J Simmons

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)?

Thanks, vebaguru. That quote from the Self Directed IRA Website is an exact quote of the first two of three paragraphs on Wikipedia. The third paragraph reads:

I appreciate that you do not think that I have, but I'll leave that for each reader to determine for him or her self whether I (with mbozek's able assistance) have explained why and how the IRS determined in PLR 9703026 that 513(b) applies to IRAs.

I do not think IRS should 'write' into tax law what Congress did not. Section 513 defines unrelated trade or business that generate UBTI. For any given 501c3 charity, there are trace or business activities that are related to its tax-free purposes and those that are not. Suppose that is the prevention of cruelty to animals in a given case. Operating a hamburger joint is obviously unrelated, and would cause UBTI. Operating a humane kennel on the other hand is related, and profits from it should not be subject to UBTI. The tax-free purpose of a 401a QRP is retirement savings. Arguably, any business could be related to that purpose. After all, business profits like investment returns add to the accumulation of retirement savings. Ergo, all active businesses would be 'related' to the tax-free purpose of a 401a QRP. It is also arguable that no active business is related to it, but rather there should be UBTI from anything but passive investments. Section 513b2 makes clear the public policy chosen by Congression that any business activity that is regularly carried on is unrelated to the tax-free purpose of a 401a QRP for retirement savings. It is not, in my opinion, and I do not want to give the impression that jpod has apparently taken from my prior posts in this thread, that the role for the IRS is to write into statutes what Congress did not. jpod is correct that Congress did not legislate that all active businesses are unrelated to the tax-free purpose of IRAs. But it is equally true that Congress did not legislate that all active businesses are related to the tax-free purpose of IRAs. Congress has has not addressed that. But Congress did legislate that IRAs should be subject to UBTI (section 408(e)(1)). A proper role then for the IRS is to give interpretive guidance on how UBTI rules should apply to IRAs. Since the tax-free purpose of an IRA is the same as that of a 401a QRP, the IRS weighed in that Congress' express policy that any active business causes UBTI where the tax-free purpose is retirement savings is the closest, most analogous to IRAs.

Sounds good to me. Will Lance Wallach get an exception?

If a tree falls in the woods and nobody is there to hear it, does it make a noise? The employees had a choice (which is of significance in tax law), but as you point out, no fund--so what are you amending other than letting the employees know that they no longer have the choice?

As a partner (UBTI). Generally speaking, an LLC that chooses to be taxed as a partnership is treated as such under the Code. An LLC that chooses to be taxed as a corporation bears most of the indicia of a corporation, except most notably internal governance. Also, given that an S corporation is taxed similarly to a partnership--current, pass-thru--investment in the S corporation can generate UBTI. So I do think the taxing status chosen by the LLC is determinative.

I have understood the change in status regs to permit an increase mid-year in a health flex account when the employee gets married or gains a new dependent mid year "to fund coverage for" that new person (Treas Reg § 1.125-4©(4), Example 1. (iii)), but not that the mid-year loss of a spouse or dependent allows for a mid-year decrease by the employee in a health flex account.

Larry, About 10 years ago, some unofficial IRS comments were made to the effect that a policy neither owned by the employer or employee was not eligible as a section 125 benefit because it was not in the context of the employment relationship. Like 125, section 106 also depends on the employment relationship. (The difference being one of choice in the matter of something other than the payment of premiums by the employer.) So logically, the notion expressed by in those unofficial IRS comments would seem to extend to the section 106 situation too. Without 106 (or 125), the payment of health insurance premiums by the employer is taxable income to the employee. So I agree with you that it seems to be includible. However, I know of nothing more declarative or authoritative.

513(a) specifies, for UBTI purposes, that with limited, incidental exceptions an 'unrelated trade or business' is "any trade or business the conduct of which is not substantially related (aside from the need of such organization for income or funds or the use it makes of the profits derived) to the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption" under Section 501. Since the basis of the tax exemption of a QRP (401a plan the trust of which is exempt from tax under 501a) is to save and invest for retirement, there is no trade or business that is substantially related to its purposes. That's what the effect of 513(b)(2) is. Since an IRA, like a QRP, is for retirement savings and investments, there is no trade or business that the IRA may regularly carry on or be a partner of that is 'substantially related' to its purpose. That's why I say the IRS got it right in PLR 9703026 when it lumped IRAs in with QRPs for purposes of UBTI if the IRA regularly carries on a trade or business, or is a partner in a venture that does so.

