For a MLP stock in an IRA, are "return of capital" payouts to be reported each year as received inside the IRA account? To be reported on IRA owner's personal Form 1040?

[Chuckwi]

I have a stock investment for a master limited partnership (MLP) held inside my qualified retirement plan (traditional IRA, Keogh profiting sharing, SE 401k account) and am now getting a Form 990-T from the brokerage firm administering my retirement account.Although no distribution from such IRA are being taken, must such "inside" income be reported for taxation each year?

Same Q for any capital gains or losses from sales of a MLP-type stock. How are capital gains or losses from sales of a MLP-type stock within an IRA account supposed to be reported as current income, or ignored until actual distributions are taken from such IRA account?

[dmertz · Accepted solution]

Your brokerage firm prepared Form 990-T and your IRA paid tax on Unrelated Business Taxable Income derived from the MLP.  Such income is taxable to the tax-exempt entity that incurs the income, in this case, your IRA.  This does not get reported on your personal tax return.  Form 990-T is it's own tax return for the entity that is your IRA.  Your IRA statement should show a reduction in value by the amount that the IRA had to pay in taxes.

As with any other investment, gains and losses from trading of the MLP within your IRA are not current gains or losses reportable on your personal tax return.  You recognize ordinary income when you receive a distribution from your IRA.

[Chuckwi]

Follow-up Q: If such 990T rules require taxation within an IRA at a very high % rate, don't such rules undermine the original stated purpose of tax deferring all gains incurred within an IRA until actual distributions? Second, does such definition of UBTI calculate capital gains or losses differently than under a person's income for reporting on From 1040? I see one net capital gain on my monthly IRA statement and another much higher number for a capital gain being stated on Form 990T.

[TaxGuyBill]

Investing in the MLP is the problem.  Pretty much any other investment would not have the problem to be taxed like that.  The gains and losses of the MLP are also quite complicated, and the gain/loss is based on the cumulative results since you bought it.

[dmertz]

"don't such rules undermine the original stated purpose of tax deferring all gains incurred within an IRA until actual distributions?"

Yes, it does, but that's the choice you make when you invest in an investment that generates UBTI which is taxable income to your IRA.  Review 26 U.S. Code § 511 - Imposition of tax on unrelated business income of charitable, etc., organizations and 26 U.S. Code § 512 - Unrelated business taxable income:
<a rel="nofollow" target="_blank" href="https://www.law.cornell.edu/uscode/text/26/511">https://www.law.cornell.edu/uscode/text/26/511</a>
<a rel="nofollow" target="_blank" href="https://www.law.cornell.edu/uscode/text/26/512">https://www.law.cornell.edu/uscode/text/26/512</a>

I also suggest reviewing the instructions for Form 990-T to see how various types of UBTI are taxed.
<a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/i990t.pdf">https://www.irs.gov/pub/irs-pdf/i990t.pdf</a>

[Chuckwi]

This concept and these corresponding rules seem to mean that an alternative method of muli-year cumulative addition of "inside" capital gains/losses are translated into re-portable income upon sale of such LP stock for a calculated amount of "gain" which was never realized or paid into the IRA (i.e., no constructive receipt). The gain calculated in the normal manner of purchase price minus sale amount is tossed. How can any amount residing in the IRA be taxable when there is no constructive receipt of such alternative amount of gain?           Secondly, the actual funds netted from the sale are still residing in the IRA and would be taxable upon distribution of such funds from the IRA to the owner (i.e., double taxation). Isn't there some over-riding dictate that states double taxation is prohibited?

[dmertz]

Under the law, tax-exempt entities such as your IRA are not tax exempt with respect to unrelated-business taxable income.  In the first point that you are trying to make, you are essentially trying to assert that the unrelated-business taxable income is not unrelated-business taxable income.  With regard to your second point, yes, the UBTI is effectively being double taxed, but not twice to the same entity.  Your IRA is subject to tax once and you are subject to tax once.

