Saturday, March 30, 2013

Gay marriage rights may carry bigger US tax burden for some / Taxes are at the very heart of the challenge to DOMA

Reuters for the Business Standard writes: If the US Supreme Court strikes down a federal law defining marriage as between a man and woman, the newfound rights for gay married couples may bear something not so welcome - a bigger tax burden.  That's because with equality, gay couples will face the same tax woes of many heterosexual couples with similar incomes, including the tax hit known in America as the marriage penalty.

Taxpayers filing as married couples may be forced to pay higher taxes as their collective income crosses into a higher tax bracket sooner than if they were filing separately.

Oral arguments on Wednesday gave gay marriage backers hope the court would overturn the 1996 Defense of Marriage Act (DOMA) after a majority of the nine justices raised concerns about the law's validity under the US Constitution.

Taxes are at the very heart of the challenge to DOMA.

The case involves Edith Windsor and Thea Spyer, a New York couple. When Spyer died in 2009, DOMA prevented Windsor from enjoying one of the biggest tax breaks enjoyed by heterosexual Americans - the exemption from federal estate tax on wealth passed from one spouse to another.

If the law is struck down, the ruling extending the exemption to gay and lesbian surviving spouses would also clear the way to more than 1,100 federal benefits, rights and burdens linked to marriage status. Cynthia Leachmoore, a tax preparer in Soquel, California, has about 40 same-sex married couples as customers ranging from teachers to Silicon Valley workers.

A handful of them have joint incomes that top $1 million. They're facing $25,000 to $30,000 more in federal and state taxes if DOMA goes down and they file taxes jointly, she said. "Most of them don't care. They'd really like to be able to say that they were married" on tax returns, Leachmoore said. "That's more important to them."

Complications
Married gay couples would see other benefits, including a break in taxes now paid on health insurance and greater access to federal family and medical leave.

There are some 130,000 same-sex married couples in the United States as estimated by the Census Bureau, and nearly 650,000 same-sex couples, married and not, in total.

The Byzantine US tax code's marriage definition is not consistent. In some sections, the marriage provisions are defined for a "husband and wife." Other places say "spouse."

If the law is struck down, the Internal Revenue Service may need Congress to clarify the tax code, or the Obama administration may say same-sex married couples will be treated the same as opposite-sex marriages, said Annette Nellen, a tax professor at San Jose State University.

Good for tax coffers
The nonpartisan Congressional Budget Office in 2004 estimated that recognition of gay marriage would, on net, help the budget's bottom line by $1 billion a year over 10 years. The increased revenue would account for about 0.1 percent of total federal revenues at the time.

The Williams Institute, a unit of the University of California at Los Angeles School of Law, estimates that gay marriage may be good also for the fiscal health of states and localities that legalise it. Of the 50 states, 31 have constitutional amendments banning gay marriage. It is legal in nine states and Washington, DC.

The remaining states' policies vary, with some recognising marriage from other states, some providing some of the legal benefits of marriage and others denying marriage by state laws. Williams Institute estimated that if Rhode Island legalised marriage, its coffers would gain $1.2 million in 2010 dollars over three years, largely due to lower spending on social welfare programs and increased income tax revenue and marriage licence fees.

That is the small slice of the hundreds of millions in operating deficits Rhode Island is expected to be working under in the next five years, as estimated by a governor's report. Because of differing state laws, it is unclear what the impact might be in states with laws disallowing gay marriage.

Brian Moulton, an attorney with the Human Rights Campaign, said that if he married legally in Washington, DC, and moved to Oklahoma, where gay marriage is not legal, the federal government might still recognise the union.

But Todd Solomon, a partner at law firm McDermott Will & Emery and author of a book on domestic partner benefits, said he was not so sure that would be the case.

"It is an open question as to what happens in Oklahoma," he said. "Each state will still be allowed to legislate marriage."

Income, estate, health taxes
Although the case was about the estate tax, only 3,600 estates owed the estate tax in 2012, according to government figures, and the wealthiest Americans pay most of it.

The end of DOMA might also save same-sex couples from having to pay some federal taxes on healthcare benefits they receive through a spouse's employer. Unmarried domestic partners on average owe an extra $1,000 annually in taxes on these benefits because they are now taxed, according to Williams.

"Everyone will get a benefit if they were carrying health insurance," said Nanette Lee Miller, head of non-traditional family practice at accounting firm Marcum LLP in San Francisco.

The impact on Social Security benefits will be mixed. DOMA prevents same sex couples from claiming the survivors benefits extended to married couples. But Social Security recipients might face greater taxes on their benefits because they will hit the level where the benefits begin to be taxed sooner if married.
Posted on 1:43 PM | Categories:

6 lessons for a successful retirement

Rob Pen for Life HealthPro writes:  Planning for retirement is a challenge that changes with each client, and there is certainly no one-size-fits-all solution. That said, you may — or may not — be surprised to hear how many truly core retirement principles your clients have never even thought about. Here are six time-tested rules that it’s worth repeating over and over and over again.

Lesson 1: It’s your responsibility to plan for retirement. 

Unless your client plans to work until the end of life, someday he or she is going to retire — and it may not be by choice. No longer can any of us depend on our employers to save for our retirements. With the exception of the federal and state governments, few employers have a pension plan and now several states are cutting back on retirement benefits. Most corporations have changed to a 401(k) plan where the employee can contribute up to $17,000 and an additional $5500 (called catch up) once they reach the age of 50. The reason for the catch, quite obviously, is that most employees have not saved enough in their younger years. The catch-up gives them an opportunity to save more in the peak earning years.


While retirees today depend on Social Security, its future is in jeopardy. Most experts believe it will continue, but the amount paid may be less if it is determined by need. Therefore, in addition to funding a company retirement plan, your clients also should be saving in other tax deferred and taxable accounts. 

You’ve heard it a 100 times: Most people don’t plan to fail, they just fail to plan. I see it every day and it is true. I often hear employees say, “My employer doesn’t match any of my contributions, so I’m not going to contribute either” or “I don’t trust my employer with my money” and the classic “I can’t afford to right now.” Successful retirees don’t make excuses; they take action. They enroll in their employer’s retirement plan as soon as they are eligible, even if the employer doesn’t match. Saving for retirement is a habit; therefore, they continue putting money away in other investments like a Roth IRA. Retirement is their No. 1 goal.

With the creation of Target Date Funds, investment selection has become simple. All your client needs to do is choose the date that they plan to retire, and fund managers will allocate their money according to the time remaining until retirement. For younger clients, the allocation has more risk; if you’re ten years away, it will be more moderate allocation.

Lesson 2: Develop a budget and live by it.

Successful retirees understand the difference between a need and a want early in life and on into retirement. They simply live below their means. While this has become more difficult with the temptation of credit, you just have to say NO! As a financial advisor, it may very well fall in your job description to emphasize this with your clients. Remind them that it’s not how much you earn each year that’s important; what matters is what percentage of those earnings you are saving. I’ve seen couples in their 50s who are making over $250K and have less than $50K in their 401(k), and nothing in savings. I see college graduates get a job, and the first thing they do is go buy an expensive car. Hey, I’m a car buff. I love cars. However, even I eventually realized that a car is a means of transportation rather than a status symbol.

The earlier you get started saving for retirement, the less you’ll have to save because time is on your side. So, don’t suffer from “excusitus” by creating a lifestyle that you’ll be paying for the rest of your life. Fund your retirement instead. Encourage every client to start out by saving at least 15% of their income for retirement until they reach the annual maximum contribution. 

Lesson 3: Don’t have unrealistic expectations.

In the 1990s, the stock market was averaging returns of over 10% annually. Investors thought this would continue, and by the end of 1999 a large percentage of investors had moved all their money into aggressive tech investments that had made 70% the year before. Then the dot com bubble occurred.  After seeing their 401(k) now equal to half the value it once was, they started calling their 401(k) a 201(k).

For fear of losing everything, employees began shifting their money into guaranteed investments. In this case, because you are making monthly contributions, you are taking advantage of buying when the markets are low. Encourage your clients to focus on share accumulation — buying more shares when the price is down — rather than how much the stock market has dropped. 

One excuse I often hear is, “But I could lose everything.” That’s true if you put all your money in your company stock and it goes bankrupt, which does happen from time to time. However, if you diversify into different asset classes (which Target Date Funds do for you automatically), chances are you won’t lose everything.  Our great country is based on capitalism and therefore every publicly traded company either produces a good or a service. While all companies go through good times and bad, as long as every working American gets up each and every morning to go into work, capitalism will prevail.

Another lesson that every client needs to hear: Do not borrow from your 401(k). Chances are they won’t pay it back. If they do pay it back, chances are they’ll borrow from it again. A retirement plan is to be used for retirement, which one day will happen. It is not an account to tap for a trip to Disney, your daughters’ wedding, a new car, a bigger house or a college education. These are all goals which should be planned for separately. Encourage your clients to establish an emergency fund of three to six months of living expenses that they can draw from if needed.

Successful retirees do not invade their retirement. When it comes to assisting their children financially, they set limits based on what they can afford rather than what everyone else is doing. If you end up going into debt or possibly bankruptcy because of supporting your children (who are capable of supporting themselves) what have you achieved? The truth of the matter is this: Children believe their parents have more money than they really do, and parents often don’t want to tell their children they can’t afford to help them. 

