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Transocean Ltd. Message Board

  • vietnamvet5 vietnamvet5 Mar 7, 2013 5:40 PM Flag

    Rig MLP and tax consequences

    Seems like the accounting tor MLP"s is a nightmare for taxable accounts and taxable IRAs , but what about Roths??? Seems like there is no issue if held in a Roth. Any tax experts out there??


    Sentiment: Hold

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    • So you have to spend 59 bucks on a deluxe tax software package every year. Big deal.

    • One thing to remember if RIG initiates an MLP, the MLP will be some kind of spinoff from RIG and you will only be able to acquire the MLP if you voluntarily purchase it. No one will force the MLP on you.

    • "Seems like there is no issue if held in a Roth."

      Danger, Danger, absolutely incorrect. I recommend that you Google 'Master Limited Partnership for a Roth IRA' and you'll find unanimous opinion that there are great pitfalls as to owning an MLP within a Roth account. Below are excerpts from one such opinion:

      However, a retirement plan might pay income taxes on income that is considered unrelated business income. The unrelated business taxable income (UBTI) rules were added to the tax code to prevent tax-exempt entities from unfairly competing against tax-paying businesses. Though originally focused on charitable organizations that own businesses, the UBTI rules also apply to IRAs and other qualified retirement plans. If an IRA earns UBTI exceeding $1,000 per year, it must pay income taxes on that income. The IRA has to file Form 990-T when gross unrelated business income is more than $1,000. It also must pay estimated income taxes during the year if the adjusted UBTI exceeds $500.

      Though Roth IRAs and distributions from them generally are tax free, all tax rules apply to Roths unless they are exempted specifically. Roth IRAs are not exempt from the UBTI rules, so a Roth IRA can be taxed when it earns UBTI.

      The IRA owner essentially will be taxed twice on UBTI. The IRA is a separate taxpayer and will be taxed on the income as it is earned. Subsequently, the owner or beneficiary will be taxed on distributions of that income. The IRA owner receives no deduction or credit for UBTI paid by the IRA, and the tax paid by the IRA does not increase the tax basis of the IRA. For example, an IRA could receive a large amount of distributions from a master limited partnership and pay taxes on part of them. Eventually this money will be distributed to the account owner. The account owner will include the full amount in gross income and pay income taxes on it at his rate.

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