7.1. Direct Participation Programs

A direct participation program (DPP) is often organized as a limited partnership (LP) or other pass-through entity. The primary defining feature of a pass-through entity is that its owners are taxed for the company’s gains and losses, rather than the company directly. Business profits or losses “pass through” to the personal income tax filings of the partners. DPPs generally are set up to fund high-risk and capital-intensive businesses, such as real estate development, oil and gas exploration, and equipment leasing. As such, they may generate losses that the partners can use to offset passive income from certain other investments. This “tax shelter” benefit is a reason some high-end investors choose to invest in DPPs.

For tax purposes, the IRS treats a business as a corporation (meaning it is taxed separately) or a pass-through entity (meaning it is not). A traditional corporation is always treated as a corporation for tax purposes. Smaller corporations whose shares are not exchange-traded might qualify to be treated as a pass-through. Limited partnerships (LPs) and limited liability companies (LLCs) get to make an election as to whether they will be treated as corporations or pass-throughs. Thus, a DPP might have one of several organizational structures that allow it to maintain its pass-through status.

Formerly, the IRS required that a DPP have no more than two of the following defining features of a corporation to qualify for pass-through status. While this requirement no longer applies, knowing these four features is still useful, because they continue to influence how lawyers and regulators think about corporations. These features are:

• Continuity of life. A corporation continues to exist even if an investor or manager dies, resigns, retires, or is expelled from the corporation. If the general partner of a DPP leaves the company, the DPP would cease