Lesson 4: Take advantage of the tax savings your retirement plan offers and gain a basic understanding of our tax code. 

In lesson two, I noted that the amount you save is more important than the amount you earn. There I was referring to saving vs. spending.  In this lesson I am referring to the amount you get to keep vs. the amount you pay in federal and state taxes. Retirement plan contributions are tax deductible, which means you are saving both federal and state taxes on your contributions.
For example, suppose your client’s income is $50K, and he is saving 10% ($5000) annually. If he is in the 15% federal tax bracket and 6% state tax bracket, he will save $750 in federal and $300 in states taxes, for a total savings of $1050, all based solely on his decision to contribute to his company retirement plan.  I remember a client who increased his contribution and his next paycheck was higher. He thought surely someone in payroll had made a mistake. After further review, we determined that by raising his contribution amount it reduced his taxable income, moving him from the 25% tax bracket to the 15%. 

The difference between a long-term capital gain and a short-term capital gain can equal thousands of dollars. Suppose you are in the 25% federal tax bracket and the 7% state tax bracket, and you sell 500 shares of Apple stock that you paid $150k for, which is now worth $300k. If you make this move prior to holding the stock for one year, you will owe ordinary income tax on the $150k gain, so 25% ($37,500). If you sell the shares after owning them for more than one year, you will pay only the long-term capital gains rate, which is set at 15%, so $22,500. This is, of course, assuming that the stock is at the same value after one year. (Note that the state tax rate doesn’t change depending on long- or short-term capital gains.)
There are several tax surprises retirees soon learn about. While some rush to start taking Social Security benefits at 62, they often find themselves going back to work. If they did this in 2012, they soon learned that their benefits are reduced by $1 for each $2 that you earn above $14,640 until they reach the full Social Security age, which is currently 66.

Next, they learn that their Social Security income is taxable. That’s right, up to 50% of your benefits will be included in your taxable income.  If your income plus half your Social Security benefit is more than $25,000 Modified Adjusted Gross Income for a single taxpayer, or more than $32,000 MAGI for married filing jointly, your benefit will be taxed at 50%. That 50% rate jumps to 85% when the base amounts are $34,000 MAGI for single and $44,000 MAGI for married filing jointly.  After explaining this, I often hear, “Wasn’t that income already taxed?”
The next tax that I am seeing on more tax returns is the Alternative Minimum Tax or AMT. This is a tax that was enacted in 1970 to tax 155 high-income families that were able to reduce their taxable income to zero because of their itemized deductions. After 40 years and several modifications, AMT now affects millions of families each year. Unfortunately, like most laws there are unintended consequences. Millions of middle class families are affected by the AMT, and that number is growing each year.

Determine if the state you live in is retiree-friendly.  Look for a state where Social Security benefits are exempt from state income taxes. Many states exclude government and military pensions from income taxes or offer a blanket exclusion amount for retirement income. Also, consider sales tax, property tax and estate tax. 

Lesson 5: Take advantage of all your employee benefits and protect your assets. 

While most employees can’t wait to enroll in their employer’s healthcare benefits, they tend to pass on the other benefits. Take disability insurance for example. According to the National Association of Insurance Commissioners, 25 percent of 35-year-olds will experience at least one period of disability during their careers, which will make it impossible for them to work and earn a living for 90 days or longer. The risk only increases as we age. Long-term disability can quickly deplete your assets quickly if you are not insured for this risk.

While employers typically limit the amount of life insurance benefits, these group polices are reasonably priced, so encourage your clients to take advantage of them. Today more than ever, families are underinsured. Some of the excuses I commonly hear are, “I don’t believe in life insurance” or “My wife doesn’t work so therefore she doesn’t need life insurance.” Spell things out for your clients. Ask them, “How much would it cost to hire a full-time nanny to care for your children until they are old enough to care for themselves?” As a rule of thumb you should have ten times your annual income, and while your needs are usually the greatest when raising a family, a need may still exist after retirement. 

Successful retirees not only take advantage of all the employee benefits available to them, they also protect their other assets. They purchase homeowners, auto, life, and umbrella insurance while they are working, and replace their disability with long-term care insurance when they retire.    


Lesson 6: Establish and maintain your estate plan.  

Of all the lessons, this is probably the one that is most overlooked. “I’m not planning on dying anytime soon,” a friend once told me. A week later he died of a heart attack, leaving a wife and two young children. Estate planning creates a master plan for the management of your property during life and the distribution of that property at death. An estate plan can be made quite simply.

Every client you work with should at least take advantage of will substitutes. A will substitute is a technique that allows you to transfer property at your death to a beneficiary outside the probate process. This will not only expedite the distribution process, but also avoid any costs associated with probate. Joint tenancy with right of survivorship (JTWROS) and tenancy by the entirety (TBE) transfer assets to the surviving tenant at the death of the other. While JTWROS can be used by non-spouses, tenancy by entirety can only be used by legally married husband and wife, and is not recognized in all states.

Naming a beneficiary is also a will substitute. While most people name their spouse as the primary beneficiary on their retirement plan, life insurance, or annuity, they fail to name a contingent beneficiary, such as their children who are age of majority. This would ensure that your children not only receive your IRA should you and your spouse pass away together but also stretch the annual distributions out over their life time. 

In addition to will substitutes, successful retirees also have a will, durable power of attorney, health care power of attorney and a living will. 
Make these six simple retirement rules part of every interaction you have with a new client. Your role as an advisor is to educate and mark out the path to financial success. It’s an important job, and these rules are a good starting point.
Posted on 7:54 AM | Categories:

Why I Bought Linn Energy In My Roth IRA : An Education in Unrelated Business Taxable Income Tax (UBIT), Master Limited Partnerships (MLP), IRAs & Taxes - all in a discussion

The following is serious investing/tax strategy & planning talk.  If you're not into this it will give you a headache.  The discussion/commentary that follows is insightful and very enlightening and  how we (CPAs & Financial Advisors) play the game down in the trenches and behind the curtain - the back and forth, pro and con of decisions and strategy.  Here we go!    Analytical Chemist for Seeking Alpha writes: Disclosure: I am long LINELinn Energy (LINE) is a widely owned stock favored in part because of its large and growing distributions. Linn and other master limited partnerships (MLPs) have recently come under fire as poor investments for retirement accounts. Many investors know that the sum of all unrelated business taxable income (UBTI) in an individual's retirement accounts cannot exceed $1,000 a year without having to pay taxes. Recently, however, there has been a great deal of discussion about whether selling partnership units in a retirement account requires recapture of previously depreciated assets. In one case, this scenario so scared an investor that he sold all of the MLPs held in his retirement accounts. For many investors, however, a careful consideration of the facts reveals that an IRA is the best place to put MLPs.

Linn Energy Corporate Structure
As a partnership, Linn Energy pays no corporate taxes and instead passes through income and deductions to its unit holders, who include that information on their personal tax returns. Many of these partnerships have good cash flow and pay high distributions, but use high depreciation and other deductions to reduce ordinary income. The distributions received often consist of return of capital, reducing one's cost basis but incurring no income tax. Partnerships like Linn Energy are thus often tax-deferred investments. Tax-deferred does not necessarily mean tax-advantaged, however, and it can easily be detrimental to investors to hold these investments in taxable account instead of tax-deferred (traditional IRA or 401(k)) or tax-free (Roth IRA or Roth 401(k)) accounts.

Linn Energy also has an affiliated stock, Linn Co. (LNCO), whose sole purpose is to hold Linn Energy units. It distributes unit income received, less some fees and some withheld for taxes. The current distribution rate is 71 cents per share per quarter, while that for LINE is 72.5 cents per share per quarter. LNCO also trades at a premium to LINE of 5.6% as of this writing. LNCO, however, reports normal 1099 dividends instead of the more cumbersome K-1 partnership forms sent out by LINE.

Holding MLPs in IRAs
In traditional IRAs, no taxes are due until money is withdrawn, at which point withdrawals are generally taxed at ordinary income rates. Roth IRAs are funded with after-tax dollars and earnings are generally tax-free. MLPs in either type of IRA present the special situation of unrelated business taxable income -- if an IRA has more than $1,000 in UBTI in any tax year, the IRA owes tax. The amount of UBTI is highly variable depending on the individual issue, but I can say that according to the K-1 forms I've received from LINE, UBTI has been zero or negative in five out of six years that I've owned shares. I have therefore been completely unconcerned about UBTI on my LINE shares.

Another potential issue with holding MLPs in IRAs is the possibility that upon selling, recapture of depreciation results in UBTI. There has been significant discussion and disagreement on this issue on Seeking Alpha and elsewhere, and I don't have enough space here to fully describe the debate. It should also be mentioned that this shouldn't be an issue for investors who plan never to sell an MLP. However, for my purposes this issue can be easily avoided: If an estimate of the recapture generated upon sale is total distributions received minus cumulative UBTI, then we can be safe and simply sell a position each time total distributions approaches $1,000.

