Common use of Audit of Tax Returns Clause in Contracts

Audit of Tax Returns. The General Partners understand that the Service is paying increased attention to the proper application of the tax laws to partnerships. While the Partnership is not being formed so as to allow investors to avail themselves of losses or deductions generated by the Partnership, the Service still may choose to audit the Partnership's information returns. An audit of the Partnership's information returns may precipitate an audit of the income tax returns of Limited Partners. Any expense involved in an audit of a Limited Partner's returns must be borne by such Limited Partner. Prospective investors should also be aware that if the Service successfully asserts a position to adjust any item of income, gain, deduction or loss reported on a Partnership information return, corresponding adjustments would be made to the income tax returns of Limited Partners. Further, any such audit might result in Service adjustments to items of non-Partnership income or loss. If a tax deficiency is determined, the taxpayer is liable for interest on such deficiency from the due date of the return. Interest on underpayment is payable at the federal short-term rate plus three percentage points, rounded to the nearest full percent (rounding up in the case of a multiple of one-half of one percent). The federal short-term rate is determined for the first month of each quarter, and the rate so determined governs the calculation of the rate of interest on underpayment for calendar quarter after the quarter during the first month of which the rate is so determined. The "federal short-term rate" for a month is determined by the Service based on the average market yield on outstanding marketable obligations of the United States with remaining periods to maturity of three years or less. In the case of any "substantial underpayment" attributable to a "tax motivated transaction," the interest rate on underpayment is one hundred twenty percent (120%) of the interest rate that otherwise apply. A "substantial underpayment" is any underpayment of tax in excess of $1,000 attributable to one or more "tax motivated transaction," which is defined to include (among other things) certain valuation overstatements, any use which may result in a substantial distortion of income for any period, and any sham or fraudulent transaction. The tax treatment of items of partnership income, gain, loss, deductions or credit is to be determined at the partnership level in a unified partnership proceeding, rather than in separate proceedings with the partners. However, any partner has the right to participate in any administrative proceeding at the partnership level. Generally, the "tax matters partner," Mxxxxxx X. Xxxxxxx, would represent the Partnership before the Service and may enter into a settlement with the Service as to partnership tax issues which generally will be binding on all of the partners, unless a partner timely files a statement with the Service providing that tax matters partner shall not have the authority to enter into a settlement agreement on his behalf. Similarly, only one judicial proceeding contesting a Service determination may be filed on behalf of a partnership and all partners. However, if the tax matters partner fails to file such an action, then any partner, unless such partner owns less than one percent (1%) interest in a partnership having more than 100 partners) or a group of partners owning five percent (5%) or more of the profits interest in the partnership may file such an action. The tax matters partner may consent to an extension of the statute of limitation period for all partners with respect to partnership items. Investment by Tax-Exempt Investors. Tax-Exempt Investors, including Employee Trusts and Individual Retirement Accounts ("IRAs"), are generally exempt from federal income taxation. However, such organizations are subject to taxation on their "unrelated business taxable income," as defined in Section 512 of the Code. Unrelated business taxable income does not, in general, include interest, dividends, rents from real property, gain from the sale of property other than inventory or property held primarily for sale to customers in the ordinary course of business, and certain other types of passive investment income, unless such income is derived from "debt-financed property" as defined in Section 514 of the Code. In addition to receiving interest income (which will comprise substantially all of its income), the Partnership may also receive payments in the nature of points or loan servicing or origination fee at the time funds are advanced under a Mortgage Investment. The fees paid for services rendered in connection with the making or securing of Mortgage Investments, as opposed to fees paid merely for the use of money, will not be treated as interest income and will most likely constitute unrelated business taxable income. Any Partnership borrowing for the purpose of making additional loans may result in "debt financed property" and, therefore, unrelated business taxable income to tax-exempt Limited Partners to the extent that the Service concludes that such borrowings are allocable to the Limited Partners for this purpose (see Rev. Rule 76-354, 1976-2 C.B. 179). Furthermore, any borrowings by a Limited Partner for the purpose of financing