purchased a limited partnership interest five years ago for $100,000. Warren is then asked to loan the partnership $20,000. If the partnership goes into bankruptcy, Warren will be considered a: A. Limited partner for the $100,000, a creditor for the $20,000 A. Limited partner for the $100,000, a creditor for the $20,000 Rationale: An investor is solicited for the purchase of a raw land limited partnership interest by a broker- dealer through Jeremy Sullivan, one of the firm's registered representatives. Turns out, the GP did not hold proper title to nearly half the acreage specified in the offering circular, and when oil is later discovered on the property, with all profits going to outside parties connected to the GP through other ventures, the LPs sue for breach of offering  fiduciary duty. Which of the following best addresses this situation? A. Limited partnership interests are generally too risky for all but institutional investors D. Jeremy could be pursued under Code of Procedure and Code of Arbitration Rationale: All of the following enjoy "limited liability" except: A. General partner of a limited partnership A. General partner of a limited partnership Rationale: A real estate limited partnership is currently using accelerated cost recovery systems (accelerated depreciation schedules). Therefore: A. Earnings will be overstated in early years and in later years C. Earnings will be understated in early years, overstated in later years Rationale: A partnership that leases airplanes to smaller, regional airlines would not have which of the following available? A. Accelerated cost recovery systems B. Depletion Rationale: The person who distributes new limited partnership interests is known in Series Sevenland as the: A. Distributor C. Syndicator Rationale: A limited partnership organized shelter in the early years of operation. What is the name given for the situation in which the partnership's income begins to exceed available deductions? A. Point of diminishing returns D. Crossover point Rationale: Which of the following accurately states the purpose of depreciation? A. To spread the cost of an asset over its useful life A. To spread the cost of an asset over its useful life Rationale: One of your investing clients is excited about becoming a limited partner in one of Donald Trump's many real estate ventures. He wants to know at what point he will be accepted as a limited partner. You would accurately inform him that: A. He will be accepted as an LP when the GP signs the subscription agreement A. He will be accepted as an LP when the GP signs the subscription agreement Rationale: A general partner would engage in a conflict of interest to the LPs if he did all of the following except: A. Borrowed money from the partnership C. Lent money to the partnership at prevailing interest rates Rationale: An investor would not purchase a limited partnership interest for a developmental (step-out) oil program for which of the following reasons? A. Tax shelter B. Recapture provisions Rationale: A developmental oil program is set up under a functional allocation in which the GP bears capitalized (tangible) costs and the LPs receive a proportionate share of intangible drilling costs. All of the following are examples of intangible drilling costs except: A. Cost of the equipment A. Cost of the equipment Rationale: Rory Gogan is an LP in a real estate partnership. His cost basis is $75,000, which includes a $25,000 share of a recourse note. If the partnership fails, Rory may claim a maximum of what amount as a passive loss? A. $50,000 C. $75,000 Rationale: Accurate statements of limited partnerships include which of the following? A. Limited partners are fiduciaries to the other LPs C. Limited partnerships are not taxed Rationale: When a limited partner sells his interest, he will be taxed on the difference between proceeds of the sale and: A. His adjusted basis A. His adjusted basis Rationale: In the first year of operation, an oil or gas drilling program would generate most of the available tax shelter through which of the following? A. Depletion D. Intangible drilling costs Rationale: Which of the following is the riskiest type of oil and gas limited partnership?The investor partners with a company that drills wells in an already-proven area. Exploratory Drilling Program – considered as a 'high risk, but high reward' kind of investment. This could also be thought of as the riskiest kind of program.
Which of the following oil and gas direct participation programs might be considered the riskiest quizlet?Exploratory programs, also called wildcatting programs, are those that look for resources near existing producing wells in the hopes of finding more deposits. These are considered riskiest of the oil and gas programs—exploratory, income or a combination of the 2.
What is the greatest disadvantage of limited partnerships quizlet?With no secondary market trading, one of the greatest disadvantages of a limited partnership is that an investor's partnership interest in one is generally not considered to be freely transferrable.
What are types of oil and gas direct participation programs?The most common DPPs are non-traded REITs (about two-thirds of the DPP market), non-listed business development companies (BDC) (which act as debt instruments for small businesses), energy exploration and development partnerships, and equipment leasing corporations.
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Which of the following types of oil and gas limited partnership programs is the riskiest?
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