Unrelated Business Income Tax

[bdeancpa]

It seems that once in the past I heard that an owner of an IRA was not allowed to pay any unrelated business income tax the IRA may owe. The tax must come out of the IRA. I can't seem to find any authorative guidance (however I have found some information by non-traditional IRA custodians on the Internet that says the same thing). Does anyone know why this is, and more importantly, does the same rule apply with respect to a qualified plan? Can a sponsor pay the Unrelated Business Income Tax for their retirement trust.

Thanks for any help you can give.

Dean Huber

[Belgarath]

I haven't done any research to see if there is a special PTE covering this situation, but in the absence of such a PTE, I don't see how this would avoid being a prohibited transaction.

[bdeancpa]

Would you think a PTE is necessry because you see a sponsor paying this tax on behalf of the plan different than a sponser paying investment management fees, accounting fees, legal fees or other plan expenses on behalf of the plan? Many sponsors pay these later fees on behalf of a plan. I'm just trying to figure out if unrelated business income tax is considered "different" than other plan fees. For example, a sponsor can pay these fees I've mentioned but I know a sponsor cannot reiburse a plan for investment transaction fees (such as trade commissions).

[Belgarath]

The UBTI is clearly a tax liability of the trust. It isn't an administrtative "fee" for plan administration. So yes, I think it is different. I'd recommend you seek legal counsel before attempting to have the plan sponsor pay the tax.

[jpod]

Payment of the IRA's tax liability should be treated as a contribution to the IRA, which may or may not be deductible, and which may or may not exceed the annual limit on IRA contributions (triggering the 6% excise tax). The more interesting question is how do you get the tax paid from IRA assets? If you distribute money to the IRA holder I suspect the custodian will automatically report it as a distribution on 1099-R, in which case you have a mess on your hands. Not sure if there is any IRS guidance explaining how this can get done without a double-whammy to the IRA holder.