Over on the MMP board someone mentioned that ETP does not allow IRA accounts to hold units due to UBTI issues. Is this correct, do folks here own ETP in non-taxable accounts? Does it have anything to do with how many units one owns? Thanks!
You're missing the point. Any gain on sale above the price paid per unit is a capital gain long or short depending on how long held. In other words: unit sale at above price paid - price paid = capital gain. The difference between the original capital invested and the lower adjusted capital amount (represented by tax deferred distributions) is what gets taxed at ordinary income rates once the units are sold. The K-1 shows the original and adjusted capital amounts. So, if you sell units for more than you paid you have both a capital gain and ordinary income event. Don't take my word for it, though. See an accountant.
A couple of comments to answer things in this strand.
First, it is indeed BWP that bans holding of units by a tax exemt entity. The tax code appears to ban holding by a ROTH in that tax is never paid, but allow regular IRA holding, but this one will get sorted out in the courts (Over the next 20 years?)
Second, factoids posted a great link to the UBTI question in a prior message. Suggest you read the strand. Most MLPs generate no or negative UBTI while a few seem to generate a bunch. The trustee of the IRA is responsible for filing a tax return for the IRA to pay the tax if UBTI is over $1000 for a year. Some of them do this well, others not so well.
Third, UBTI is a factor of too many things to calculate - ie my UBTI is different on OKS units I hold in my ROTH vs. in my regular account! It IS a a per unit calculation so if a company generate UBTI, the more you own the more UBTI is generated.
Last, a personal comment. Why would you put a tax deferred investment in a regular IRA when you are deferring taxes? Makes no sense as an IRA can provide better tax saving on other classes of investments.
UBTI notwithstanding, there isn't really much difference between tax-deferred distibutions in an IRA or outside one. Unless MLP units are held until death the deferred income becomes taxable as soon as the units are sold anyway. Held in an IRA, the distributions become taxable when they're withdrawn in retirement. Under current tax law, it seems the main advantage of holding the units outside an IRA is the 15% maximum tax rate on l.t. capital gains vs the ordinary income tax rate applied to gains withdrawn from an IRA. If the non-IRA units are held until death, however, the step-up in basis cancels any taxable event on deferred income. At least that's how I understand it. I'd guess Arb is planning on his units becoming part of his estate to avoid tax on all deferred income and capital gains.
>Last, a personal comment. Why would you put a tax deferred >investment in a regular IRA when you are deferring taxes? >Makes no sense as an IRA can provide better tax saving on >other classes of investments.
I don't understand this part. If ETP pays dividends of $3.30/unit in 2008, aren't these taxable at 15% federal dividend rate?
First, factoids - thanks for reposting the great links.
Second, it is BWP that forbids ownership by any tax exempt entity such as an IRA. The tax code is a bit unclear on this issue with recent tax court opinions saying that holding MLPs in a ROTH would not be legal since tax is never paid as required by the MLP structure, but a regular IRA might be OK since the tax is eventually paid. Our court system will decide this in the future (like 2020 probably).
Third, the UBTI issue has nothing to do with holding companies not allowing people to hold MLPs in an IRA. The UBTI issue is that if you have more than $1000 in UBTI the IRA trustee must file and pay taxes for the IRA. Some brokers handle this well and for free, while others plead ignorance and/or charge for filing.
Fourth, on UBTI- factoids has done a huge study on how big the UBTI problem is and how to predict UBTI. He has a link to a recap he posted in a previous message in this strand. I think the gist of factoids findings is if a MLP has earnings greater than distributions, then UBTI might be a problem. My personal opinion is putting a tax deferred investment in a tax deferred account is not very smart. Using MLPs in a ROTH is very smart. If the courth rules they cannot be in a ROTH then they will simply be sold, probably by the company unless the holder moves quickly.