You might be wondering the wisdom of such a course; after all, won't this generate significant transaction costs? Not really. At forward distribution rates, 100 shares of Linn Energy would take 13 quarters to distribute $1,000. If one were to sell Linn Energy every three years, and pay commissions of say $8 each transaction, then an annualized expense ratio would be 0.14%. In the case of Linn Energy, the LINE units under this strategy are more appealing than the LNCO shares, which do not issue a K-1 but pay a 2.1% lower distribution and trade at a 5.6% premium. Instead of 100 shares of LINE generating $290 in distributions per year, the same dollar amount invested in LNCO would buy only 94.7 shares and generate only $268.95 in distributions annually. Following the safe strategy of selling LINE every three years in an IRA instead of simply holding LNCO would be better by 0.43% annually after all costs.

Why "Tax Advantaged Investments Should Not Be Held in Tax-Advantaged Accounts" Is Bad Advice
Common wisdom holds that tax advantaged investments such as MLPs should not be held in tax advantaged accounts such as IRAs. As a rule of thumb the common wisdom is fine. But tax strategy for your investments need to be tailored to your individual tax circumstances, of which there are as many as there are investors. In many cases, an IRA is the best place to hold an MLP. Consider the following situation:

An investor has $5,000 to invest and has decided that they will invest in Linn Energy. They are currently in the 15% tax bracket, and expect a higher income in the future. Their choices of where to put that $5,000 are: regular brokerage account (pay taxes on income and investment profits), traditional IRA (don't pay taxes on income now, but pay taxes on withdrawals), or Roth IRA (pay taxes on income now, pay no taxes on investment gains).
Whether an investment is tax advantaged or not doesn't change the fact that the Roth IRA is likely the best account for this investor. A traditional account -- suggested by conventional wisdom -- would likely be the worst possible choice for this investor for an MLP, as they defer 15% income taxes now to pay 25%, 33%, or higher taxes when they sell later.

Indeed, in this example, if the investor wanted (e.g., for easier accessibility) to hold Linn Energy in a taxable brokerage account, they would most likely be better off buying LNCO instead of LINE. Fellow Seeking Alpha author Reel Ken had an excellent article demonstrating this point, but the main point is that MLPs defer current dividend and capital gains taxes into ordinary income when sold. When an investor starts and ends in a higher tax bracket, it can take 20 years or more for an MLP to be tax advantageous. If an investor starts in a lower tax bracket and moves into a higher tax bracket before selling an MLP, the investor almost certainly would have been better off holding common stock (LNCO, in this case, even considering the lower distribution rate). Of course, if an investor is in a high tax bracket now but anticipates selling when in a lower tax bracket, the math changes yet again and the MLP may be advantageous.
In any case, conventional wisdom is only a general guideline and in regards to MLPs can easily lead investors astray. I'm neither a registered investment advisor nor a tax professional, but it's clear that investors need to consider their own personal tax situation to determine whether LINE or LNCO is a better investment, and whether it should be held in a taxable, tax-deferred, or tax-free account. For me, LINE in a Roth IRA was the best choice.

Disclaimer:  I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Reminder -- consult a qualified tax professional for information on your specific tax situation.

Comments (133)

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  • Good luck with your investment.
    25 Mar, 09:39 AMReply! Report AbuseLike1
  • Although you did not mention it specifically, age is another factor in the LINE/LNCO equation. Having reached retirement age, LNCO is a nice vehicle for "life simplification". The IRAs and 401s are pretty much set, so different priorities are in play.

    Thanks for the article and in-depth scenarios.

    25 Mar, 09:45 AMReply! Report AbuseLike2
  • Hi analytical,

    I think this is an unfortunate piece. It exhibits either disregard for the proper tax treatment of MLPs in an IRA or just ignorance.

    If you really have doubts about the taxation, then don't write an article taking a position or do some research and offer something useful.

    It's interesting that your article is about LINE, because if you bother to contact their tax department you will find out that they are on record that, upon sale, the recapture is UBTI.

    The tax Code is a maze. Anybody can do research and lose their way. I have many times. But to not do any research and just offer an opinion is not what people should expect. Not, at least, from any serious author.

    25 Mar, 09:47 AMReply! Report AbuseLike10
  • Good comment Reel Ken. While UBTI is regularly not an issue with retirement accounts investing in MLP's, the recapture upon sale will catch the unsuspecting retirement account investor, especially if you've owned the asset for years. Why tempt fate, There are a few MLP's that have the structure like LNCO, or offer regular dividends, such as KMI and EEQ that would do the job for retirement accounts.
    25 Mar, 10:42 AMReply! Report AbuseLike4
  • Reel Ken, to hit the UBTI taxation level in an IRA, or even get close to it, one must be a multi-zillionaire and have loaded up IRA accounts with specific MLPs. Those are lucky people who need not worry about taxes.
    25 Mar, 10:51 AMReply! Report AbuseLike0
  • Hi jklk0429,

    The UBTI exemption is $1,000.

    When you sell your units, all those nice distributions you received without paying UBTI tax are taxed. It is called "recapture".

    That means, in order to avoid UBTI on the sale your cumulative distributions would have had to be less than approximately $1,000.

    Now, say the average investor held units for only five years, they would have to had distributions under approximately $200/year. Assuming a 5% distribution yield, that equates to a holding of about $4,000 in unit value. If they held for as long as 10 years, that equates to an investment of only $2,000.

    So, your premise is backwards. It is not the multi-zillionaire that would face the issue. Only the very modest investor would escape. These are, as you might put it, the unlucky people that probably don't know what they're doing anyway.

    25 Mar, 11:05 AMReply! Report AbuseLike0
  • Hi Reel Ken,

    This article really wasn't about UBTI in IRAs. That issue has been discussed many times and in much greater detail than I could have here, and I linked to several sources for readers who wanted greater detail.

    Instead, this article largely focused on what an investor should do with that information. For many people, the issue of recapture may make investing in LINE in an IRA unattractive. They have one particular tax situation. For others, investing in LINE outside of an IRA is not as attractive an investment as investing in LNCO would be, due to deferring capital gains but paying ordinary income tax rates when paid. For me, my position in LINE is of a size that holding it in my Roth IRA is the best decision for me.

    In all of these cases, investors should not trust conventional wisdom, or what one writer on Seeking Alpha is doing. Instead, they should apply principles discussed on Seeking Alpha to their own particular tax situation. The details make all the difference.

    25 Mar, 02:04 PMReply! Report AbuseLike0
  • I hold shares in my Roth as well - Can one ignore the K-1 filing if the UBTI does not total anywhere near $1,000 in a given year?
    25 Mar, 04:01 PMReply! Report AbuseLike0
  • Hi Jeff,

    the problem is not the K-1 but the sale of units, which requires a 4797, recapture tax and a 751 statement.

    There has been a lot written in this and its worth looking it over

    25 Mar, 04:35 PMReply! Report AbuseLike0
  • So Ken, you are saying UBTI and distributions are the same thing?
    25 Mar, 06:46 PMReply! Report AbuseLike0
  • Hi jklk,

    No. UBTI is the tax paid on net earnings. Distributions are the monies the MLP distributes.

    Each distribution consists of two parts; earnings (which are subject to UBTI each year) and Return of Capital (ROC), which are not subject to current UBTI. So, on an annual basis you need only concern yourself with UBTI and that is what the K-1 reports.

    It gets a little complicated from here. The reason you can receive ROC and not be currently taxed comes from one of two areas. ..

    1) The ROC can come from liquidation of an asset and not be supported by earnings. You don't want this, it means the distribution is in jeopardy andf the MLP is unhealthy. You've got bigger problems than taxes.

    2) The distribution can come from actual earnings that are shielded from tax by depreciation and/or depletion allowances. This is almost always the case for a healthy MLP and certainly the case with LINE.

    Now, when you sell the MLP, the depreciation/depletion that shielded the earnings from annual UBTI, is recaptured and taxed as UBTI.

    Though there are various accounting adjustments, the shorthand is to consider that the UBTI on sale will roughly equal the amount of prior distributions that were not subject to UBTI on the previous K-1's.

    I know it's complicated, but it's not of my doing, blame the IRS.

    25 Mar, 08:24 PMReply! Report AbuseLike0
  • Hi Reel Ken, I would assume your intentions are good here. Might be best if you direct people to an attorney who specializes in MLPs. My tax attorney was on counsel at an MLP for 20 years and she continues to be active in their activities, and taxation issues regarding MLPs. She strongly encourages the "Average Joe" to pile MLPs into IRAs if that is the overall strategy. I have gone over the UBTI issue in detail with her and she, nor I have any concern.
    26 Mar, 10:05 AMReply! Report AbuseLike0
  • Hi jklk,

    I have consistently recommended seeking competant advice. Quite frankly, if your attorney has no problem with piling them in IRAs she either doesn't understand the problem or doesn't care.

    Maybe she should have a discussion with the attorneys at Tax Package Support or the Attorneys that wrote the Code. Because they aren't on the same page with her.

    I do find it interesting though, that it seems no matter what issue is at stake, it seems there are plenty of attorneys that getting paid or working for businessess that don't see problems that others see.

    My granma used to call it "biting the hand..." and .."knowing where your bread is buttered..."

