UBTI Payment/990-T

[Guest cashmere]

A customer pays the taxes on the UBTI from withhin their IRA, the customer gives the Trustee of the IRA approval to liquidate an investment that is in the IRA. The check from the liquidation comes to the Trustee, the Trustee then deposits the check into a Federal Reserve for payment of the UBTI for the customer. I want to know is the money from that came from the liquidation considered a reportable distribution to the customer/IRS or would it be considered a transfer since the customer did not take receipt of the money?

[Guest mjb]

why not ask the trustee since the trustee will report the payment to the IRS?

[Guest cashmere]

Actually the trustee has processed these type of transactions in previous years as transfers, but now stating that they should be processed as distributions. They cannot provide any written instructions regarding this.

[BeckyMiller]

I do not see any reason why this would be a distribution. The IRA is a taxable entity in this case, the cash was used to pay the IRA's tax liability. It is of no benefit to the IRA participant. The IRA is not a pass-through entity paying this tax on behalf of the participant. It is the IRA's tax, not the participants. Gosh - I am just saying the same thing over and over.... Sorry.

[Guest mjb]

Under Reg 1.408-4(a)(2) an assignment of the owner's rights under an IRA is deemed to be a distribution to the IRA owner. Payment to another person at the direction of the IRA owner is an assignment of interest in the IRA.Why is the payment of the taxes to the IRS by the trustee pursuant to the direction of the IRA owner any different than the payment to the owner who then writes a check to the IRS? Under IRC 72(t) payment from an IRA pursuant to a tax levy is exempt from the 10% penalty tax but not ordinary income tax.

[Appleby]

The amount used to pay they UBIT should not be reported as a distribution from the IRA on Form 1099-R.

I agree with mjb about asking the custodian. If they are saying it is treated as a distribution, then they should be able to provide a cite for their position.

I also agree with Becky that it should not be a distribution.

IRS Publication 598 and the Instructions for Form 990-T talks about filing a Form 990-T for the amount. None of these documents talks about reporting the amount as a distribution from the IRA.

This is unlike the instructtions for reporting an IRS Levy, which requires the amount to be reported as a distribution.

[Guest Quicksilver]

I agree that distribution to pay the tax should not be a distribution. I also believe that a tax basis is created on the amount of income subject to UBTI. that needs to tracked

[jevd]

I agree that distribution to pay the tax should not be a distribution. I also believe that a tax basis is created on the amount of income subject to UBTI. that needs to tracked

I believe the IRA is treated as a separate entity here. The fact that the IRA pays the tax on the UBTI does not create a tax basis. It is simply an expense related to the IRA. If the account owner paid the tax outside of the IRA ( this is not allowed) then I might agree.

[Guest mjb]

I agree that distribution to pay the tax should not be a distribution. I also believe that a tax basis is created on the amount of income subject to UBTI. that needs to tracked

Under Reg 1.408-4(a)(2) the basis in an IRA account is zero. The only exeception are after tax contributoins to the IRA.