Legal Definitions - direct-participation program

A direct-participation program is an investment structure where individuals pool their money to invest directly in a specific business venture or asset, such as real estate, energy projects, or equipment leasing. Unlike traditional stocks or bonds, the ownership interests in these programs are not bought and sold on public stock exchanges like the NYSE or NASDAQ, meaning they are typically less liquid. A defining characteristic is that the program's financial results—including income, losses, deductions, and credits—"pass through" directly to the individual investors' personal tax returns. This avoids corporate-level taxation and allows investors to directly benefit from or be responsible for the venture's financial outcomes for tax purposes.

Here are some examples to illustrate this concept:

• Real Estate Limited Partnership: Imagine a group of investors forms a limited partnership to purchase, renovate, and manage a portfolio of commercial office buildings. Each investor contributes capital and receives a partnership interest. The partnership itself does not pay corporate income tax; instead, the rental income generated, along with operating expenses and depreciation deductions from the buildings, are allocated and reported directly on each investor's personal tax return. The partnership interests are not traded on any public exchange.

  This illustrates a direct-participation program because: Investors directly own a share of the real estate venture, their interests are not publicly traded, and the tax consequences (income and deductions) flow through to their individual tax returns.

• Oil and Gas Drilling Program: A company organizes a program where individual investors can buy units in a limited partnership formed specifically to fund the exploration and drilling of new oil and natural gas wells in a particular region. Investors contribute capital, and in return, they receive a share of any profits from successful wells, as well as certain tax deductions related to drilling costs.

  This illustrates a direct-participation program because: Investors are directly participating in the ownership and financial outcomes of the drilling operations, their investment units are privately held and not publicly traded, and the income and specific deductions (like intangible drilling costs) are passed through to their personal tax returns.

• Equipment Leasing Partnership: A small group of professionals decides to invest in a partnership that acquires specialized, high-value industrial equipment (e.g., large construction cranes, medical imaging machines) and then leases this equipment to various businesses. The investors contribute capital to purchase the equipment and share in the lease payments received. The partnership units are not listed on any stock exchange.

  This illustrates a direct-participation program because: The investors directly own a share of the equipment and the leasing business, their investment is not publicly traded, and the lease income and depreciation expenses on the equipment are passed through directly to their individual tax returns.