Investment in a restaurant

[Gary]

Say a pension plan purchases a Denny's restaurant and that he owns the property and charges the tenant rent to use the property, but the plan does not receive income from the restuarant itself.

Based on a UBIT IRS publication my impression is that this would generate UBIT because even though the plan is just renting the property the tenant is using the property for a commercial business unrelated to the purpose of the tax exempt plan.

Does that seem correct?

Now let's say instead that the plan is experiencing the profits/losses from the restaurant as a commercial business. Does this create UBIT? My understanding is that it does as well.

And finally, as a generalization say a pension plan owns a portion of a limited liability partnership.

If the partnership only generates income from dividends and interest than it would not generate UBIT, but if it also experienced profits/losses from the business of the partnership it would generate UBIT. Does t his seem correct?

Thanks.

FYI the pension plan only has two participants

[Guest Rajeev]

Under most cases, pension plans do not have UBIT, but will have to be looked at on a specific situation

[J Simmons]

Say a pension plan purchases a Denny's restaurant and that he owns the property and charges the tenant rent to use the property, but the plan does not receive income from the restuarant itself.

Based on a UBIT IRS publication my impression is that this would generate UBIT because even though the plan is just renting the property the tenant is using the property for a commercial business unrelated to the purpose of the tax exempt plan.

Does that seem correct?

Hi, Gary, who is "he" and what relationship does "he" have to the plan? If the plan owns the R/E, but leases it out to a proprietor in which the plan does not have any interest (other than he's the tenant of the R/E) and the rent is a fixed amount (not dependent upon the profits/losses, or amount of either, of the restaurant business), then this should not be UBTI. That is because it is a fixed rate of return for the plan on its investment in the R/E. If the only relationship between the plan and the proprietor is the landlord-tenant relationship, then the proprietor is the one operating a business, not the plan. The plan is passively renting the R/E to the proprietor so that he can operate a business--for the plan, it is a passive investment with a fixed rate of return and should not engender UBTI.

Now let's say instead that the plan is experiencing the profits/losses from the restaurant as a commercial business. Does this create UBIT? My understanding is that it does as well.

This permutation on the initial fact pattern would expose the plan to UBIT on its share of the profits/losses.

And finally, as a generalization say a pension plan owns a portion of a limited liability partnership.

If the partnership only generates income from dividends and interest than it would not generate UBIT, but if it also experienced profits/losses from the business of the partnership it would generate UBIT. Does t his seem correct?

Generally speaking, yes.