SIE (Training Consultants v3.5, 2025): Ch. 1 Equity Securities, Sec. 9 - Introduction to Direct Partnerships

Direct Participation Program (DPP)

An investment, such as a real estate or oil & gas partnership, that provides investors certain tax advantages and allows income, gains, losses, and deductions to flow through to investors.

Limited Partnership

A partnership composed of general and limited partners; commonly used for DPPs.

General Partner (Sponsor/Manager)

Manages the partnership and has unlimited liability.

Limited Partner

Investor whose liability is limited to the amount of their at-risk investment in the partnership.

Adjusted Cost Basis

The investor’s cost or basis in a partnership interest, adjusted for contributions, income, distributions, losses, non-deductible expenses, and depletion.

At-Risk Investment

The investor’s initial cash investment plus any recourse loans.

Recourse Loan

A loan for which the investor is personally responsible.

Non-Recourse Loan

A loan where the investor is not personally responsible; the lender can only claim the partnership property as collateral in case of default.

Conduit Theory

Income and expenses of a limited partnership flow through to the limited partners for tax purposes; avoids double taxation.

Form K-1

Tax form issued to limited partners showing their share of income, gains, losses, deductions, and credits.

Alternative Investments / Non-Correlated Assets

Investments expected to provide regular or steady returns, including DPPs, real estate, private equity, futures, and derivatives.

What is a Direct Participation Program (DPP)?

An investment that provides tax advantages and allows income, gains, losses, and deductions to flow through to investors.

What is a limited partnership?

A partnership composed of general and limited partners; commonly used for DPPs.

Who is the general partner in a limited partnership?

The partner who manages the entity and has unlimited liability.

Who is a limited partner in a limited partnership?

An investor whose liability is limited to their at-risk investment.

What is adjusted cost basis?

The investor’s cost in a partnership interest, adjusted for contributions, income, distributions, losses, non-deductible expenses, and depletion.

What is an at-risk investment?

The investor’s initial cash investment plus any recourse loans.

What is the difference between a recourse loan and a non-recourse loan?

Recourse loans hold the investor personally responsible; non-recourse loans only allow the lender to claim the partnership property as collateral.

What is the Conduit Theory?

Income and expenses flow through to limited partners for tax purposes, avoiding double taxation.

What is Form K-1?

The tax form issued to limited partners detailing their share of income, gains, losses, deductions, and credits.

Why are DPPs considered alternative investments or non-correlated assets?

They provide regular or steady returns and are not closely correlated with traditional securities like stocks and bonds.

What are some disadvantages of limited partnerships?

Lack of liquidity, limited control, possible tax code changes, potential loss of investment, additional IRS scrutiny, and Alternative Minimum Tax consequences.

What should investors consider before purchasing a DPP interest?

Possible loss of principal, general partner management ability, potential conflicts of interest, tax code changes, and projected rate of return. #