    26 Mar, 12:37 PMReply! Report AbuseLike0
  • When you sell only part of your total position in a MLP you will not be able to claim any suspended losses you may have in that MLP for that sale.
    25 Mar, 10:53 AMReply! Report AbuseLike1
  • RK,
    When selling a MLP in IRA, does one file on Turbo tax, or rely on custodian to compute taxes, as normal UBTI on form 990T?

    25 Mar, 10:59 AMReply! Report AbuseLike0
  • Hi GD,

    It is the custodian's responsibility to fill out the forms (990-t) and extract the tax from your IRA account.

    The custodial agreement generally passes the responsibility for providing them the info on your shoulders. It is wise to read your custodial agreement to determine who does what.

    Of course, the clerks in the brokerage houses have no technical expertise, so be prepared for anything.

    25 Mar, 11:34 AMReply! Report AbuseLike0
  • Custodian position! Is this ok w/ IRS?

    http://bit.ly/11EFoNs

    25 Mar, 08:06 PMReply! Report AbuseLike0
  • Hi GD,

    Well this is the poster child for passing the buck to the investor.

    It's really not an IRS issue as you signed on to it and therefore accepted the responsibility to complete all forms. All your custodian is doing is mailing them in and cutting the check.

    So, the onus is on you, better learn how and when to complete 990-T. Sorry.

    25 Mar, 08:29 PMReply! Report AbuseLike0
  • hey analytical chemist.... jim cramer linked your article on twitter. calling it a "good piece on linn energy." i've never seen him link any SA article before.
    25 Mar, 11:25 AMReply! Report AbuseLike0
  • Thanks for the heads up!
    25 Mar, 06:54 PMReply! Report AbuseLike0
  • Congrats analytical.

    On the other hand, it does say an awful lot about Cramer. Looks like the 'ole pump and dump is about to happen.

    25 Mar, 11:39 AMReply! Report AbuseLike0
  • Appreciate your tactful & informed comments (& articles), Reel Ken... I've been waiting until lock-up period on LNCO has passed before taking a position... Apr 10th as I recall. In your view, does that make sense or won't the lock-up expiration be a factor for LNCO? TIA.
    25 Mar, 12:44 PMReply! Report AbuseLike0
  • Hi TIA,

    I don't see it as a factor. People are hungry for yield and LnCo is a perfect match for IRAs.

    I'm sure it will have bumps, but I'm a fan.

    25 Mar, 01:27 PMReply! Report AbuseLike0
  • If arson is retired and has no earned income can a person have lnco in a roth? My cpa said that you cannot because they have a distribution and not a dividend and that will increase the value of your
    ira, and you cannot increase if you don't have earned income, unless it's from interest or a dividend. thanks

    27 Mar, 01:12 AMReply! Report AbuseLike0
  • Hi caleagle,

    With all due respect to your CPA, he's nuts.

    First, LnCo is not an MLP it is a stock just like any other stock.

    The distribution is either a dividend or return of capital. We all know the dividend is O.K and the return of capital is the same as if you sold part of your stock.

    The IRS makes no distinction, whatsoever, on investments by the ROTH on account of your retirement status or earnings. The only restrictions are on additional contributions from personal funds, without earnings, but that doesn't mean the Roth can't grow as a result of investment performance

    27 Mar, 07:44 AMReply! Report AbuseLike1
  • cal:

    Indeed, Linn created LNCO almost for the express purpose of being in IRAs, acknowledging that IRAs aren't the best place for LINE. Happy investing! (And you might want to start shopping for a new CPA.)

    27 Mar, 09:16 AMReply! Report AbuseLike2
  • Caleagle,
    Ken and I can agreed on this one: your CPA is nuts. You only have to have earned income to contribute to a Roth. Once the money is in there, you want it to grow. At that point earned income doesn't matter.

    27 Mar, 10:48 AMReply! Report AbuseLike0
  • I have read many MLP articles and comments on SA over the last year. Some readers have very strong opinions on the proper placement of these investments--maybe it goes beyond opinions, where they might be confusing their opinion with fact. Seems like there are two very different kinds of UBTI--as the author says the first kind appears on your annual K-1 and is (in my experience) generally insignificant or non existent so not an issue for most; and the second kind apparently happens at the time the MLP is sold--the so called "recapture". I would guess the question is whether there can be a "recapture" if there isn't a "capture". In a taxable account you capture the tax benefit of MLPs annually. Do you capture the tax benefit in an IRA? I would GUESS no. But instead of guessing why don't we have one person who gives us something beyond their personal opinion. Is there any reader who has had the IRS tell them they owe additional taxes because they didn't report an MLP recapture in an IRA?
    25 Mar, 02:10 PMReply! Report AbuseLike3
  • Hi Bruce,

    just call LINE and speak to their tax dept. They'll confirm it.

    The IRS in instructions for 990-T state unequivocally that recapture is taxed as UBTI.

    If you have it in writing from the IRS already, do you really need anything else?

    25 Mar, 04:37 PMReply! Report AbuseLike0
  • Movie man:

    I tried to look at the 990-t and don't see anything unequivocal. Seems fuzzy to me. LINE might confirm that recapture is taxed as UBTI but will they confirm that IRAs recapture? I still haven't heard anything from the investing public that the IRS has taxed them for the item. That will be unequivocal. Where are they?

    25 Mar, 07:06 PMReply! Report AbuseLike0
  • If you contact the Tax Package Support for Linn ((800) 203-5179), they will tell you that all recapture upon sale of the units is UBTI. (Don't call Linn, they are prevented from giving tax advice.) Thus, it follows that if you hold the units within an IRA, and you have positive UBTI over $1000, you will be liable for the tax on the amount over that.

    Roth IRAs are not exempt from UBTI; and UBTI tax rates are at trust tax rates which are the highest rates the IRS has.

    25 Mar, 07:27 PMReply! Report AbuseLike0
  • Hi Bruce,

    It requires a little effort, I guess. Recapture is IRC Sec 1245 and 1250.

    Here's the instructions from the 990-T....

    "Line 4a. Capital Gain Net Income

    Generally, organizations required to file Form 990-T (except organizations described in sections 501(c)(7), (9), and(17)) are not taxed on the net gains from the sale, exchange, or other disposition of property. However, net capital gains on debt-financed property, capital gains on cutting timber, and ordinary gains on sections 1245, 1250, 1252, 1254, and 1255 property are taxed. See Form 4797"

    I think it is pretty clear (given that "Lawyerese" is never clear) when it says.. "However...1245,1250..... taxed".

    Let's move on,.I've posted this and a zillion other code sections and IRS statements over the last couple years. I

    25 Mar, 08:36 PMReply! Report AbuseLike0
  • Good point , Bruce7b
    27 Mar, 05:23 AMReply! Report AbuseLike0
  • I'm a bit puzzled.

    Since LNCO and LINE are identical from a business standpoint (both in the oil and gas business, so to speak), why would you not simply buy LNCO and avoid all questions raised as to whether you may or may not have UBTI? That's the exact reason LNCO was created.

    After the Berry merger, LNCO and LINE will both have the same dividend (distribution), and you can avoid all the hassles.

    25 Mar, 02:13 PMReply! Report AbuseLike0
  • RLP,

    LNCO has traded at a premium to LINE for a while now, probably because some people find it worthwhile to pay a bit more in order to avoid the K-1 hassles and issues.

    25 Mar, 02:41 PMReply! Report AbuseLike3
  • Hi Analytical,

    That is certainly true. However, it is trading higher not because of a filing tedium. It is trading higher because, avoidance of MLP taxation increases net yield, increasing value.

    25 Mar, 04:45 PMReply! Report AbuseLike1
  • I think the explanation is that LNCO is suitable for institutional investors, who have bid it up compared to LINE.
    25 Mar, 05:40 PMReply! Report AbuseLike0
  • Ken,

    Again, that depends on the individual circumstances. You call this article "fuzzy and provides no real answers" while you make universal statements that are NOT universal, and therefore in some circumstances factually wrong. For me, and for many other investors, LINE provides a higher yield. For another set of investors, LNCO provides a higher yield after taxes. My comments are fuzzy because there is not one universal right answer on the best way to own Linn Energy. For me, holding LINE in a Roth IRA is the best situation, and I specifically say that in this article.

    25 Mar, 06:59 PMReply! Report AbuseLike1
  • Hi Be Here Now,

    Sure that's it, institutional investors just can't wait to buy the worse of two identical investments, and they just bid it up for self flagellation.

    The same thing happened with KMP and KMR.

    The price discrepancy is driven by the perception of value. The only difference between the two issues is the tax issues.

    25 Mar, 08:40 PMReply! Report AbuseLike0
  • Hi Analytical,

    You are chasing a higher yield without properly making the tax adjustments. It is net-after-tax yield that matters.

    MLPs are probably the most complex investment available to the general public. The nuances are overwhelming.

    You treat it like the simplest thing around. Have you ever even seen a K-1? or filed UBTI for a non-resident state? Have you personally experienced the hazards of computing basis for UBTI as required under Rev Rul 84-53? Are you aware that 84-53 is so complex that the MLPs just tell you to do it, that they won't figure it out? Do you know what a 751 statement is and would you be willing to file it? Did you file a section 754 statement on behalf of your IRA when you purchased the Units?