[Chuckwi]

Thanks dmertz for your detailed answers to date.
1) I remain disturbed that my assets within an IRA can incur tax liability upon selling MLP stock for amounts I never received or materialized in the IRA account, and is much different from the other normal calculation for capital gain (being net sale price minus net purchase price). For example, the IRA gain calculated for one MLP stock sold is $47,102 yet the monthly custodian statement shows the "normal" calculation of $19,843 (which is the amount actually received in the IRA account.  
2) The accounting firm used by the IRA custodian commingles the return of capital for 2016 and 2015 together with such separately calculated capital gain -- treating such commingled amount as being short-term (applied on Form 4797, Part II as "property held less 1 year or less". Such custodian documents sent to me recently state in a table titled “K-1 Form 1065 – PTP Summary”) two sets of amounts being applied as being subject to taxation:
? the UBTI amounts found on line 20V of the K-1 (for 2016 and for 2015), plus
? a second row in the summary table of amounts titled “1065 K-1”.
Is such commingling or end treatment as a short-term investment correct?
3) The custodian-supplied Form 4797 “Sale of Business Property” bundles two types of income as being capital gains and then transferring such bundled amounts to Form 990-T “Exempt Organization Business Income Tax Return” Part I “Unrelated Trade or Business Income” line 4b. Part of such bundled amounts originate from PTP Summary table row 1, classed by the custodian as “1065 K-1”. There is another entry for such same amounts by the custodian to Form 4797 Part I line 5 “Income (loss) from partnerships and S corporations”.  Which entry is incorrect, because having both such entries on Form 990-T become off-setting and appear to leave the sub-total over-stating includable income. It would appear the line 4 amount should not include the amounts from PTP Summary table row 1, classed by the custodian as “1065 K-1”.

[dmertz]

I suggest reviewing the instructions for Form 990-T and IRS Pub 598.  I know nothing more than what is stated there.
<a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/i990t.pdf">https://www.irs.gov/pub/irs-pdf/i990t.pdf</a>
<a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/p598.pdf">https://www.irs.gov/pub/irs-pdf/p598.pdf</a>

However, it seems to me that the amount reported with code V in box 20 would be the sum of the separate types of UBTI and would be the total amount taxable to the IRA.

[fanfare]

Don't hold tricky assets in your IRA. You won't have to worry about it.

[dmertz]

Also, I would expect that any income to the MLP retained by the MLP would be reflected in the share value of the MLP.  I would expect that that income that was not retained by the MLP would be distributed to your IRA as cash or as re-investments in the MLP, similar to what happens for capital gains and dividend distributions from a mutual fund held by an IRA (although mutual funds do not generate UBTI).

[Chuckwi]

Do any or all of the taxation directives regarding IRS Form 990-T for unrelated business income  within a traditional IRA upon a sale of a MLP-type of stock apply for Roth IRAs with sales of an MLP-type of stock?

[Critter]

form 990-T instructions ....

Trustees for the following trusts that  have $1,000 or more of unrelated trade or
business gross income:

1. Individual retirement accounts
(IRAs), including traditional IRAs
described under section 408(a),
2. Simplified employee pension IRAs
(SEP IRAs) described under section
408(k),
3. Savings incentive match plan for
employees of small employers IRAs
(SIMPLE IRAs) described under
section 408(p),

4. Roth IRAs described under section 408A, ********

5. Coverdell education savings
accounts (ESAs) described under
section 530(b),
6. Archer medical savings accounts
(Archer MSAs) described under
section 220(d) and
7. Health savings accounts (HSAs)
described under section 223(d).

<a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/i990t.pdf">https://www.irs.gov/pub/irs-pdf/i990t.pdf</a>

[dmertz]

All statutes that apply to a traditional IRA also apply to a Roth IRA except for explicit differences spelled out in the tax code.  Since a Roth IRA *is* an IRA, it is subject to the same taxation of UBTI.

[Critter]

If you don't understand what is happening then ask  the plan administrator to explain it ... this form has nothing to do with distributions or contributions in an IRA but everything about what you are invested in and the types of income they produce.

http://irataxservices.com/form-990t/