UBI Tax on IRA due to MLP investment
Hello,
I understand that MLP (Master Limited Partnership) companies throw off income to IRAs that is considered Unrelated Business Income, and taxed as such by the IRS. There is a $1000 exemption. I have seen a document which claims one can avoid paying this tax by using a number of IRA accounts and keeping the UBI income to each below the 1K limit.
However, I have also seen discssions on message boards that claim the IRS considers all T-IRAS as one account, and all Roth IRAa as another, so any individual has a de-facto limit of 2 separate IRA accounts in the eyes of the IRS. This means the 1K exemption would apply to each of these two accounts, allowing maximum of $2K exemption.
Can anyone here confirm which is the case…?
If in fact the IRS conbines all T-IRAS into 1 account for this purpose, then there is a REAL problem in filing to pay this tax, as the sponsors of each account has no idea how much UBI is received by the other accounts. How can each file the correct tax payment without knowing how much UBI came into the other accounts… The sponsors must file the payment, not the owner of the IRA.
Could the IRS really be this stupid….?
Thanks,
Gerry
Permalink Submitted by mk foss on Wed, 2008-11-26 01:55
The instructions for Form 990-T do not specify that IRAs be combined for purposes of the $1,000 gross income threshhold for filing. The instructions also indicate that consolidated returns cannot be filed.
I don’t think the instructions are definitive when it comes to UBI and IRAs, much of the instructions deal with tax exempt organizations and not IRA trusts.
Custodians are responsible for the filing and it would be burdensome for each custodian to determine whether there are other IRAs at other institutions before preparing a return.
Someone arranging their IRA investments with a number of custodians in order to avoid the UBIT has too much time on their hands. If it appears that someone is evading rather than avoiding tax, IRS can deal with it.
Permalink Submitted by Gerry M on Thu, 2008-11-27 22:33
Thanks for the response, mtgf…
I downloaded the dreaded 4-page 990-T form and its 24 pages of instructions and the first thing that appears contrary to some other info I’ve seen is that every IRA account with $1000 UBI must file it… presumeably independently from all other IRAs. There is a single box for the EIN of the IRA, which tells me you’d need to file a separate form for each IRA you own… and from the statement below, I think the $1000 limit applies to each…
It specifically says: “Fiduciaries for the following trusts that have $1000 or more of unrelated trade or business gross income must file Form 990T: 1. IRAs, ……. , 4. Roth IRAS,….” (there’s 7 kinds of trusts listed.)
The other thing to note is that dastardly word “gross” in the statement, as it implies you cannot subtract the negative UBIs from the positive ones. (Seems about half the MLPs post negative UBI.) I didn’t find a statement that clarified the definition of “gross income”.
Do you agree with my conclusions…
Thanks again…!
Permalink Submitted by mk foss on Sat, 2008-11-29 23:30
Yes I agree with you. Each IRA must file; towards the back of the instructions “consolidated returns” are prohibited. I don’t really think that they’re talking about IRAs there but it’s just more of a hint that everything is separate.
I’ve filed 990-Ts for partnerships that have terminated. You can deduct all of the losses from a passive activity on the profit return even if you haven’t been required to file 990-Ts previously. You need to keep all of the records just in case.
The other bad thing is if you actually owe the tax, you’re likely to have an underpayment penalty. There is no safe harbor based on not paying tax in a prior year for a 990-T.