ROBS plans and UBTI

I've never seen anything on this, which probably means it is ok. I haven't done any research, but just wondered if anyone knew if there was a specific exemption? In other words, generally if a qualified plan operates an active trade or business, the income derived from that business may be subject to UBTI.

What about a ROBS plan, where the plan owns the stock, or nearly all of it, in the corporation? Does UBTI generally apply, or is there a special exemption? Maybe I'm out in left field on this to start with...

When a 401k generates profits from a business, the net income is subject to payment of tax just like a business outside the 401k to put it on the same playing field as a regular tax-paying entity. So, for example, a 401k that generates net income from investing in a retail store will be subject to UBIT because the retail store is considered an operating company.

As long as the corp that is owned by the ROBS is a C corp then the tax on the business income is taxed at the corporate level.  So if any cash moves from the C corp to the 401(k) that is a dividend.  In this case that would be investment income.  It would be treated no differently then if 401(k)  plan got a dividend from its IBM stock.   In this case the plan is NOT running a business but investing in a business. 

If someone were to make the mistake of putting S Corp stock into a ROBS then there would be UBTI due on the pass through income from the S Corp.  ESOPs are the only type of qualified plan that can own S Corp stock and not pay UBIT. 

The key here from a practical point of view is the income taxed at least once.  As goldtpa says the point it to put the all businesses on equal footing.  In fact if I remember my tax law history UBTI started not with qualified plans but not for profits.  I am thinking it was a university was running a manufacturing business and claiming it did not have to pay taxes on the profits which it used to keep the university doors open.  That was seen as an unfair business advantage to not pay taxes. 

I once worked on a PSP plan for that owned land and cattle directly.  That is to say the title of the land and any ownership papers of the cattle was in the PSP trust's name.  This guy thought he was being clever becasue he was running a cattle ranch in a non-tax paying entity.  His prior TPA had not thought of the UBTI.  In this case the plan is running a business and UBTI was due to put this business on equal footing with other ranching businesses. 

Hope that helps clarify when and why UBTI is due.  I am pretty sure I have it correct but it has been a while so if someone wants to make the claim I got it wrong I am willing to listen. 

This might be more answer then you wanted also! 

Thanks!