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Lane
Lane, CFP, MBA, CRPS
Category: Tax
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Experience:  Providing Financial & Tax advice since 1986
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I owned a stock call Ferrell Gas Partners (FGP) in 2009 and

Customer Question

I owned a stock call Ferrell Gas Partners (FGP) in 2009 and 2010, 20,000 shares, then sold them in early 2011. The stock was held in an IRA in TDAmeritrade. We were not informed by the IRA Dept of TD Ameritrade that the company (FGP) distributes K-1 distributions each quarter. The company was paying $2.00 per share dividend, which I considered good, since the stock price was only in the $18-$24 range.

What I was not informed about by Ameritrade was that I was to pay taxes on these dividends each year. Now TDAmeritrade is coming back on me to say that I owe taxes on those two years of distributions. They said my CPA should have known that taxes were due, even though he had no idea what I had in my SEP-IRA. Ameritrade knew what I had in the account but they did not inform me that my CPA (who did not know what was in my account) should have sent them a special form, so they (Ameritrade) could pay the taxes on these distributions from the SEP-IRA. Since these funds were held in a SEP-IRA I did not feel taxes would be due until we took distributions, but Ameritrade is now telling me we should have sent this special form to them, so the taxes could be paid from the SEP-IRA account. My problem is that, if the taxes were paid out of the SEP-IRA BEFORE we took any distributions from the IRA, then I would have to pay 35% taxes AGAIN when I took distribution from the IRA. In my estimation this is double taxation. This would make my tax on these distributions double what I would have paid normally. I did not receive any K1 forms from Ferrell Gas to know that any taxes were due before we took out any distributions.
I feel Ameritrade is at fault since their IRA Dept did not send me any warning of any double taxation that might be due. What are my options ?
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

It sounds like you have UBIT.

Generally, everything in an IRA is never taxed until distributed, but with certain investments that have Unrelated Business Income (therefor Unrelated Business Income Tax, UBIT) the taxes have to be paid by the IRA ...

In other words the IRA gets a tax bill.

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).





The Motley Fool has an excellent article on this:

http://www.fool.com/taxes/2000/taxes000908.htm

"The UBIT was first introduced into law in 1950. Prior to that, tax-exempt organizations had a competitive advantage over for-profit corporations. As long as the level of business activity conducted by a tax-exempt organization was not so extensive that it caused the organization to lose its tax exemption, a tax-exempt organization could undertake business activities and retain the profits without any income tax burden. As a result of highly publicized incidents in which tax-exempt organizations undertook business activities in direct competition with for-profit businesses, Congress enacted a general tax on the "unrelated business income" of tax-exempt organizations.

What do tax-exempt organizations have to do with your IRA account? Nothing... other than the fact that the same rules for UBIT that apply to tax-exempt organizations also apply to your traditional IRA account. They also apply to your Education IRA, and your SEP. The UBIT also appears to apply to your SIMPLE account and your Roth IRA account."



Additionally, The taxes that your IRA account is required to pay will reduce the balance in your IRA account, which will reduce your tax-deferred or tax-free income, that's what. And, it's a hassle. And, in addition to the tax, the IRA will likely have to pay tax preparation fees, compounding the problem.


Sorry to be the bearer of bad news, but it sounds like you now have a very good understanding of the effective double taxation that CAN happen.

What's worse, whoever had you do this inside an IRA gave you very bad advice.


Here's an overview of the legalities of it:

http://www.irs.gov/pub/irs-tege/eotopicl00.pdf


You may want to show all of this to your CPA. I find it hard to believe that he never even saw a statement.


Lane







Expert:  Lane replied 1 year ago.

Hi, just checking back in to see if there's anything I can do to clarify.

Let me know.

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