his investment in the Partnership can result in "debt-financed property" and, therefore, unrelated business taxable income. As a consequence of the exercise of a default remedy under a Partnership, the Partnership may be forced to foreclose and hold real or other property (which secures the Mortgage Investment) for a short period of time. The Partnership is permitted to borrow funds to assist in the operation of any property on the security of which it has previously made a Mortgage Investment and the operations of which it has subsequently taken over as a result of a default. Furthermore, the foreclosed properties may be subject to other existing mortgages. Consequently, any such acquired property may be deemed to be "debt-financed property." In such event, net income and gain from any such property may constitute unrelated business taxable income, although Employee Trusts (but not most other tax-exempt organizations, including IRAs) may nevertheless qualify for an exception, found in Code Section 514(c)(9), which would exempt them from taxation on such net income in the case of the real property. The Partnership intends to hold its Mortgage Investments for investment and, therefore, no unrelated business taxable income should result from the disposition of these assets. Such may not be the case, however, if the Partnership does not act in accordance with this intention and it is determined that the Partnership is a dealer in the business of buying and selling Mortgage Investments. The General Partners have represented that they intend to conduct the activities of the Partnership in a manner so as to minimize or eliminate the risk of having the Partnership classified as a "dealer" for federal income tax purposes (See "PROPERTY HELD PRIMARILY FOR SALE/POTENTIAL DEALER STATUS.") In computing unrelated business taxable income, a Tax-Exempt Investor, including an Employee Trust or IXX, may deduct a proportionate share of all expenses which are directly connected with the activities generating such income or with the "debt-financed property," as the case may be, and is also entitled to an annual exclusion of $1,000 with respect to unrelated business taxable income. Even though a portion of the income of a Tax-Exempt Investor is unrelated business taxable income, income from other sources which is not unrelated business taxable income will not be subject to federal income taxation. In addition, the receipt of unrelated business taxable income by a Tax-Exempt Investor generally will not affect its tax-exempt status if the investment is not otherwise inconsistent with the nature of its tax exemption. In addition to the general tax treatment of unrelated business taxable income received by tax-exempt investors, special rules apply to charitable remainder trusts. In general, a charitable remainder trust is a trust in which a portion of an asset will be transferred to a charitable organization through the use of a trust and the trust itself will not be subject to taxation on its income. If a charitable remainder trust (which includes charitable remainder annuity trusts, charitable remainder unitrusts and charitable remainder net income trusts) receives any unrelated business taxable income for any taxable year, the trust is taxable on all of its income as a complex trust. The remainder trust is taxable on its accumulated income to the extent the income is not distributed to beneficiaries and to the extent the income exceeds the amount deductible under Section 661(a). The Partnership does not anticipate that it will generate any significant unrelated business taxable income. However, Prospective Investors which are charitable remainder trusts should review their individual tax situation with their tax advisors to determine the effect of the receipt of unrelated business taxable income to the trust. A Prospective Investor which is a Tax-Exempt Investor is strongly urged to consult its own tax adviser with regard to the foregoing unrelated business taxable income aspects of an investment in the Partnership. Furthermore, with regard to certain non-tax aspects of an investment in the Partnership, (see "RISK FACTOR - Investments by Tax-Exempt Investors" and "ERISA CONSIDERATIONS.") State and Local Taxes. In addition to the federal income tax consequences described above, prospective investors may be subject to state and local tax consequences by reason of investment in the Partnership. A Limited Partner's distributive share of the taxable income or loss of the Partnership generally will be required to be included in determining his reportable income for state or local income tax purposes in the jurisdiction in which he is a resident. Further, upon his death, estate or inheritance taxes might be payable in such Jurisdictions based upon his interest in the Partnership. In addition, a Limited Partner might be subjected to income tax, estate or inheritance tax, or both. Depending upon the applicable state and local laws, tax benefits which are available to Limited Partners for federal income tax purposes may not be available to Limited Partners for state or local income tax purposes. Potential investors are urged to consult their personal tax advisor regarding the impact of state and local taxes upon an investment in the Partnership. A discussion of state and local tax law is beyond the scope of this Prospectus.

