After much research, I have discovered that Canadian Royalty Trusts should not be held in an IRA, since you miss out on the foreign tax credit, and wind up with the same after-tax dividend that you’d get outside the IRA.

My question is, how about AMERICAN royalty trusts, like Prudhoe Bay (stock symbol: BPT)? There is a complex combination of dividends not eligible for favorable tax treatment, coupled with some depletion and other deductions. What is the bottom line, for a high tax-bracket investor? Own inside the IRA or outside the IRA?

I have found many articles and blogs saying something to this effect: “If your IRA invests in things that produce Unrelated Business Income (UBI), and the net income from these investments exceeds $1,000, your IRA could be subject to the Unrelated Business Income Tax (UBIT).”
Source: http://www.fool.com/taxes/2000/taxes000908.htm

However, in my own research, I have looked at the 2006 Tax Information packet for Hugoton Royalty Trust, and in page 9, I found this: “In the opinion of the trust’s tax counsel, Winstead Sechrest & Minick P.C., the income of the trust will not be unrelated business taxable income so long as the trust units are not ‘debt-financed property’ within the meaning of section 514(b). In general, a trust unit would be debt-financed if the trust unitholder incurs debt to acquire a trust unit […]”.

So, I’m still trying to figure out … once an investor has decided that an american Oil & Gas Royalty Trust or MLP is a good investment, should it be held in an IRA or in a taxable account, given the choice?