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UBTI


Guest Sieve
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We've probably beaten this issue to a pulp, but bear with me a minute (or 2) . . .

I think it is clear, even without 513(b), that a general partnership interest will most probably be considered an active trade or business for the general partner, and hence subject to UBTI--and I agree that this general partnership rule will also apply to IRAs, as a result of 408(e)(1) (but irrespective of 513(b)). However, under normal UBTI rules, a limited partnership interest can be viewed as a passive investment not rising to the level of an active trade or business, and thus is not always subject to UBTI. And that's where 513(b) comes into play.

Given that, I believe that 513(b) is aimed at abrogating the normal UBTI rule re: limited partnership interests. It treats a limited partnership interest the same as a general partnership interest--as an active trade or business--but only for those entities mentioned in 513(b) (such as a qualified plan). An IRA is not one of the entities listed. The IRS jumping to the conclusion that an IRA's limited partnership interest is subject to the special statutory rule of 513(b) without it being mentioned in the statute--even if the nature of the tax exemption for an IRA is comparable to or identical to that of a qualified plan--seems to be a leap of faith beyond the pale of even IRS powers. Now, a limited partner certainly could be carrying on an active trade or business based on facts & circumstances, but 513(b) doesn't look to facts & circumstances for, among others, a qualified plan--so, in a limited partnership situation, an IRA should be subject to the same factual determination that all those not directly covered by 513(b) (such as a 501©(3) tax-exempt) are subject to

So, I agree with jpod that the PLR is wrong as it applies to the association of 513(b) and limited partnership interests to IRAs.

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Sieve,

Without application of section 513(b), you'd be back in the hopper of section 513(a). That leads me to ask what types of active trades or businesses carried on by a limited partnership would you envision would be related to the tax-free purpose of the IRA (no UBTI) and which would be unrelated (UBTI)?

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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I'm looking at 512(a), which says that UBTI "means gross income derived by any orgnization [subject to IRC Section 511] from any unrelated trade or business . . . regularly carried on by it." 513(b) removes the requirement that the regular business must be carried on by "it" for a qualified plan, and considers there to be UBTI if the business is regularly carried on by a partnership of which the QP is a member (i.e., whether as a general or as a limited partner).

So, for entities not mentioned in 513(b), it would seem to me that a limited partnership interest might not result in UBTI because the tax-exempt entity (or the IRA)--as opposed to the partnership--might not, in fact, be regularly carrying on a trade or business when holding only a limited partnership interest.

Perhaps ownership of a limited partnership interest is always considered to be regularly carrying on a trade or business, in which case my argument falls apart (although I then would wonder what might be the purpsose of 513(b)). Or, perhaps IRAs and other trusts are included in 513(b)(1), in which case, again, my argument is invalid. I wonder about the 513(b)(1) point, too, because I came across a case which indicated that any trust is covered under 513(b)!

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What's the cite for the case you found?

I think the purpose of 513(b)(2) is to resolve the dilemma of whether all active business are related or all are unrelated to the purpose of retirement savings. I.e., the type of trade or business.

I think a purpose of 512(a) is as you quote, "carried on by" the otherwise tax-free entity. I.e., the proximity of the tax-free entity to the active business.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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http://ftp.resource.org/courts.gov/c/F2/72...20.82-1619.html

See the paragraph numbered 17.

The case also makes the jump that IRC Section 512© causes all business carried on by a partnership with a tax-exempt member to be subject to UBTI , but I don't think that's what 512© says at all, since an unrelated trade or business cannot be such as to the tax exempt (as required by 512©(1)) unless the business of the partnership "is an unrelated trade or business with respect to [the tax exempt]" (i.e., carried on by the tax-exempt, since that's part of the definition of "unrelated trade or business"). Also, I think 512© really just explains how a partnership fits into the rule of 512(a)(1), i.e. allocating income & deductions among partners.

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Larry,

It's one thing to disagree with an IRS PLR, but a court case...

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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  • 2 weeks later...
Guest scotlyn911

Assuming this is taxed under 511, is it taxed under 511(a) or 511(b). My thought is that the corporate tax rate would apply. See the "other than" language in 511(a)(2) and section 2 of Pub. 598 saying 511(a) applies unless listed in 511(b)(2).

Sorry this isn't 100% germane.

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Bonus points to BG5150. I thought the intended irony was going to go unmentioned.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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