    With all due respect, you seem like a nice guy and you are certainly trying hard to be of value to your readers. I respect that. But when it comes to the ins and outs of MLPs, especially the tax ramifications and its effect on valuations, you are a bicycle rider trying to fly an F-14.

    25 Mar, 08:52 PMReply! Report AbuseLike0
  • Have you read my article? You seem to like asking questions answered above.

    In lieu of responding to further comments, I'll wait until you start a response with a question that was not answered in my article.

    26 Mar, 02:03 AMReply! Report AbuseLike0
  • Hi Analytical,

    I've read your article very carefully and this is what I take away from it. Correct me where I'm wrong.

    1) You have awareness of the UBTI problems surrounding LINE and that they don't effect LnCo.

    2) LINE has a slightly higher yield (currently 7.97%) vs LnCO (currently 7.37%) and you favor the higher yield.

    3) You acknowledge that UBTI tax, if imposed, could reduce the yield on LINE sufficiently so that LnCo would net a higher yield.

    4) You choose LINE over LnCo because, with your modest $5000 investment, you can "run-around" the UBTI issue with targeted systematic sales and "earn" the extra yield LINE has to offer.

    Here's my problem with your strategy.

    1) We're talking about 60 basis points on a $5,000 investment. That translates into $30/ year.

    2) For this $30, you are willing to accept the extra work involved in receiving, reviewing and filing K-1's, not to mention filing a 751 statement every time you sell.

    3) For this $30, you are willing to check each and every non-resident state's income tax requirements to see if you have crossed the filing threshold. You are willing to file and pay tax in these states where appropriate.

    4) For this $30, you are willing to keep track of suspended loss to offset UBTI on sale. Something LINE does not provide.

    5) For this $30 you will create an algorithm that will enable you to compute exactly how many shares you need to sell to avoid UBTI recapture when you sell your units.

    6) Since you won't know the annual UBTI until after the close of any tax year, yet your systematic sales must take place during the year, your algorithm will figure this out.

    7) LINE is such a good investment you don't mind selling it off piecemeal each year.

    8) Your $5000 investment buys only 131 units. Your systematic selling program means selling very small lots (as little as, say 10) and incurring transactions fees, that could represent as much as 2%-3% of the sales price.

    9) I could go on, but do I need to?

    Now, to each their own, but for me that's an awful lot of effort and work for $30. So I congratulate you on being willing to make such a Herculean effort.

    Ouch, I just realized that it cost me over $30 in my time writing this comment. I hope you don't blow your $30 answering.

    26 Mar, 07:07 AMReply! Report AbuseLike2
  • Reel Ken,

    "Sure that's it, institutional investors just can't wait to buy the worse of two identical investments, and they just bid it up for self flagellation."

    Page 4 of LINE's LinnCo Presentation states that LNCO signifcantly expands LINE's investor base to (among others) institutions. So apparently you disagree with LINE management on this issue, which is your right, but I think they have a better understanding of this than you.

    In fact, I simply cannot make sense of your comment. In other comments you prefer LNCO to LINE, yet here you prefer LINE to LNCO. What gives?

    26 Mar, 11:53 AMReply! Report AbuseLike0
  • Your summary points are largely correct. And although I appreciate what you count as a herculean effort, it's really not.
    1) Yes, it's about 60 basis points.
    2) It takes no effort to receive a K-1, other than opening my mail box and an envelope. I have no filing requirement for the K-1's issued by companies held in my IRA (not true of everyone). And there's no need to make a 751 statement for publicly traded partnerships, which of course LINE is. See http://1.usa.gov/XEcOIT
    3) The income so far in any given year is way below the filing requirement for any state where there is income. This is one that might change my opinion -- if I had a large enough position to file in other states, that might be enough to make me to sell. Fortunately, it's not yet an issue.
    4)Not necessary with my strategy.
    5) The algorithm is sell all, buy back, each time total distributions gets close to $1000. For 100 shares, that would be every 3 years. Arithmetic doesn't seem like too difficult an algorithm.
    6) This is why it should be close to $1000, but under. Maybe $900.
    7) I can immediately sell and buy back. How good an investment it is doesn't matter if you're only not holding it for 10 minutes.
    8) I'm not sure why you're selling it piecemeal. As I wrote in the article, I would sell the whole position every 3 years or so. I even discussed how much the commissions would be a drag on return.
    9) You haven't given me a reason why my strategy won't work. Will it work for everyone? No. Is it going to be common enough that it should be the default strategy? No. But for my particular situation, it's the best. It obviously is not the best situation for you, and you're worried about other people following it blindly. That's a fair concern, and I specifically told them this won't work for everyone; that a consideration of their own tax situation is required.

    $30 or even twice $30 is a small price to pay for education. And a number of commenters here have thanked us because they learned something. I think you've done a good job illustrating a variety of reasons why holding LINE in an IRA can be bad for investors. I've identified one situation where it's good. Readers now have to figure out their own optimal strategy.

    26 Mar, 12:09 PMReply! Report AbuseLike0
  • Could you elaborate on #7?

    7) I can immediately sell and buy back. How good an investment it is doesn't matter if you're only not holding it for 10 minutes.

    What purpose would that serve, besides costing you $15-25 for the trades?

    26 Mar, 12:23 PMReply! Report AbuseLike0
  • Hi be here now,

    The premise you laid out was that institutional investors are bidding up the price.

    I disagree, institutional investors see added value in LnCo and are simply willing to buy it. It is the added value that is causing LnCo to outperform LINE.

    Bidding up the price is a whole other matter.

    I'm confused about your last mention. I prefer LnCo to LINE. What comment are you referring to?

    26 Mar, 12:44 PMReply! Report AbuseLike0
  • Reel Ken,

    Prices are bid up when there are more buyers than sellers. That is the effect of the additional, institutional, investors, that are not there for LINE. Simple supply and demand.

    My impression from your response to my original comment was that, in that response alone, you preferred LINE to LNCO. Clearly you do not.

    26 Mar, 12:50 PMReply! Report AbuseLike0
  • Hi AC,

    Look its your effort for your $30, who am I to argue.

    I transposed section 754 and 751 in my question. And 754 is requuired. LINE in its k-1 package seems to think 751, too.

    Since you've obviously figured this all out, I would appreciat eit if you could eexplain how your buy/sell 10 minute strategy gets around RevRul 85-53. Because unless you avoid this hurdle you're back to square one.

    If your strategy is to be the lessor of two investments and then try to ratiionalize it away, then your strategy is working perfectly.

    26 Mar, 01:16 PMReply! Report AbuseLike1
  • Everywhere else in this thread you quote IRS regulations as your evidence, but here you say the Linn Energy is the better source than the IRS? Interesting.

    I can't find any sources for RevRul 85-83. The IRS at http://1.usa.gov/Xa4t3Z doesn't have a PDF on it. Can you provide more information?

    26 Mar, 02:43 PMReply! Report AbuseLike0
  • Hi ASnalytical,

    I feel bad if I sent you on a wild goose chase. It is RevRul 84-53.

    But you typo'd also, so that compensates.

    26 Mar, 05:06 PMReply! Report AbuseLike0
  • To my eyes, it looks like that revenue ruling basically says that you have to use an average cost basis instead of a first in, first out or other method of cost basis calculation. Is that the one you're talking about?

    If so, my strategy of selling an entire position before UBTI is triggered means that 84-53 is irrelevant, since all methods of calculating a basis are equivalent if you liquidate the entire position.

    26 Mar, 06:06 PMReply! Report AbuseLike0
  • Hi AC,

    You've got the gist of it. The problem is that a simultaneous sale and purchase can be construed as a partial sale and capital contribution. Not a liquidation and new purchase. In that case, your average basis doesn't reset.

    In essence that's what 85-43 says, is that purchase and sales of partnership interests are indivisible and you can't treat it as individual lots.

    Most MLPs will report a buy and sale in the same tax year in this way. They won't issue two K-1's to the same taxpayer, one for each sale. Instead they combine it as a sale and a capital contribution and 85-43 sticks its ugly head.

    Better check with LINE and see what they do.

    26 Mar, 08:07 PMReply! Report AbuseLike0
  • Interesting. I'll read more on LINE's treatment of this. Selling on Dec. 31 and buying back on Jan 1 would avoid this, but would be suboptimal.
    26 Mar, 09:29 PMReply! Report AbuseLike0
  • Hi AC,

    I trade options frequently.

    One year I sold a call as part of a spread and it was assigned at expiry on a Friday. Well, on Monday, I bought to cover.

    The transaction was scheduled as a sale on the 17th and a buy on the 20th. One K-1, recorded as such.

    27 Mar, 07:54 AMReply! Report AbuseLike0
  • Ken,

    What's your basis for saying that a 754 statement is required by unitholders? The IRS at http://1.usa.gov/Zx9VMO and 26 C.F.R. § 1.754-1 at http://bit.ly/YDVcTK both suggest that these statements are made by the partnership, not by limited partners. I'm not saying you're wrong, but I can't find data to support your assertion.

    27 Mar, 01:30 PMReply! Report AbuseLike0
  • HI AC,

    I haven't done independent research on this, and I reached my position because the K-1 package from EPD says to file a 754 when you purchase units. They even provide a sample language with warnings if you don't.

    It may be resultant from an accounting change they made.

