Taxability of mlp in 401(k)

[arauzodra]

I received a k1 for a master limited partnership held in my 401(k) account.  The UBTI is less than $1,000 so there is no UBTI tax.  However, are the other income line items (interest, dividends, royalties, capital gains) subject to reporting and taxes on my Form 1040 even though this is an investment in a retirement account?

[Critter]

Nothing in a retirement account is taxable on an income tax because it is housed in a tax sheltered entity ... only the UBTI is applicable.

[arauzodra]

Can you cite IRS codes/sections/law supporting that position?  I received an IRS notice adjusting my income tax return to include the above-referenced K-1 income items.  The K-1 properly reflected the ownership entity as an IRA/SEP account.  The IRS Response Form requires a statement (along with any supporting documentation) indicating the reason for disagreement with their proposed income tax changes.  I would like to reference the tax code/section and verbage regarding the exclusion of mlp income for retirement account holders.  I have been unable to locate this information online.  Thanks!

[dmertz]

If this K-1 showed items were taxable, they would be taxable to your IRA.  They would never be taxable to you personally since your IRA is the entity that owns the investment, not you.

Does box 1 of the K-1 indicate that the entity is a type of retirement plan?  Is the I2 box marked?  If the IRS does not recognize that the owner is a retirement plan, they would probably treat the income as yours rather than as income to the retirement plan account.  Note that the instructions for Schedule K-1 indicate that for an IRA the partner information should be that of the IRA custodian, not you.  I would think that the same would be true when the partner is an account in a qualified retirement plan like your 401(k), but I can find no specific IRS guidance saying this.  If the K-1 is in your name and SSN, I can imagine that the IRS might think that it is your income, particularly if box I1 does not indicate that the type of entity is a retirement plan (rather than an individual) or the I2 box is not marked.

[arauzodra]

Box I1 indicates "IRA/SEP" and Box I2 is checked off indicating partner is a retirement plan. Box F indicates that I am the partner and Box E (Partner's ID#) is a partial account # that I do not recognize; it is not a social security #.  My social security number does not appear anywhere on the K-1.  I assume that the Partner ID# is associated with my SSN.  In the absence of specific IRS guidance,  would you respond to the IRS that the retirement account is the owner and thus the related income is that of the IRA as well?

[arauzodra]

I just realized I incorrectly stated that this investment is in my 401(k) account.  It is in my IRA/SEP account.

[dmertz]

It seems clear that the IRS has made a mistake in thinking that this is taxable income to you.  Respond to the IRS accordingly.

[dmertz]

Regarding your earlier question regarding the tax code, it isn't about what *is* in the tax code but what *isn't* in the tax code.  There is nothing in the tax code that can cause an IRA to be treated as a pass-through entity that would result in income to the IRA being treated as income to you personally.

[Critter]

The partner ID is the IRA's number ... if you don't understand it then ask the IRA trustee to explain it to you.

[Critter · Accepted solution]

https://ttlc.intuit.com/questions/4128445-is-income-reflected-on-k-1-from-mlp-taxable-if-held-in-ret...