And all Sections 512-514 do is define what is and is not UBTI for purposes of being taxed under Section 511. Is your position that IRAs are subject to tax on UBTI but there is no definition of UBTI as taxable to IRAs?

I think that being subjected to Section 511 (due to the last sentence of Section 408(e)(1)), an IRA is treated like a QRP for purposes of Sections 511-514. The reason is that those Sections 511-514 were not drafted with IRAs in mind. So there was no reason to specify it in Section 513(b)(1). I think the IRS got it right in PLR 9703026 by an interpretation that essentially adds IRAs to the types of trusts listed in Section 513(b)(1).

I think the answer is Yes, but am intrigued by why you might think otherwise. I think the answer to this is No. Unlike the penalty for an IRA participating in a prohibited transaction (where the penalty is disqualifying the entire IRA), for UBTI it is the income taxation now and without creating any basis or avoidance of later income taxation.

Yes.

Usually, no. That's one reason that investors like to invest in a limited liability entity, such as a corporation. It limits their liability, and exposure to what they paid for the stock. However, and rare though it may be, check the corporate documents such as shareholder and stock subscription agreements that might contain a provision allowing for the corporation to assess the shareholders when the corporation faces cash flow shortages.

Also, check the VEBA document for what it provides about how to apply excess assets upon termination.

A hot potato, indeed. The CFO for the US Dept of Enegery in 2005, Susan Johnson Grant, tried to curb what she called a triple dip by employees of DoE contractors. The employee would take early retirement (and get the subsidy under the DB plan). Then would hire back on with the contractor and earn a salary, continue the enhanced DB payments, and accrue benefits under beefed up employer contributions to DC plans since many of the DB plans had become closed to new hires (or re-hires).

Didn't someone suggest a while back, Masteff, that you might be medieval? I like how you brought it current as an 'IRS clarification'.

Following up on this, suppose that for a 20 or more EE situation the ER has a cafeteria plan, gives each employee $500/month worth of cafeteria credits (i.e., each eligible employee can elect and receive up to $500/month in cafeteria benefits without having to agree to corresponding payroll reduction). The cafeteria plan offers group major medical coverage. It also allows EEs to elect coverage under individual health policies that are not major medical. An eligible employee age 66 wants to forego the major medical (otherwise a cost to him of $650/month, which would use all of the $500/month in cafeteria credits and require $150/month in payroll reduction). Instead, he wants to use $280 a month to pay for Part B and Part D coverages, and have the other $220/month of cafeteria credits used to pay for a health flex account. If the employer does nothing to encourage those EEs on Medicare to forego the group major medical coverage, is the mere availability of the $500/month cafeteria credits to be applied to Part B supplemental coverage and otherwise a problematic inducement itself?

Barring someone pointing out authority that cuts contrary, I think the Plan Administrator is within its rights to so apply the $25,000 threshold in this way. From the plan's perspective, the AP is an alternate payee of a portion of the P's benefits. It is just that the awarded benefits portion is payable to the AP instead of to the P. Under a different part of the QDRO statutes, the awarded benefits are not available to the AP until the P reaches the age under the plan that if no longer employed benefits payout could commence to the P; P's age continues to have a bearing on when the awarded benefits are payable.

Wow! There must an alternate universe that Lance inhabits.

You certainly have a number of concerns/issues.

See response to the other of this double post.

Some courts would actually prefer to receive a proposed order in a word processor format, so that the judge may change it as he/she sees fit before perhaps signing it. A document must be an order, decree or judgment to be a QDRO (if all the other requirements are met). So I'm not quite sure why the all caps emphasis "ORDER" in distinction from a QDRO. Most courts require that documents filed with the court, including QDROs and other orders specify atop the first page the court, caption, case number and title of the document. This is for identification purposes. After the spot for the judge to sign the proposed order, most proposed orders have a clerk's certificate of service, indicating how the order (once signed) is provided to each attorney and unrepresented party. That might be what you are referring to as a formal ORDER. If so, you should have the document provided in word processor format meet all those format requirements that the divorce demands/requests.

When I've contacted banks to get a rate, the situation I have posed is if someone had a CD with the bank for like term and in the same amount as the loan will be, and is willing to pledge that CD as collateral for such loan, what would the interest rate be? I have found that 3 or 4 banks, some regional and some local, publish internally on a daily basis, such a rate. They also explain that because the CD is with that bank and pledged, giving the bank full, liquidable security, the bank would not have a creditworthiness criteria for such a loan. For that situation, most do prime+2 pts but one does prime+1 pt.