    If this is not the case, blame them AND blame me for accepting something without checking it out.

    27 Mar, 01:36 PMReply! Report AbuseLike0
  • Ken,

    That fits with my research. I can't find anything from a government source saying individual investors need to file 754 statements, but I have come across some MLPs that say you should. Other MLPs specifically say you don't. An accounting change would fit the data.

    27 Mar, 01:43 PMReply! Report AbuseLike0
  • Hi AC,

    I checked my LINE k-1 and they are silent on it.

    Seems to me that confirms what you concluded.

    This is something I should have done more research on before I settled in. Glad you picked me up.

    27 Mar, 01:56 PMReply! Report AbuseLike0
  • I think your article is neither fortunate or unfortunate. It is well written and helps me to understand possible taxation treatment when I go to sell my LINN in my SEP. In my case everything I withdraw is taxable income so what does it matter? My CPA is even fuzzy on UBTI.
    25 Mar, 02:45 PMReply! Report AbuseLike1
  • Hi Jralpha,

    The article provides no definitive information on the tax consequences. If it had, your question would have been answered.

    The tax issue revolves around the SEP, itself, having to pay taxes, in addition to any you might.

    You see, when an article is fuzzy and provides no real answers, readers such as yourself are left in the dark.

    I suggest you seek out other articles that address these issues in a more responsible manner.

    25 Mar, 04:43 PMReply! Report AbuseLike1
  • Ken The recapture as you read it is the total depreciation and deletion claimed when you sell an MLP in an IRA account? You said you could count all your negative UBTI against the recapture I think. To count your negative UBTI do you have to fill out a form T-990 each year or can you wait until you sell the MLP which could be 10-20 years?
    25 Mar, 04:00 PMReply! Report AbuseLike0
  • Hi alschroed,

    Just keep records. No filing each year.

    25 Mar, 04:39 PMReply! Report AbuseLike0
  • I received my first k-1 this year from LGCY inside my ROTH. I did not report anything because Box 20 Code V (UBTI) showed a negative amount. I understand that I only report this if this amount is over $1000. Since it was not, do I have to worry about reporting values in Box 1-3 that show ordinary income/dividend? From my findings people say to ignore these and simply look at UBTI when inside an IRA.
    25 Mar, 04:08 PMReply! Report AbuseLike0
  • If you didn't sell any units, the K-1 UBTI is all you need to deal with
    25 Mar, 04:40 PMReply! Report AbuseLike0
  • ken -- but what if you hold units in a standard brokerage account? i have both . . .

    and, frankly, after a year of listening to various sides of this in/out tax advantaged accounts, i'm now just as confused as when i started.

    26 Mar, 11:02 AMReply! Report AbuseLike0
  • The k-1 is all you need to address if you don't sell any units.
    26 Mar, 01:18 PMReply! Report AbuseLike0
  • thank you, sir!
    26 Mar, 01:21 PMReply! Report AbuseLike0
  • I need to ask, for years my UBTI is always a negative (no income) on my shares of LINE. This means when I sell, there is no recapture OR does it mean I need to claim that as a positive at the time of sale?
    25 Mar, 04:44 PMReply! Report AbuseLike0
  • I have held LINN stock in my ROTH for 5 years and have never had to pay any tax. In 2012, I earned $2,000 in dividends and paid no tax. I am happy with LINN and have no intention of selling. Great article, Analytical.
    25 Mar, 04:46 PMReply! Report AbuseLike0
  • Hi User,

    LINN has been good and congrats on owning it.

    First, LINN doesn't pay dividends.

    Second, since your distributions, over five years probably approach $10,000 you, or your heirs will succumb to UBTI. And this amount is building. Eventually the tax man will get his due.

    25 Mar, 09:02 PMReply! Report AbuseLike0
  • One thing is certain; if there was ever any doubt that our tax code need simplifying and clarifying, this should convince the doubters.
    25 Mar, 04:50 PMReply! Report AbuseLike3
  • I hold a significant portion of my ROTH in MLPs. I have had since 2009. I have net negative UBTI every year. Only one of my MLPs had positive MLP (MMP). Many G&P MLPs have UBTI.

    The discussion about tax advantaged investments in retirement accounts usually takes up annuities and financial advisors with no scruples pushing retirement account investors into annuities.

    The case for MLPs becomes more interesting in the sense that you have an investment that grows its income quarter over quarter. I have MLPs generating double-digit yield to cost distributions and one with 25% yield to cost.

    If there is a better income generating investment for my ROTH IRA I haven's found it and I do look because none of us can afford to rest on our laurels.

    25 Mar, 04:51 PMReply! Report AbuseLike1
  • Hi Bruce,

    Yes, MLPs have done well. Nice move.

    Keep track of your negative UBTI and suspended losses. You will need them when, and if, you ever sell any units. (of course since they are in an IRA you, or your heirs, will be forced to liquidate at some point)

    From what you say, you are facing down a significant UBTI tax problem when you sell these units. These "suspended losses" can help reduce the tax bite, but most MLPs don't keep records of them.

    25 Mar, 09:10 PMReply! Report AbuseLike0
  • Reel Ken,

    Don't the adjustments to basis and ordinary gains (reported on the Supplemental Sales Schedule) already account for suspended losses?

    26 Mar, 06:01 PMReply! Report AbuseLike0
  • Hi giorgio,

    It would be nice if they did. I know that EPD and LINE don't.

    They simply say that if you have them be sure to use them. A while back one reader said he spoke with one of them and complained. They answered that they don't have the capability to track them

    Maybe it will change, maybe for some it already has, but not for mine.

    26 Mar, 08:10 PMReply! Report AbuseLike0
  • One thing is certain; if there was ever any doubt that our tax code needs simplyfying and clarifying, this should be convincing enough.
    25 Mar, 04:53 PMReply! Report AbuseLike2
  • Thanks to A/Chem and Ken for discussing this important topic.
    25 Mar, 07:07 PMReply! Report AbuseLike1
  • An interesting new disclosure from E-trade, just made available (found on another board):

    Etrade's new policy changes-

    8.06 Investment of Amounts in the IRA – You have exclusive responsibility for and control over the investment of the assets of your IRA. All transactions will be subject to any and all restrictions or limitations, direct or indirect, that are imposed by our charter, articles of incorporation, or bylaws; any and all applicable federal and state laws and regulations; the rules, regulations, customs and usages of any exchange, market or clearing house where the transaction is executed; our policies and practices; and this agreement. After your death, your beneficiaries will have the right to direct the investment of your IRA assets, subject to the same conditions that applied to you during your lifetime under this agreement (including, without limitation, Section 8.03 of this article). We will have no discretion to direct any investment in your IRA. We assume no responsibility for rendering investment advice with respect to your IRA, nor will we offer any opinion or judgment to you on matters concerning the value or suitability of any investment or proposed investment for your IRA. In the absence of instructions from you, or if your instructions are not in a form acceptable to us, we will have the right to hold any uninvested amounts in cash, and we will have no responsibility to invest uninvested cash unless and until directed by you. We will not exercise the voting rights and other shareholder rights with respect to investments in your IRA unless you provide timely written directions acceptable to us.

    You will select the investment for your IRA assets from those investments that we are authorized by our charter, articles of incorporation, or bylaws to offer and do in fact offer for IRAs (e.g., term share accounts, passbook accounts, certificates of deposit, money market accounts.) We may in our sole discretion make available to you additional investment offerings, which will be limited to publicly traded securities, mutual funds, money market instruments, and other investments that are obtainable by us and that we are capable of holding in the ordinary course of our business.

    If the investments held in your IRA generate $1,000 or more of "Unrelated Business Taxable Income" within the meaning of Section 512(a) of the Internal Revenue Code ("UBTI"), your IRA may owe a tax under Section 511 of the Internal Revenue Code. You understand and agree that you will be solely responsible for obtaining all information necessary for determining whether your IRA is required to file a Form 990-T for each tax year and all information needed to properly complete and file a Form 990-T for such tax year. Furthermore, you agree to prepare or have prepared the required Form 990-T tax return, and any other documents that may be required, and to submit them to the Custodian for filing with the IRS, at least 5 business days prior to the date on which the return is due for such taxable year, including an appropriate payment directive authorizing the Custodian to pay the applicable UBTI from your IRA. The Custodian will then file the Form 990-T in accordance with your instructions. You agree to indemnify the Custodian from any claims that may arise relating to the Form 990-T.

    You understand and acknowledge that the Custodian will assume that either (a) your IRA has not generated UBTI or (b) you have independently filed the Form 990-T if the Custodian is not provided the Form 990-T and payment directive within the time period specified in Section 8.06 for the applicable tax year. You agree that, if your IRA holds assets that generate UBTI, your IRA at all times will contain sufficient funds to pay any tax imposed on the UBTI as the time this tax obligations becomes due, and that, if necessary to satisfy such obligations, you will liquidate assets or contribute sufficient amounts to your IRA (even if your contribution constitutes an "excess contribution"). You further agree that, to the extent funds are not available, the Custodian is authorized to liquidate any investments in your IRA necessary to generate the funds needed to satisfy your tax obligation. You understand and acknowledge that, in cases where the annual federal tax due is more than $500, the IRS requires that quarterly estimated tax payments be made. You understand and acknowledge that the Custodian will make such quarterly payments on behalf of your IRA only if you direct us in writing to make these payments, and if you notify the Custodian of the amount you wish to have paid each quarter.

