MLPs in IRAs – 990-T Filing

Submitted by [email protected] on Wed, 2013-01-23 05:05

I’m interested in investing in MLPs in my IRA accounts. I’m concerned about the 990-T form that must be filed if the MLPs report sufficient Unrelated Business Taxable Income (UBTI). From reading the 990-T instructions, I understand that the broker handling the account must file the form and submit the tax if more than $1000 of UBTI is accumulated in the account. It appears each IRA account stands alone, and UBTI amounts in separate accounts would not be totalled up into a single 990-T, but I’m not really sure, as the instructions are very complicated.

Since I have several broker accounts, this raises several questions:

1) Does each broker file a separate 990-T if UBTI in my account in his hands exceeds $1000, and pay the tax out of that account, independent of my other accounts…?

2) From my reading of the 990-T instructions, it appears that only the positive UBTIs (gains) are added up and would be taxable if over $1000, while the negative UBTIs (losses) cannot be subtracted from the gains in any year. However, UBTI losses may be carried forward 5 years to offset gains for each MLP. Will any broker provide such a complicated process, or even have access to the data to do it…?

I have done some trading of MLPs, but in small share amounts that never accumulated a taxable amount of UBTI. I have never had a broker refuse to trade an MLP ticker. I would think, if they could not handle the results of such tax being due, they would lock out trading of MLPs in IRA accounts, but it appears they don’t…

From my trading so far, I see that the UBTI is reported on the K1 forms sent out to investors, brokers, and the IRS, and my holdings of each MLP with each broker appears on it’s K1, along with an ID number identifying the broker.

3) If I manage the holdings so that each IRA account never accumulates more than $1000 UBTI, would that result in never having to pay the tax…?

Thanks for any advice..!
Gerry



Submitted by mk foss on Wed, 2013-01-23 17:16

Because of the hassle of 990-T filings, I wouldn’t invest in MLPs in my IRA but I’ll try to answer your question.The MLPs are good with individual owners in producing a Schedule K-1 that combines all ownership even those held with different brokers. I’m not sure that they are as good in dealing with IRA K-1 Schedules. UBI losses can be carried forward 15 years, not 5 years amd a current year UBI loss can offset UBI from another MLP owned by the same IRA. Often the K-1 schedules are sent directly to the IRA owner. You need to be proactive in contacting the custodian with the UBI amounts so they can prepare the necessary filings. No 990-T need be filed for a loss but you can still claim that loss to offset the first UBI income within the same IRA – that places an additional burden on the IRA owner. You must notify the custodian of the current K-1 income plus losses from prior years that haven’t been used.Form 990-T is generally due May 15 but an exception for IRAs makes the form due April 15. The $1,000 exemption offsets current year income but does not create or increase a UBI net operating loss. 



Submitted by Samuel Feldman on Sat, 2015-04-25 20:44

What is the proper way to use a prior year UBTI loss on the 990-T?  (There doesn’t seem to be a line on the form for loss carryforwards.) Is it the case that you can use the prior year loss against the current year gain, even if you didn’t file the prior year 990-T?



Submitted by Alan - IRA critic on Wed, 2013-01-23 19:12

Some additional issues often debated with respect to IRA UBTI for which there are diverse opinions are:

  • IRA custodians don’t all collect or net the same K1 information supplied by IRA owners in the same manner.
  • If the IRA custodian holds multiple IRAs, do they consider each account separately for 990T purposes?
  • Some have stated that there is a 1,500 threshold for ALL IRA accounts owned, but since the 990T is done at the individual custodian level, there is no way to reflect such a limit. People are using multiple IRAs with different custodians to manage the 1,000 threshold, apparently without consequence.
  • Many custodians net positive and negative UBTI figures each year for different MLPs in arriving at the 1,000 990T threshold. Some indicate that this is not technically correct, that each MLP should stand alone and UBI losses can be carried forward to later years for the particular MLP. Doing both would be duplication.
  • Some state that the sale of an MLP triggers additional UBTI, eg cap gains convert to UBTI, but those who hold MLPs are saying that a sale does not appear to spike K 1 UBTI figures.
  • Apparently, the IRS has just been accepting what they get and enforcement in this area has been minimal in the past. Perhaps that changes with the current IRA tax rule enforcement initiative. Basically, the IRS has often overlooked such basic violations as excess contributions and incorrect RMDs, so the emphasis will likely be on the more basic issues before they concentrate on IRA k 1 matters.

 



Submitted by Geoffrey Foisie on Thu, 2013-05-23 19:28

My IRA custodian just told me that it would be up to me to fill in the 990-T. But what I’ve read above, and a few places elsewhere, suggests that it is the custodian’s responsibility to submit the 990-T. Does anyone have definitive authority on whether the custodian has any responsibilities re the 990-T and UBTI from an MLP held in an IRA?



Submitted by Alan - IRA critic on Thu, 2013-05-23 19:38

The custodian is not required to file the 990T, but most of the major custodians do. If your custodian does not provide this service, you would have to do it yourself or find a tax professional to file it.



Submitted by Geoffrey Foisie on Fri, 2013-05-24 04:04

Thanks Alan. I and my clients are with a major, Pershing, who apparently won’t  file the 990 T for advisor-managed IRA’s.



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