Audit of Tax Returns. The General Partners understand that the Service is paying increased attention to the proper application of the tax laws to partnerships. While the Partnership is not being formed so as to allow investors to avail themselves of losses or deductions generated by the Partnership, the Service still may choose to audit the Partnership's information returns. An audit of the Partnership's information returns may precipitate an audit of the income tax returns of Limited Partners. Any expense involved in an audit of a Limited Partner's returns must be borne by such Limited Partner. Prospective investors should also be aware that if the Service successfully asserts a position to adjust any item of income, gain, deduction or loss reported on a Partnership information return, corresponding adjustments would be made to the income tax returns of Limited Partners. Further, any such audit might result in Service adjustments to items of non-Partnership income or loss. If a tax deficiency is determined, the taxpayer is liable for interest on such deficiency from the due date of the return. Interest on underpayment is payable at the federal short-term rate plus three percentage points, rounded to the nearest full percent (rounding up in the case of a multiple of one-half of one percent). The federal short-term rate is determined for the first month of each quarter, and the rate so determined governs the calculation of the rate of interest on underpayment for calendar quarter after the quarter during the first month of which the rate is so determined. The "federal short-term rate" for a month is determined by the Service based on the average market yield on outstanding marketable obligations of the United States with remaining periods to maturity of three years or less. In the case of any "substantial underpayment" attributable to a "tax motivated transaction," the interest rate on underpayment is one hundred twenty percent (120%) of the interest rate that otherwise apply. A "substantial underpayment" is any underpayment of tax in excess of $1,000 attributable to one or more "tax motivated transaction," which is defined to include (among other things) certain valuation overstatements, any use which may result in a substantial distortion of income for any period, and any sham or fraudulent transaction. The tax treatment of items of partnership income, gain, loss, deductions or credit is to be determined at the partnership level in a unified partnership proceeding, rather than in separate proceedings with the partners. However, any partner has the right to participate in any administrative proceeding at the partnership level. Generally, the "tax matters partner," Mxxxxxx Xxxxxxx X. Xxxxxxx, would represent the Partnership before the Service and may enter into a settlement with the Service as to partnership tax issues which generally will be binding on all of the partners, unless a partner timely files a statement with the Service providing that tax matters partner shall not have the authority to enter into a settlement agreement on his behalf. Similarly, only one judicial proceeding contesting a Service determination may be filed on behalf of a partnership and all partners. However, if the tax matters partner fails to file such an action, then any partner, unless such partner owns less than one percent (1%) interest in a partnership having more than 100 partners) or a group of partners owning five percent (5%) or more of the profits interest in the partnership may file such an action. The tax matters partner may consent to an extension of the statute of limitation period for all partners with respect to partnership items. Investment by Tax-Exempt Investors. Tax-Exempt Investors, including Employee Trusts and Individual Retirement Accounts ("IRAs"), are generally exempt from federal income taxation. However, such organizations are subject to taxation on their "unrelated business taxable income," as defined in Section 512 of the Code. Unrelated business taxable income does not, in general, include interest, dividends, rents from real property, gain from the sale of property other than inventory or property held primarily for sale to customers in the ordinary course of business, and certain other types of passive investment income, unless such income is derived from "debt-financed property" as defined in Section 514 of the Code. In addition to receiving interest income (which will comprise substantially all of its income), the Partnership may also receive payments in the nature of points or loan servicing or origination fee at the time funds are advanced under a Mortgage Investment. The fees paid for services rendered in connection with the making or securing of Mortgage Investments, as opposed to fees paid merely for the use of money, will not be treated as interest income and will most likely constitute unrelated business taxable income. Any Partnership borrowing for the purpose of making additional loans may result in "debt financed property" and, therefore, unrelated business taxable income to tax-exempt Limited Partners to the extent that the Service concludes that such borrowings are allocable to the Limited Partners for this purpose (see Rev. Rule 76-354, 1976-2 C.B. 179). Furthermore, any borrowings by a Limited Partner for the purpose of financing his investment in