    25 Mar, 08:02 PMReply! Report AbuseLike0
  • I called Charles Schwab this morning and they actually set up a spreadsheet on your account, and if it (the IRA) has MLPs, they will send the owner a letter in early February requesting the K-1s. Sometime around April 1st (when all the K-1s presumably have arrived), they will contact the owner if any taxes are due and obtain the payment information (process is the same as E-Trade describes above).

    They will also file a 990-T if the UBTI is negative, and track it year-year. She was not able to answer whether the UBTI is cumulative year-year, or just for each separate MLP.

    Schwab does this "because they are required to" and does not charge for the filing.

    26 Mar, 12:04 PMReply! Report AbuseLike1
  • Hi rip,

    Good info !!!

    The world is closing in on the UBTI issue. All the financial institutions and the MLPs themselves are starting to "caveat" the whole area.

    Recapture UBTI has been a "sleeper" for a long while, but they are wising up to their potential liability as providers. Hopefully these kind of discussions will wake the SA readers up and bring them awareness.

    The Age of Innocence has passed..

    25 Mar, 09:15 PMReply! Report AbuseLike0
  • RK,
    Many have asked, on various articles on SA, and other Boards, for investors who have paid taxes on sale of MLPS in IRA. to come forward, and confirm such. With close vigilance. I have never seen anyone post on such. have you ever done it, or know anyone who has? why no responses?

    25 Mar, 09:39 PMReply! Report AbuseLike0
  • Hi GD,

    There was a post to a previous article that gave the statistics , direct from IRS, of the UBTI paid on IRAs.

    I don't remember all the details, but they were in the thousands of taxpayers and I think the average tax was around $6,400.

    I'll try and hunt it down for you. Don't hold me to the above numbers.

    I've also had communications from MLP owners that have paid these taxes.

    Frankly, anyone can say they did or did not pay. I wouldn't rely on it one way or the other. I know some of those that keep pushing the point and I view it as a smokescreen.

    If the IRS instructions to 990-T aren't enough, if the IRS Audit Guide (provided in a earlier article) isn't enough, if the Code isn't enough, if the Regs aren't enough, if the Tax Attorneys at Tax Package Support isn't enough, then I can't see how unsupported statements (for or against) can provide the comfort level you're looking for.

    You see, instead of pressing that issue, I'd simply ask the naysayers to provide ONE, just ONE piece of authority (opinion is not authority, hearsay is not authority) to discredit the information.

    I may be simple-minded in this, but I sort of think our system of rules/regulations presumes that one side presents it's case and the other side presents their case and the verdict is rendered.

    It's not ... one side presents its case and the other side says "liar, liar pants on fire".

    25 Mar, 09:58 PMReply! Report AbuseLike2
  • Well I sold 1000+ shares of LINE in Nov 2012. Held it in an IRA for 2 yrs. Meet with accountant tomorrow, K1's in hand.

    Will know damages (if any) from IRA well before April 15.

    Some people waste 100's of thousands of dollars in tuition at a name brand University to get a useless degree. I sure don't mind paying a couple grand to cut through all the opinions and finally get an actionable answer to the whole question.

    True knowledge is always worth the price.
    Uain

    25 Mar, 11:39 PMReply! Report AbuseLike2
  • Hi Uain,

    Make sure you show your CPA the supplemental sales schedule.

    That's where the recapture is provided. He'll need to file a 4797, a 990-T and a 751 statement for the sales.

    Also, show him the non-resident state income schedules so you can be sure to file in each state as appropriate.

    Don't forget to bring all your prior K-1s with you. He will need to compute your cumulative suspended losses to offset some of the UBTI. LINE doesn't provide it.

    If he has any questions, the people at Tax Package Support are very helpful.

    My guess is that a couple of grand in costs, is probably just about right.

    Good luck.

    26 Mar, 07:16 AMReply! Report AbuseLike1
  • Uain, Please do come back and let us know what you learn. First-hand info is very valuable.
    26 Mar, 09:22 AMReply! Report AbuseLike1
  • Having purchased my 1st MLP in '72 (disposed of it in '92), I suggest readers listen to Reel Ken regarding tax implications. (FWIW, I took an initial position in LNCO today in a Roth IRA.)
    26 Mar, 12:15 AMReply! Report AbuseLike0
  • Does anyone know someone whom has had to pay to the IRS -- the UBTI taxes out of their accounts, regardless of whether it was IRA -- ROTH -- or Taxable? Does anyone have any personal experience of having to pay UBTI ? I read of many articles talking about it-- I've not read anything from someone whom has paid. Is there a link I could be directed to from someone with this experience -- I'm looking at 11K in distributions from KMP this year (2013), if my Quicken program is even close to correct.
    Thanks

    26 Mar, 05:11 AMReply! Report AbuseLike0
  • Hi R.Fritz,

    It's amazing how every time UBTI comes up this exact question appears. In fact, it now appears three times within this article. I could say yes or I could say no. Do you believe me or not.

    Here's the answer I gave GD...

    There was a post to a previous article that gave the statistics , direct from IRS, of the UBTI paid on IRAs.

    I don't remember all the details, but they were in the thousands of taxpayers and I think the average tax was around $6,400.

    I'll try and hunt it down for you. Don't hold me to the above numbers.

    I've also had communications from MLP owners that have paid these taxes.

    Frankly, anyone can say they did or did not pay. I wouldn't rely on it one way or the other. I know some of those that keep pushing the point and I view it as a smokescreen.

    If the IRS instructions to 990-T aren't enough, if the IRS Audit Guide (provided in a earlier article) isn't enough, if the Code isn't enough, if the Regs aren't enough, if the Tax Attorneys at Tax Package Support isn't enough, then I can't see how unsupported statements (for or against) can provide the comfort level you're looking for.

    You see, instead of pressing that issue, I'd simply ask the naysayers to provide ONE, just ONE piece of authority (opinion is not authority, hearsay is not authority) to discredit the information.

    I may be simple-minded in this, but I sort of think our system of rules/regulations presumes that one side presents it's case and the other side presents their case and the verdict is rendered.

    It's not ... one side presents its case and the other side says "liar, liar pants on fire".

    26 Mar, 07:21 AMReply! Report AbuseLike1
  • RK,
    Good Morning! The regs, are the Regs--what a mess!
    My desire is to hear from several people, w/ real world experience paying the "Tax", or not, how, and why, with actual experience, whether they are in compliance w/ your opinion, or not. Already talked to 2 CPA's, who were not helpful! Did not feel like paying for their education on the issue.
    I'm not afraid to pay a competent CPA, or trying to avoid paying a tax. Just want real live experience?

    26 Mar, 09:17 AMReply! Report AbuseLike0
  • Hi GD,

    Interesting. You want to ignore the plain language of the IRS in the instructions for form 990-T and the Tax People at Tax Package Support, to name a few. Instead you hunger for hearsay.

    This is even more telling, as you acknowledge that your CPAs have trouble understanding what should be done, but some lay person, who may or may not have filed correctly is of value to you.

    Now, to shed some insight. Taxpayers will fall into one of two groups....

    1) Those that understand the instructions provided by the IRS and their MLP and have filled out the forms and paid the tax. Put me in that group. On the other hand, since you have trouble believing all the other source material I provided, then I guess you have trouble believing this too.

    2) Those that can't or choose not to understand the instructions and don't file. In essence those that play the "audit lottery". By the way, as you can guess from the ratio of comments on SA, this is easily the majority.

    For those that fit into category 2)... they mostly get away with it. This is because the recapture amounts are only reported to the taxpayer by the MLP with instructions to file 4797. Recapture is not provided to IRS on the K-1 or any other form.

    This is changing as the MLPs and B/D's a have new reporting requirements.

    The only confirmation you can receive of any real value would be a THIRD group---- those that have filed 990-T or 4797 with IRS and had the IRS return the form saying there is no tax. Good luck with that one.

    26 Mar, 09:43 AMReply! Report AbuseLike0
  • Reel
    OK lets try from a different direction. I'm looking for experience. Perhaps I will get my answer from my own Tax Accountant -- I just sent him about 7 pounds of tax information for 2012. My wife has 930 shares(units) of KMP in an IRA, 430 ROTH, and 100 between she and I. I have only 600 in an IRA. I think UBTI is limited per account, also, per tax-payer, to 1K. Am I right --so far? I always file late, I always pay a penalty for under with-holdings, and I always get mad at the IRS. I do pay my Accountant very well, close to 2K each year to put my tax-return in order. This year is different -- wife and I retired together in 2011 --- and moved a great deal of funds into MLP's middle to late 2011, the tax year 2012 will be a full year of MLP income --- and I'm a lit worried about that UBTI "thing". Experience will be an answer, perhaps. Don't know a way to keep you posted about this tho --
    Anyway - Thanks ya'll

    26 Mar, 05:40 PMReply! Report AbuseLike0
  • Reel Ken,

    "The only confirmation you can receive of any real value would be a THIRD group---- those that have filed 990-T or 4797 with IRS and had the IRS return the form saying there is no tax. "

    The IRS doesn't receive enough info to know whether tax might be due or not... they don't receive the suppemental sales schedule figures.

