SIE Understanding Products and Their Risks Question 64: Answer and Explanation

Question: 64

Which of the following is correct regarding tax consequences of a Direct Participation Program (DPP)?

• A. The owners are taxed at a lower rate, in consideration of the DPP income already being taxed.
• B. The owners are taxed on profits reported as passive income, but the DPP is not taxed.
• C. The owners are taxed on profits reported as actively participating, but the DPP is not taxed.
• D. The DPP is taxed, and the owner receives tax-exempt dividend income from the DPP.

Correct Answer: B

Explanation:

B: Choice B is correct because the owners do not materially participate in the operation of the DPP, the DPP is not taxed, and the owner is taxed on passive income reported on the federal return. Passive losses can generally only be applied against passive income for the same year. Passive losses in excess of the passive income for the year, in some cases, may be carried over to the following year. Choice A is incorrect because the DPP is not taxed. Choice C is incorrect because the owners do not materially participate in the operation of the DPP. Choice D is incorrect because the DPP is not taxed and the owner receives taxable income or taxable loss, according to the financial results of the DPP.