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Pitfalls of limited partnerships are not obvious to novice

By Ron SchererBusiness correspondent of The Christian Science Monitor / November 8, 1982

New York

Dorothy and her husband are close to retirement. Both have worked hard, but neither ever made a lot of money.

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A few years ago Dorothy inherited some money and her husband's income increased. Their taxes also rose, and a friend recommended a local financial consultant.

The consultant immediately recommended investing $5,000 in a limited partnership involving an oil and gas exploratory drilling program. When she read the prospectus, Dorothy said she was scared when. The consultant told her, ''Don't worry, this will make you rich.'' As part of the deal, Dorothy and her husband signed a letter of credit from a local bank. It obligated them to pay an extra $24,000 if the drillers needed more money. The drillers did. So far, aside from the tax breaks, Dorothy and her husband have gotten back $800 in income on their $29,000 investment.

Dorothy also invested in a series of six other limited partnerships. One involved a hotel. It eventually went bankrupt. Another purchased precious gems, which quickly lost half their value. Looking back on it, Dorothy (not her real name) comments, ''We were not sophisticated investors, . . . and being so close to retirement we needed income, not losses.''m

Dorothy's experience is not unique. Tax shelters are complicated investments, which should only be used by sophisticated investors. The prospectuses - which, if read, can be quite revealing - often are merely skimmed through. Even if read , they are often long, complicated, and difficult to understand. However, every year stock brokers, financial consultants, and others recommend investors plunk down cash in limited partnerships. Some should invest; some shouldn't.

Investment advisors differ somewhat as to how much income you should have in order to invest in a limited partnership. Thomas Spear, vice-president of the Asset Management Group, a fee-for-service investment counseling firm with offices in Colorado, California, and New Jersey, says he believes individuals who are not in the 50 percent tax bracket should consider something besides limited partnerships.

Other options include Individual Retirement Accounts, or Keoghs for the self-employed; investing in utility stocks that have dividend programs offering tax advantages; and investing in home insulation to take advantage of energy tax credits. Once you have used up all these options, Mr. Spear suggests looking at limited partnerships.

Robert A. Stanger, in his new book, ''Tax Shelters: The Bottom Line,'' notes that as a general rule, tax shelters shouldn't reduce your taxable income below person. He figures this income level will be about the 38 percent bracket by 1984. He says he recommends this level because ''Tax shelters are usually priced to produce a reasonable return only for investors benefiting from tax savings at this rate or higher.''

According to regulatory statutes, investors in most limited partnerships must also complete a net-worth type of financial statement. For most oil and gas programs, an investor must have a net worth of $225,000, not including personal property, or a net worth of $60,000 and a taxable income of at least $60,000 a year. Some states have their own laws and even higher standards.

Once you decide to hand over your cash to someone heading towards the oil patch, there are some important things you should know about most limited partnerships: