It was a profit and sharing plan, I always filed on time, I just got audited and they found that I had allowed an employee to make a $500 contribution in excess of what was allowed even thought they were fully vested (I was earning annual returns for 5 years of 30%) for a one year period but I had never corrected it over the next 2 years so they said it was repetitive since it had not been corrected until they brought it to my attention. The law says that if it only happens once and you correct it that there is no penalty and everything goes on but the argument was that for two years it was nt known or corrected even though she only over contributed once so they said it had 3 times. The choices were
\1) pay the 60k they said I owed
2) fight in court and pay an attorney 10k plus ( you can not represent yourself unless it is an individual return) or
3) reach a settlement for 9 cents on the dollar which is what I did.
It matters little if you are right, it is going to cost you. they lose 85% of their tax court decisions but it still costs you unless you can prove they have repeatedly harassed you which is how I got them to quit auditing me.
I get audited a lot because I have a high income, and use a lot of tax shelters in highly gray areas and often ask for bigger refunds than I claim I make. I have won all audits except for the one above and probably would have won it had I wanted to spend more money. I am very aggressive on my individual returns but not my corporate or retirement anymore. I went 10 years of making over 250k and not paying taxes, that gets you audited, but it was all legal. I spend lots of time reading tax code books and seeing how to avoid taxes, I am not an expert but I do know that with MLPs and being so unknown by the IRS you if chosen will wish you had never played with the IRS on this issue even if you are correct. According to the article in these posts even the author admits few understand the tax implications of MLPs including the IRS but that doesnt stop them from making decisions detrimental or false to get you to pay them more or settle so as to avoid costing more. I have currently set up a family trust to avoid all estate taxes and have given most of my assets already away to my family through the trust as estate taxes can be a lot worse than income taxes. They can go to 60% in my bracket.
The first time I was audited was what I call an "Al Capone" audit. They spent 5 full days and I had to prove where every penny came from that hit all of my accounts. At the end of 5 full days I owed $22 because of a savings acct my wife had I didnt know about. When asked what caused the audit the agent said he knew the problem day one. When asked why he spent 4 more he said because he didnt have anything else to do and it was scheduled. I told him he wasnt worth the 40cents an hour he earned. Maybe that is what caused my audits. They have highly educated me and I have been paid handsomely for their education.
The only problem with holding an MLP in an IRA is the UBTI. If it exceeds $ 1000, the tax on the UBTI (at the relevant corporate rate) must be paid by the firm, e.g., Fidelity, holding the account, with funds from the account. The amount of UBTI generated varies from MLP to MLP and from person to person. The firm may charge about $ 200. for this service. Also, by holding the MLPs in several distinct IRAs, a large cumulative UBTI can be avoided, in the opinion of some knowledgeable tax folks (of course, check this with your IRA folks).
The amount of UBTI generated can be substantial, if the investment is substantial. E&P MLPs generate the largest amount, but also provide higher returns.
If one is concerned, there are mutual funds of MLPs that generate no K1s. One interesting play is MLPL, an ETN that tracks the Alerian infrastructure index, at a 2x leverage. It pays 10+ % at its current price.
Disclosure: I hold MLPs in and out of my IRAs.
Thanks to everyone for all the great replies. I guess I would be better off putting this in my taxable account and dealing with the K1. I had read so many conflicting reports about putting it in an IRA that I wanted to get others opinions. Thanks again!
the vast majority of my mlp holdings are in ira's. i refuse to pay taxes to convert my 401k's, now ira's to taxable accounts and lose the time value of money on the tax paid. the return i get on the mlp's is worth the cost of ubti. rlbeard i do not fully understand your point on losing depreciation if mlp is in an ira. when you partially or fully sell a mlp in and ira there is no tax. please share your concerns more fully with me
I have been told by many previous posters that over 1000 shares will create serious problems for an IRA and my broker (a VP at a large firm confirms this) I am not willing to jeopardize the IRA tax status to do so. You may not get audited buy I have been audit 18 times and I will not lose tax deductibility of my IRA. I at the first of this year rolled all of my IRAs to ROTHS. I quit doing pension, profit sharing and IRAs 10 yrs ago because I could earn better returns in real estate and stocks long term especially with tax considerations than retirement accounts. With a retirement acct you lose the only true tax gift and that is long term gains, everything else is a deferment to a time when taxes may be higher with no long term gains benefit. There are a lot of articles in SeekingAlpha about the mlps in iras unfortunately I can not give you the http for them. All I am saying is that the risk of losing your tax deductibility of your IRA and paying the tax\es and PENaLTIES would deter me from this without a guarantee by my acct in writing with a money gurantee. A $500 mistake in my profit sharing plan cost me $60000 in IRS penalties. Get the drift.
I think many on this message board would be interested in understanding your thinking on putting your mlp holdings into your IRA. (I assume you are talking about a traditional IRA.) Here’s my problem (forget the minor items associated with mpls like ubti): Case #1. Let’s say you buy a mlp at $20. It pays $2.00 distribution a year. The stock drops the amount of its distribution each year. Thus at the end of the first year the stock has paid $2.00 and now sells for $18. At the end of the second year the stock pays another $2.00 and now sells for $16. At the end of 10 years the stock will have paid a total of $20 in distribution and is worthless. Now consider two investors in the stock, one who holds the stock in his IRA and one who owned the stock outright. The one who owns the stock in the IRA pays taxes at his top short-term rate on $20 a share when he withdraws the money from his IRA. The other investor essentially has paid no tax over the years in getting his original investment back.
Case #2: mlp bought at $20, pays $2.00 per year distribution but in this case the stock maintains the price of $20 per share for the full ten years. Both sell at the end of 10 years. Both get back their original investment in distribution of $20. The one who owns the stock outright pays taxes at the capital gains rate on $20 per share. The person who has the stock in his IRA pays taxes at his top short-term rate not only on the $20 distribution over the years but also on the $20 stock sell price when he withdraws the money from his IRA.
Please enlighten us on how this makes good financial sense?
yes, as long as you are not holding several million dollars worth. Go back and look at the historical "UBTI" - unrelated business taxable income for bbep per unit. Good luck finding some... The total UBTI over $1000 is taxable in your IRA.
I have been given different advice, and the answer is no, never, no way. You have depreciation you cant use and at some point it has to be recaptured even if you didnt use it. It also causes other problems. But then I feel unless you are in a Roth IRA your money shouldnt be in an Ira as it loses the only true tax shelter which is long term gains, which maybe Obama wants to get rid of.