the Partnership can result in "debt-financed property" and, therefore, unrelated business taxable income. As a consequence of the exercise of a default remedy under a Partnership, the Partnership may be forced to foreclose and hold real or other property (which secures the Mortgage Investment) for a short period of time. The Partnership is permitted to borrow funds to assist in the operation of any property on the security of which it has previously made a Mortgage Investment and the operations of which it has subsequently taken over as a result of a default. Furthermore, the foreclosed properties may be subject to other existing mortgages. Consequently, any such acquired property may be deemed to be "debt-financed property." In such event, net income and gain from any such property may constitute unrelated business taxable income, although Employee Trusts (but not most other tax-exempt organizations, including IRAs) may nevertheless qualify for an exception, found in Code Section 514(c)(9), which would exempt them from taxation on such net income in the case of the real property. The Partnership intends to hold its Mortgage Investments for investment and, therefore, no unrelated business taxable income should result from the disposition of these assets. Such may not be the case, however, if the Partnership does not act in accordance with this intention and it is determined that the Partnership is a dealer in the business of buying and selling Mortgage Investments. The General Partners have represented that they intend to conduct the activities of the Partnership in a manner so as to minimize or eliminate the risk of having the Partnership classified as a "dealer" for federal income tax purposes (See "PROPERTY HELD PRIMARILY FOR SALE/POTENTIAL DEALER STATUS.") In computing unrelated business taxable income, a Tax-Exempt Investor, including an Employee Trust or IXXXXX, may deduct a proportionate share of all expenses which are directly connected with the activities generating such income or with the "debt-financed property," as the case may be, and is also entitled to an annual exclusion of $1,000 with respect to unrelated business taxable income. Even though a portion of the income of a Tax-Exempt Investor is unrelated business taxable income, income from other sources which is not unrelated business taxable income will not be subject to federal income taxation. In addition, the receipt of unrelated business taxable income by a Tax-Exempt Investor generally will not affect its tax-exempt status if the investment is not otherwise inconsistent with the nature of its tax exemption. In addition to the general tax treatment of unrelated business taxable income received by tax-exempt investors, special rules apply to charitable remainder trusts. In general, a charitable remainder trust is a trust in which a portion of an asset will be transferred to a charitable organization through the use of a trust and the trust itself will not be subject to taxation on its income. If a charitable remainder trust (which includes charitable remainder annuity trusts, charitable remainder unitrusts and charitable remainder net income trusts) receives any unrelated business taxable income for any taxable year, the trust is taxable on all of its income as a complex trust. The remainder trust is taxable on its accumulated income to the extent the income is not distributed to beneficiaries and to the extent the income exceeds the amount deductible under Section 661(a). The Partnership does not anticipate that it will generate any significant unrelated business taxable income. However, Prospective Investors which are charitable remainder trusts should review their individual tax situation with their tax advisors to determine the effect of the receipt of unrelated business taxable income to the trust. A Prospective Investor which is a Tax-Exempt Investor is strongly urged to consult its own tax adviser with regard to the foregoing unrelated business taxable income aspects of an investment in the Partnership. Furthermore, with regard to certain non-tax aspects of an investment in the Partnership, (see "RISK FACTOR - Investments by Tax-Exempt Investors" and "ERISA CONSIDERATIONS.") State and Local Taxes. In addition to the federal income tax consequences described above, prospective investors may be subject to state and local tax consequences by reason of investment in the Partnership. A Limited Partner's distributive share of the taxable income or loss of the Partnership generally will be required to be included in determining his reportable income for state or local income tax purposes in the jurisdiction in which he is a resident. Further, upon his death, estate or inheritance taxes might be payable in such Jurisdictions based upon his interest in the Partnership. In addition, a Limited Partner might be subjected to income tax, estate or inheritance tax, or both. Depending upon the applicable state and local laws, tax benefits which are available to Limited Partners for federal income tax purposes may not be available to Limited Partners for state or local income tax purposes. Potential investors are urged to consult their personal tax advisor regarding the impact of state and local taxes upon an investment in the Partnership. A discussion of state and local tax law is beyond the scope of this Prospectus.