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Alliance Resource Partners LP Message Board

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  • phughyoung phughyoung Jun 7, 2012 5:42 PM Flag

    Do you own ARLP or another MLP in an IRA?

    That is factually incorrect. UBTI is reported on the K-1. Any taxes that result from a sale are because you are required to recapture depreciation and certain other expenses taken by the company. That is reported as ordinary gain on your tax return. In addition, you may have capital gain to report. The Sales Schedule makes that quite clear. Turbo Tax handles all this very well.

    The issue of UBTI is simple. If the total UBTI reported from all the K-1s attached to your tax-deferred account is less than $1,000, you owe no tax. If you have more than $1,000, then your broker will file from 990T and pay the tax from your IRA for you. They may or may not charge you for this service. Paying the tax does not constitute a distribution from your retirement account.

    Please try to get your facts straight before posting (mis)information.

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    • You're arguing tax matters with jrad?
      He is a tax professional and knows more about MLP taxation than just about anyone on any of the MLP boards.

      I'm not an expert but I have read other opinions supporting what jrad said on this subject.

    • You're half right. The part that you are right about is where you say " you are required to recapture depreciation" on the sale. Depreciation recapture is ordinary income under sections 1250 (for buildings) and 1245 (non real estate depreciation recapture).

      But you are wrong about the tax consequences of this. Look at page 9 Line 4a of the instructions to IRS Form 990-T (talking about what's taxable for UBTI purposes) where it starts by saying that capital gains are generally not taxable to an exempt entity. Then it adds "however, ordinary gains on section 1245, 1250, 1252, 1254 and 1255 property are taxed."

      So the IRS position is that the ordinary gain as reported on the K-1 schedule is taxable for UBTI, which is the trap I pointed out. The MLPs don't have to report this gain on the face of the K-1 because it's not a partnership-level item. That is, if the MLP sold a pipeline, it would have to report the ordinary gain on Form 4797, which would carry to Lines 1 and 20V. But because the sale was done by the partner and not the partnership, the MLP only has to report the information on the back-up schedule.

      And I have no idea why the IRS doesn't bother to enforce this rule. I don't think they know how to track this, since IRAs don't file any normal kind of tax returns.

      • 1 Reply to jrad52
      • Thank you for that information. Some of it was new to me.

        I do have a question. How do we know that the gains reported from the sections you mentioned are not already included in Box 1 (20V)? It is, after all, ordinary gain, not capital gain. Is it possible that information is buried in there somewhere? And if it's not, why wouldn't the information (at least for buildings) just be reported in box 9(c) of the K-1? That box rarely has any information in it. The answer to that might help explain why the IRS doesn't or hasn't enforced this bit of code.

        Also, you posit that the seller of an asset might by a partner, but not the partnership. Do you mean the GP? If that's not what you mean, then who else could sell something for the partnership that the partnership would not have to report?

        Finally, do you think that the holder of the account is responsible for tracking this information even if it might be already included in Box 1 as I suggested, or even if it is not reported in any decipherable way by the MLP? I suggest your anwer might be yes. If so, that is another possible reason why the IRS doesn't or hasn't enforced it. It's not a reasonable proposition to do it.


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