UBTI and Roth conversion – double taxed?

Submitted by Michael Neuenschwander on Tue, 2021-06-29 22:21

scenario: roth conversion done at the end of 2019. They converted the full account ($25,000). Enterprise products stock (publicly traded LP that issues a K-1) happened to be about $5,000 of that account. In Jan 2020 they sold the shares of Enterprise.

So on 2019 tax return they paid taxes on the full value of enterprise (as part of the roth conversion). However they just received a 990-T for 2020 saying they had UBTI due to the sale of Enterprise. Other years it had always been less than the $1,000/yr. so they have never had UBTI. However on the sale, the Enterprise the 2020 K-1 is showing $3,527 of Section 751 Gain and $1,062 of Negative withdrawals Capital Adjustment.

While all the accounting at enterprise level i’m sure is correct on a per share / account level basis. Enterprise doesn’t record that it was an IRA and now a Roth, so they are not taking into account the fact that taxes were just paid on the entire value of the position.

So does the Roth conversion negate or offset some or all of the UBTI from the sale, or adjust the tax basis in the Enterprise position. Or are they really stuck paying taxes on the full value for the conversion and then again on UBTI the next year?

Thanks



Submitted by Alan - IRA critic on Wed, 2021-06-30 03:49

Is the UBTI reported on line 20 (Code V) of the K-1?  That is the only K-1 line which results in UBTI tax on an IRA. There is no addition to IRA basis resulting from the tax paid by the IRA, although the tax paid by the IRA reduces the gain in the IRA which would otherwise be subject to tax if the gains were distributed before the Roth became qualified. UBTI is usually an annual occurrence for LPs and is totally separate from taxes paid to convert to Roth. But it does hurt more in a Roth IRA since all Roth contributions are post tax as opposed to a pre tax retirement account.

Submitted by Michael Neuenschwander on Wed, 2021-06-30 19:39

Line 20 of the K-1 code V only shows $46  however there are several other codes:20z1 Section 199A PTP Income $4620AB Section 751 gain $3,52720AH2 Receipts for UBTI purposes $21320AH3 Deduction for UBTI purposes $16720AH6 negative whitdrawals capital adjustment $1,062 It really seems to be the disposition of the asset that triggered the higher UBTI?

Submitted by Alan - IRA critic on Wed, 2021-06-30 20:43

Not positive, but my guess would be that the PTP issued the same K 1 for the Roth as for taxable accounts, and it can be ignored for tax reporting since Code V is under 1000. Who prepared the 990 T? If your Roth custodian filed the 990 T return, you might see if you can get them to recheck this. Otherwise, check with a knowledgeable CPA.

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