I'm not sure what you mean by "support," because what I've provided is all of the support that exists. I'll try to clarify my answer.
1. IRC 408(a) provides in relevant part: "For purposes of this section, the term 'individual retirement account' means a trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries...." This defines IRA accounts as trusts for purposes of federal tax law.
2. IRC 408(e)(1) provides in relevant part: "Notwithstanding the preceding sentence, any such account is subject to the taxes imposed by section 511 (relating to imposition of tax on unrelated business income of charitable, etc. organizations)." Here, all traditional IRAs are subjected to the UBIT imposed by IRC 511.
3. IRC 511 applies the UBIT to 501(c) tax exempt organizations, and to 401(a) trusts (including 401(k) ERISA retirement plans).
4. IRC 512(b)(12) provides in relevant part: "Except for purposes of computing the net operating loss under section 172 and paragraph (6), there shall be allowed a specific deduction of $1,000." This Section provides all tax exempt organizations and trusts described under the aforementioned statutes with the $1,000 UBIT deduction.
5. IRC 408A(a) ("Roth IRAs") provides in relevant part: "Except as provided in this section, a Roth IRA shall be treated for purposes of this title in the same manner as an individual retirement plan." Since no subdivision of IRC 408A exempts a Roth IRA from the UBIT, therefore all Roth IRAs are equally subject to the UBIT as applies to traditional (IRC 408) IRAs, and further,Roth IRAs are permitted the $1,000 deduction.
Thus, all IRAs are subject to the UBIT, and granted the $1,000 UBIT deduction.
As you can see, it's a rather convoluted road through the federal tax code, but the law clearly subjects all IRA accounts to the UBIT and permits them the $1,000 deduction.
If you are looking for independent legal authority in support of my analysis, see IRS Private Letter Ruling (PLR )(###) ###-####(not available online except from proprietary subscription research services; a summary is available in the Journal of Accountancy, Vol. 183, No. 4 (April, 1997) (quoted below):
Partnership Investment Taxed to IRA
According to Internal Revenue Code section 408(e)(1), amounts an IRA earns are generally tax deferred until distributions are made. However, in certain instances, IRAs are not tax deferred.
In private letter ruling(###) ###-#### ***** individuals IRA purchased a limited partnership interest in a nonpublicly traded partnership. The partnership served independent tire retailers and financed the construction of a warehouse and leased its floor space to an unrelated party. The loan to finance the warehouse remained outstanding. As a limited partner, neither the individual nor the IRA custodian could participate in the management of the partnership.
IRAs with unrelated business taxable income (UBTI) are subject to tax under IRC section 511. UBTI is gross income less any directly related expenses an organization derives from an unrelated trade or business. Section 512(b)(3) excludes rents from the definition of UBTI, but section 514(a)(1) includes any gross income from debt-financed property. For an IRA subject to section 511, an unrelated trade or business is any trade or business regularly carried on by an IRA or partnership of which it is a member.
The IRS ruled that the business income passed through to the IRA as a limited partner in the retail tire business constituted UBTI. It further said the rental income from the warehouse was generated by debt-financed property and it, too, constituted UBTI. Thus, the IRA was liable for any income taxes due on the UBTI that exceeded the $1,000 statutory exemption of section 512 (b)(12).
Observation: If the IRA had invested in a publicly traded partnership instead of a nonpublicly traded partnership the results would have been the same. However, if the IRA had invested in a corporation or in a publicly-traded partnership that was taxed as a corporation, then there would be no UBTI. An IRA should avoid being taxed on active income at all odds.
Michael Lynch, CPA, Esq., associate professor of accounting at Bryant College, Smithfield, Rhode Island.
- See more at: http://www.journalofaccountancy.com/issues/1997/apr/taxbrfs.html#sthash.V8wO8pmW.dpuf
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