Limited Partnership within an IRA

Possibly. It looked like KMP issues a K-1. This means it might have unrelated business income. If a partnership held in your IRA generates UBI greater than $1000, then your IRA has to be pay tax. The tax will be paid by the IRA custodian (ie. the company where your IRA is like ETrade, Fidelity), and the tax rate is the trust tax rate which is almost a flat 35%

8575,00.html). Line 20V of K-1 states the unrelated businessincome.

Box L of the K-1 states the initial investment. Say it was 10k and line 20V is $300, then if you were to invest 40k then UBI would be $1200 and there would be tax. So somehow you should get a sample K-1 or ask the company about it. If line 20V is zero you have no worries.

FWIW, I have 400 shares of KMP purchased 6 years ago. Line 20V shows

-610. I have it in a taxable account, not an IRA so I don't have the problem you mentioned above. I only show the amount to give the OP an idea of what line 20V might be.

Just to add a comment:

The $1000 of UBTI is the total generated by all you IRA accounts.

So if you have three IRA accounts each with a PTP generating UBTI of $400, each custodian will have to calculate the UBTI for this account and of course charge you a lot for doing that. Probably well over $250 for each calculation.

Art, do you have a reference that supports this conclusion? This one has been driving me nuts for a long time, and I've reached the opposite conclusion, but based on only forms and instructions, which we all know aren't legally worth the paper they're printed on. I suppose there's also the remote possibility that my analysis could be faulty.

Phil Marti VITA/TCE Volunteer Clarksburg, MD

I haven't researched this issue, but based on what I do know, I would tend to agree with you. I don't see how an IRA could have UBTI, since its purpose is to invest in things that generate income. Any reasonable investment would satisfy that purpose.

Here is the needed citation that verifys the validity of Art's concern:

"IRC Section 408(e)(1) Exemption from tax.? Any individual retirement account is exempt from taxation under this subtitle unless such account has ceased to be an individual retirement account by reason of paragraph (2) or (3). 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)."

No cites, this comes from a recent seminar.

To answer wheher IRAs are subject to UBTI, Pub 598 is pretty clear they are.

IRAs holding not only MLPs but REITs and certain S Corps and LLC etc that generate UBTI maybe subject to filing a 990T and paying tax on the income.

The $1,000 exclusion from tax on UBTI comes from the 990-T where all UBTI eventually flows (I think to line 5) and then is reduced, but not below zero, by 1,000.

And the 990-T asks that all sources of UBTI be added to that line.

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Looking at this as a Form vs Substance issue, it makes little sense to think one can split an IRA earning 1500 of UBTI and thus clearly subject to UBTI into two separate IRA accounts, perhaps with different custodians, each earning 750 of UBTI and magically avoid UBTI, but other than trying to understand how to fill out a

990-T I have not found a cite to this specifically.

Anyone want to argue why form should rule over substance here?

Why would a for-profit company have unrelated business income. If they have ordinary income (line 1 of K-1) then it is not taxable in IRA, but certain types of income are unrelated business income and taxable in the IRA. I can see that a non-profit company should pay the tax because businesses may incorporate as non-profits and shield their business profits from taxes. But if you have a company, say one selling musical instruments, how can it generate unrelated business income? An example of what UBI really is?

A "for-profit" entity (an IRA in this case)) would have unrelated business income because Section 408(e)(1) of the Internal Revenue Code says so.

What is and is not UBI can be determined by reading Section 511 of the Internal Revenue Code.

Because it is the IRS that gets to apply substance over form and they only do that when it increases tax revenue.

Actually, Section 511 sends the reader onto Section 512:

"512(a)(1)General rule.? Except as otherwise provided in this subsection, the term ?unrelated business taxable income? means the gross income derived by any organization from any unrelated trade or business (as defined in section 513) regularly carried on by it, less the deductions allowed by this chapter which are directly connected with the carrying on of such trade or business, both computed with the modifications provided in subsection (b)."

And, Section 513 says, in part:

"513(a)General Rule.? The term ?unrelated trade or business? means, in the case of any organization subject to the tax imposed by section

511, any trade or business the conduct of which is not substantially related (aside from the need of such organization for income or funds or the use it makes of the profits derived) to the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501 (or, in the case of an organization described in section 511(a)(2)(B), to the exercise or performance of any purpose or function described in section 501(c)(3)), except that such term does not include any trade or business? 513(a)(1) in which substantially all the work in carrying on such trade or business is performed for the organization without compensation;"

I'm willing to bet that the IRS is going to take the position that operating a business is NOT "substantially related ... to the exercise or performance" of an IRA making investments to fund the owner's retirement.

When the business and the IRA owner are related parties, even more dire threats to the IRA exist.

In my example, having just one IRA own a REIT or MLP that generates $1500 in UBTI could produce more tax revenue than splitting the IRA into two separated accounts, each with 750 of UBTI, only if form trumped substance.

So following your "increase tax revenue" argument, theirs should argue substance over form, which is what usually happens anyway, right?

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Unrelated comment, Bill: I think you were searching for an accrued basis 1040 taxpayer? I think our esteemed moderator can help you in your search.

And this is where I draw my conclusion that it's not the aggregate of UBI for all accounts held for the individual beneficiary by all custodians, but rather the aggregate UBI in the trust that's filing the 990-T. I might argue that if one custodian held two accounts for the benefit of the same person that each account is a separate trust which looks at only its holdings, but I can also see a substance over form argument for one custodian looking at all accounts held for the benefit of one individual. What I cannot see supported in the 990-T instructions is having custodian A responsible for determining the UBI in any accounts held by other custodians for the benefit of the individual and then filing a 990-T covering all of them.

IIRC from the K-1 instructions, the partnership is told to report trusts under the trust's EIN, so the individual doesn't even get one. If the custodian is supposed to send the individual a copy and the individual is supposed to do the aggregation of all K-1's and inform the/which? custodian, you'd think the IRS would make a passing reference to these responsibilities someplace. I haven't been able to find anything with such direction, and that's the only way I can think of that the aggregation you mentioned could happen.

Phil Marti VITA/TCE Volunteer Clarksburg, MD

But if the business was organized as a C corporation and had income from these side businesses, then paid out dividends on 1099-DIV, then no unrelated business income?

I don't know but I expect if the IRA is the controlling owner of this hypothetical C corporation, then, upon audit, the IRS would collapse the transactions and UBI would exist.

My questions is why are there people so anxious to have their IRA invest in a business which, based on the typical outcome for startups, will probably fail so completely that the investors will get ZERO?