income from a mineral interest is subject to taxation when the organization (in this case a private foundation) is liable for the operating expenses associated with its interest. I'm looking at the materials from Mesabi Trust, North European Oil Royalty Trust, and BP Prudhoe Bay Royalty Trust. It appears that each of these produces a booklet or letter about the income and expenses on a per-unit basis. Am I jumping to a bad conclusion if I take that to mean the net income is UBTI?
The two entities you list are not tax-exempt non-profit corporations under IRC Sec. 501, that one needs to worry about UBTI. These entities operate as a grantor trust, a pass-thru entity. As such, they merely pass through to their unit holders all the trust income, trust expenses and depletion allowance that gets posted to the unit owners Schedule E. Typically, this is expressed as $X per unit owned.
Alan, you may have misread my question. I'm referring to the income FROM the trusts to the private foundation. The 990-PF and 990-T have been extended and will likely have to be extended again in February because the foundation also owns units in a few PTPs.
Same answer except that it is investment income to the foundation. UBT come about when an exempt organization "actively engages" in an activity not related to the exempt purpose of the organization.
An exempt organization's income from a mineral interest is not a royalty excluded from the computation of unrelated business taxable income by section 512(b)(2) of the Code where the organization is liable for the operating expenses associated with its interest.
If income from something is not a royalty excluded from the computation of UBTI, then it must be UBTI.
Here's what the rul An exempt organization's income from a mineral interest is
not a royalty excluded from the computation of unrelated business
taxable income by section 512(b)(2) of the Code where the
organization is liable for the operating expenses associated with
its interest.
Advice has been requested whether certain income received
from a mineral lease by an organization exempt from Federal
income tax under section 501(a) of the Internal Revenue Code of
1954, but subject to tax under section 511 on its unrelated
business taxable income, is excluded in computing unrelated
business taxable income by section 512(b)(2).
The organization owned a working interest in oil and gas
producing property. Under the terms of an agreement with an
independent operator, it was relieved of liability for the
development costs associated with the interest, but remained
liable for the expenses of operating the property. =========================================================== Buying units or shares in the royalty trust is not a working interest in oil and gas producing property such that the unit holders are liable for the operating expenses. You are not liable for the operating expenses. Therefore, there is no UBTI to the unit/shareholders.
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