UBTI in IRA

Submitted by Stephen Csenge on Fri, 2015-11-20 20:06

I will try to keep this brief. 75 year old client had Kinder Morgan Energy Partners stock in her IRA. It actually was in her deceased husbands account and rolled into hers upon his death in 2006. Kinder Morgan did a sale / merger in 2014 and the client received stock in the new entity and some cash in her IRA. Out of the blue, in October 2015, she received a copy of a 990-T produced and filed on her behalf (without her knowledge) by PricewaterhouseCoopers (PWC) and her account was automatically debited $7,836 for taxes and “late” penalties due. Several questions:

1) I am vaguely familiar with UBTI but was under the impression an IRA would have to have a large majority ownership in a Partnership entity to be at risk of incurring. The PWC document seems to indicate the limited partnership had earned more than $1,000 or UBTI thereby triggering the tax. Is the threshold that low?

2) I’m not sure how PWC figured the Capital Gain net income (4a on the 990-T). Would her cost basis be the original purchase price or the value at date of husbands death that rolled into her IRA?

3) The IRA custodian is saying that the distribution to the IRS (the $7,836) is NOT a taxable distribution from the IRA and will not be reported for 2015. Does that make sense?

4) If the IRA holder has now paid tax on the gain from the sale of the partnership, would not the proceeds of that transaction become After-Tax dollars in the IRA?

I think that’s it..



Submitted by Alan - IRA critic on Sun, 2015-11-22 00:57

  1. I don’t think the UBTI is more than a small % of a typical MLP, but obviously this varies by MLP, and a taxpayer should limit the number of units purchased so that the $1,000 taxable exemption is not breached.
  2. Not sure about this one, or that it applies to IRA held 990 T forms.
  3. This is correct. The UBIT is paid directly by the IRA, and cannot be paid by the individual. It is not reported as a distribution from the IRA.
  4. Payment of the 990 T tax due does not generate any basis (Form 8606) in an IRA, so essentially there is a double tax since the MLP income will also be taxable once IRA distributions are taken. Many IRA custodians will file the 990 T without charging for preparation, but if they did make a charge, that would also come from the IRA as a fee payment, not a reportable distribution. 


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