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socrateaser
socrateaser, Lawyer
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I own MLP's in 3 retirement accounts (1) ROTH (2)

Customer Question

I own MLP's in 3 retirement accounts (1) ROTH (2) Contributory IRA (3) IRA Rollover.. As there are 3 DIFFERENT account titles does EACH account qualify for the $1,000 UBIT tax exclusion? ..I am writing a paper so will need some references for your conclusion
Submitted: 1 year ago.
Category: Tax
Expert:  socrateaser replied 1 year ago.

Hello,

1. IRC 408 ("Individual Retirement Accounts"), subd. (a) declares a traditional IRA to be a "trust." This section applies to the "Traditional" IRA, and to any other IRA by reference.

2. IRC 408(e)(1) imposes the UBIT on an IRA trust. This section also refers to IRC 511 for the provisions related to the UBIT, and the $1,000 exemption.

3. IRC 512(b)(12) provides for the $1,000 exemption.

4. IRC 408A ("Roth IRAs") provides that except as provided for in this section, that the provisions of IRC 408 apply -- thereby imposing the same UBIT and exemption on a Roth IRA.

In short, all IRA accounts are subject to, and qualify for, the UBIT and the $1,000 exemption.

Note: The term, "contributory IRA is found nowhere in any federal statute, regulation or case law. It is commonly used to distinguish an IRA account to which the owner can contribute -- but, even this distinction is nonstandard. Consequently, the use of the "contributory" term should be avoided, in preference for "traditional," "Roth," "Rollover" (which may be either traditional or Roth), and SIMPLE.

I hope I've answered your question. Please let me know if you require further clarification. And, please provide a positive feedback rating for my answer -- otherwise, I receive nothing for my efforts in your behalf.

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Customer: replied 1 year ago.
I am not clear...DOES each (3) account qualify for its own $1,000 exemption ?...Your answer does not address this ...I know that an IRA is treated as a Trust ..but am I allowed 3 $1,000 exclusions as they are titled in 3 different accounts...If the latter is true I need some support..Thanks, ***** *****
Expert:  socrateaser replied 1 year ago.

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

I hope I've answered your question. Please let me know if you require further clarification. And, please provide a positive feedback rating for my answer -- otherwise, I receive nothing for my efforts in your behalf.

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Expert:  socrateaser replied 1 year ago.

Hello again.

I've been reviewing this Q&A session, trying to understand what I may have missed. Suddenly, I realize that you were asking whether or not you could expect three separate $1,000 deductions for your various MLPs ("EACH", in your words). I totally missed the obvious question, and I apologize for misunderstanding your question. Ironically, I wasted a great deal of personal time trying to identify explain the hierarchy of the law to you, which really had little to do with your question. So, I've been appropriately punished.

That said, the only legal reference I can find concerning this issue is found in Treas. Reg. 1.512(a)-1(a): "In the case of an organization which derives gross income from the regular conduct of two or more unrelated business activities, unrelated business taxable income is the aggregate of gross income from all such unrelated business activities less the aggregate of the deductions allowed with respect to all such unrelated business activities."

In other words, an organization which has more than one unrelated business activity would have to aggregate the income, and thus be entitled to only one $1,000 deduction. Unfortunately, the definition of an organization, found in Treas. Reg. 1.511-2, completely omits any discussion of IRC 408 or 408A plans (discussing only 501(c) and 401(a) organizations/plans/trusts). Consequently, it appears that there is no statute, regulation or case law which supports the position that your individual MLPs would entitle you to multiple $1,000 deductions.

Your argument would probably be weaker if the MLPs are all contained within the same IRA account -- stronger, if in separate IRA accounts, because you could argue that the trusts and contained organizations are distinct.

That's about as far as I can go with this issue. I wish there were more. Again, I apologize for being so dense, and I thank you for your not subjecting me to a negative feedback rating.

Hope this helps.

Customer: replied 1 year ago.
Socrates tried very hard and researched a very difficult projectI'm extremely pleased with his effortsAnd would recommend him to all
Expert:  socrateaser replied 1 year ago.

Due to fee-splitting restrictions placed on California lawyers under Rules Prof. Conduct, rule 1-320(A), I can't use the Justanswer phone call option. I can send you an additional services offer, which you can accept or decline at your convenience and discretion (however, customary legal services fees will apply).

Thanks again for using Justanswer!

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