UBTI message # 11804 at MLP bd by rock-n-r
Re: Question for rock n rent on UBTI
Glad to be of help! I've learned a lot over the years on the financial strengths and weaknesses of MLPs by lurking on this board, and thought it was high time to reciprocate a bit.
1) No, you cannot net positive and negative UBTI for different MLPs.
2) Yes, you can carry forward negative UBTI to offset positive UBTI from that same MLP in future years.
3) It appears the $1,000 applies to each separate IRA, but I need to double-check on this.
4) Yes, you can deduct depletion and IDCs when calculating UBTI.
Long and involved technical explanation with all the gory details:
As to the tax on unrelated business taxable income, it is computed and reported on Form 990-T, and I have prepared a number of them over the years. But that has been for charitable organizations (any revenue from advertising in a magazine or newsletter published by a non-profit is UBTI), not for IRAs. Thus, I am familiar with the rules concerning UBTI, but do not have specific experience as to how they relate to IRAs.
"Unrelated business taxable income", or UBTI, is defined in Internal Revenue Code (IRC) Sec. 512. IRC Sec. 512(a)(1) provides the general rule that UBTI means "the gross income derived by any organization from any unrelated trade or business . . . less the deductions allowed by this chapter [i.e., IRC Secs. 1 through 1400U] which are directly connected with the carrying on of such trade or business, both computed with the modifications provided in subsection (b)."
In other words, UBTI is to be computed using the same rules you and I use to compute taxable income, except for the special modifications listed in IRC Sec. 512(b). The most important of these modifications are that interest, dividends, most rents, and capital gains are excluded from income, unless if they are derived from so-called debt-financed property (the determination of what is debt-financed property is horrendously complicated, and we don't have access to the underlying books and records of each MLP, so we have to trust the MLP that it has excluded the relevant items of income when determining UBTI in box 20V of the K-1).
With this as background, let's turn to your specific questions.
1) One of the rules you and I have to use in calculating taxable income is the PTP passive loss rule of IRC Sec. 469(k)(1), which says that you cannot net a loss from a PTP against any other income except for ordinary income from that PTP (at least until you sell your entire interest in the PTP, which releases all suspended losses). This rule is not mentioned in or modified by IRC Sec. 512(b), and thus also applies to the computation of UBTI. If you have negative UBTI from a particular PTP, it cannot be used to offset positive UBTI from another PTP. Note that this results from the specific rules applicable to PTPs. If you had negative UBTI from, say, a privately syndicated real estate partnership that is not a PTP, that negative UBTI could be used to offset positive UBTI from another real estate partnership. But under IRC Sec. 469(k)(1), you have to calculate income or loss separately for each PTP, and cannot use losses to offset income from other PTPs.
2) Once again, the general PTP passive loss rules of IRC Sec. 469(k)(1) apply here - just as on your and my 1040, the loss from a PTP is suspended and carried forward, and then available to offset income from that particular PTP in a future year. Thus, negative UBTI this year from a PTP gets carried forward and is available to offset positive UBTI from that same PTP in future years.
3) The $1,000 dollar figure comes from IRC Sec. 512(b)(12), which allows a specific deduction of $1,000 when computing UBTI. Because this is contained in IRC Sec. 512, it is a deduction which is allowed to "the organization" on which the tax on unrelated business income is imposed. IRC Sec. 408(e)(1) imposes the tax on unrelated business income on each individual retirement account. I do not see any language in IRC Sec. 408, IRC Sec. 511, or IRC Sec. 512 that would require aggregating IRAs of a single owner/beneficiary together for computing UBTI. Thus, it appears to me that the $1,000 limit applies to each separate IRA. This of course suggests a big loophole (or tax-planning strategy, depending on your perspective), namely, opening up multiple IRAs so as to slice up your MLP holdings and get multiple $1,000 specific deductions. Again, I see nothing in the IRC or Treasury Regulations prohibiting this, but will want to consult some specialized literature that I have in my office on whether there may be court cases or other pronouncements that close this loophole.
4) Neither the allowance for depletion nor the expensing of intangible drilling costs (IDC) are mentioned or modified in IRC Sec. 512(b), and thus both are available for computing UBTI. There are, however, specific rules relating to depletion and IDCs that need to be observed. In the case of depletion, you can take either cost depletion under IRC Sec. 611 or percentage depletion under IRC Sec. 613, but if you take percentage depletion, then IRC Sec. 613(a) limits that depletion to 100% of your taxable income from that property, and IRC Sec. 613A(d)(1) also limits it to 65% of your total taxable income. Furthermore, under IRC Sec. 59(e)(2) and Treasury Regulation 1.612-4, IDCs may either be expensed immediately or else capitalized and amortized over 60 months (the latter option is sometimes beneficial for taxpayers who face the Alternative Minimum Tax). Because an MLP does not know your specific tax situation, and thus does not know what elections you will make with respect to depletion or IDC, it will generally state those items separately and then let you include them in your calculations. This applies to UBTI as well as to regular taxable income - you are allowed to elect to take percentage depletion, but the amount of percentage depletion you can take may be limited by how much other UBTI you have, and you need to calculate that - the MLP does not have the information to calculate that for you. I have no idea from where EVEP gets the clairvoyance to do the calculation for you.
In closing, I just need to add my general disclaimer that this is free advice and may be worth exactly as much as you've paid me for it. In particular, you cannot use this advice to argue with the IRS; if you want an opinion that will get you out of IRS-imposed penalties, you need to consult your own tax advisor and pay him/her for it.