    26 Mar, 06:09 PMReply! Report AbuseLike0
  • Giorgio,

    I was under the belief that the brokerages are now required to report more information, am I wrong.

    You may be right that you could slide by, but boy, if you hit a audit, then you are going to produce a lot of records.

    Hope all is going great my friend. Gratian

    26 Mar, 06:18 PMReply! Report AbuseLike0
  • Hi R. Fritz,

    UBTI is seperate per taxpayer.

    Is the money you moved into MLPs in 2011 in IRAs or taxable. Taxable accounts don't have UBTI.

    If it's in IRAs, I would swap out the KMP for KMR. I would also do it in the taxable account.

    You need to look at the whole issue, buyt there is no question in my mind that, KMR works better than KMP. It will also take 4 pounds of your "little tax bundle".

    26 Mar, 08:15 PMReply! Report AbuseLike0
  • Hi giorgio,

    that's my point. Trying to get affirmative proof is impossible, until some case goes to court. This, unfortunately, may be sooner than people think.

    26 Mar, 08:17 PMReply! Report AbuseLike0
  • Hi Gratian,

    I've seen the custodial agreements for IRAs. Check them out.

    It is a lesson in "pass the buck". The B/D's are trying to get out of the way of what will prove to be flying bullets.

    There is a phase in on reporting and MLPs haven't been hit yet. I don't lkknwo if anyone knows when or if they meet the new reporting requirements.

    26 Mar, 08:19 PMReply! Report AbuseLike0
  • Gratian,

    The IRS might receive more in the future, but I don;'t think the IRS gets anything more than the K-1 now. Computing basis and taxes due is still left up to the unit owner, and as you can see, there is a LOT of uncertainty on MLP tax matters, even at the IRS...

    As for records, well, I keep all my stock buys and sells in word docs. I can go back 20 years if need be to show how I calculated my basis. I also keep every K-1. I even declare my options income, and I know the IRS doesn't get that info yet.

    If I ever get audited, one of my old bosses (who paid me under the table) is the one who should be very afraid... she doesn't know I declared all that under the table money on my tax returns....

    27 Mar, 02:00 AMReply! Report AbuseLike0
  • @giorgiolb, me too on being scrupulous on reporting every scrap of income. I've always believed it's how to keep out of *real* trouble with the IRS. Things like these MLP muddy tax laws can always be smoothed over, but under-reporting income is a black-and-white issue. Not that your friendly IRS auditor will understand the MLP stuff any better than you. I just went through an IRS "inquiry" for a prior-year return with an MLP sale (in a non-tax-advantaged account) and I'm pretty confident the IRS agent didn't know how to account for any of it.

    And, no, the IRS doesn't get any of the supplemental info on MLP sales. I remember reading that options sales will be reported to the IRS beginning with this tax year.

    27 Mar, 07:11 AMReply! Report AbuseLike0
  • Hi giorgio and Rick,

    there is alittle fly in the ointment on the reporting aspect of sales.

    If you sell an MLP, you are required to file a 751 statement, which says, essentially, that you have reported all recapture properly.

    So, even if the MLP doesn't report your recapture to IRS you're stuck.

    27 Mar, 08:01 AMReply! Report AbuseLike0
  • Not sure how submitting a generic 751 statement is a "fly in the ointment" to the fact that the IRS does not get the supplemental data.
    27 Mar, 08:55 AMReply! Report AbuseLike0
  • rickstep,

    Yep. The fact that the IRS even requires a 751 statement leads me to believe there's a lot of blind leading the blind going on.

    Turbotax doesn't even generate a 751 statement. I prefer to e-file my tax returns, so I typed my 751's onto the one blank form permitted by turbotax. That clearly isn't the best way, but it appears to be the only POSSIBLE way to e-file my entire return, all at once.

    So while Reel Ken's correct about the requirement, it doesn't appear to be a very big priority at the IRS... or at Intuit, for that matter.

    27 Mar, 01:14 PMReply! Report AbuseLike0
  • giorgio,

    I take the easy way out, I turn everything over to the CPA firm each year along with the power of attorney allowing them to talk to the IRS.

    Last year when the IRS came knocking to check on my return, everything was handled by the CPA firm.

    Life is to short to worry about this kind of crapola.

    As for MLP's, my CPA told me only in a taxable account and because I'm worried that he will hurt me, I always follow his advice.

    Best wishes my friend. Gratian

    27 Mar, 01:54 PMReply! Report AbuseLike0
  • Gratian,

    Sometimes the easy way out is best, but in this case, there seems to be no clear cut answers, even among CPAs....

    ..the answer is simple, congress needs to simplify the tax code, otherwise, a legion of tax attorneys and your CPA firm will continue to reap the benefits....

    hah.

    28 Mar, 03:50 AMReply! Report AbuseLike1
  • Giorgio,

    I agree, if we went to a simple 10% flat tax for individuals and corporations the unemployment rate would go up for the tax preparation folks.

    However we pay good money to make sure we buy the best of the worthless pin head politicians, so we have no worries about making anything simpler.

    Best wishes, Gratian

    28 Mar, 05:57 AMReply! Report AbuseLike0
  • RK,

    Do you know of any MLP issue changing the ownership of a joint taxable account to a family trust?

    It would still be a taxable account, but the ownership is the family trust instead of spouses.

    It does seem that we have had a lot of debates over the years of having MLP's in IRA's. I keep mine in the taxable accounts.

    Best wishes, Gratian

    26 Mar, 09:22 AMReply! Report AbuseLike0
  • Hi Gratian,

    If the family trust is revocable and the beneficiaries report on the same ID#, no change.

    If the trust is irrevocable and has a separate ID#, then it would be a gift. I don't see a problem, outside of normal gift trust issues your attorney would advise you about.

    26 Mar, 01:22 PMReply! Report AbuseLike0
  • Ken,

    Thanks for the reply, yes it is revocable with the same ID#. I was hoping that I did not screw up the pooch with all the estate changes this year.

    I moved a joint taxable loaded with MLP's and Muni's to the trust created by my attorney.

    Best wishes, Gratian

    26 Mar, 01:34 PMReply! Report AbuseLike0
  • Reel Ken and alschroed: The 2 years I owned LINE in my Roth, the negative UBTI far exceeded the distributions. Does this mean, if I sell now (1) there is no reportable UBTI in respect to the sale, and (2) I won't even need to complete the T-990? Thanks
    26 Mar, 10:08 AMReply! Report AbuseLike0
  • Hi User,

    Recapture is a direct function of depreciation. The negative UBTI probably indicates that your depreciatin exceed the income.

    You will still have recapture, but keep track of the negative UBTI, as it should be able to reduce your recapture UBTI.

    Check your holding out wth Tax Package Support (http://bit.ly/HMDorz) and search for the tax calculator. That will approximate your recapture amounts. Just be sure to subtract your neg-UBTI, as it probably ins't concluded.

    26 Mar, 01:27 PMReply! Report AbuseLike0
  • I simply don't understand why, if one has a choice between LINE and LNCO for one's IRA, one wouldn't choose LNCO.

    I agree completely with Reel Ken, and have yet to see a good argument refuting him.

    26 Mar, 10:37 AMReply! Report AbuseLike1
  • Sounds to me like as long as LINE is generating negative UBTI that exceeds the distributions, LINE is still the better choice in an IRA.
    26 Mar, 04:40 PMReply! Report AbuseLike0
  • User: I respectfully disagree.
    26 Mar, 04:44 PMReply! Report AbuseLike0
  • So I bought and sold tons of LINE last year but never held it through a distribution. Made a good living doing it. I got my K1 and it shows a negative UBTI of over 100,000 dollars. How can this hurt me?
    26 Mar, 04:48 PMReply! Report AbuseLike0
  • Ken, section 512(b)(5) of the Internal Revenue Code excludes gain from UBTI unless it is from inventory property. Section 512 is the section that defines UBTI. Given that exclusion, not sure how recapture from sale of partnership unit is UBTI
    26 Mar, 04:53 PMReply! Report AbuseLike1
  • I know this isn't an MLP tax forum but it seems like we have lots of people with knowledge so I thought I would ask about what happens when I give MLP units held over a year (i.e., long term) away either to:

    1 - a 501c3 charity - do I get to deduct the current market value at time of donation and when the charity sells the units do they end up paying the recapture tax OR do I only get to deduct the written down value of the units?

    or

    2 - my daughter who is in a much lower tax bracket (15% bracket) who then sells them and then pays the recapture tax at her lower tax rate. Related to this is what is the value of the gift (i.e., we want to give her our annual exclusion $28,000) - is it the current market value of the depreciated value?

    Thanks for any knowledge you can share.

    26 Mar, 05:41 PMReply! Report AbuseLike0
  • The rules are that MLP's with a low basis are an "ordinary income recapture event" waiting to happen. You can still donate MLP's (like stocks) to avoid paying capital gains taxes on any embedded capital gains, but the ordinary income deferral comes due also. Effectively, your charitable write off is limited to the unit appreciation over what you paid for the units (which is different from your tax basis). If there is ordinary income that has been deferred, you are liable for that at the time of the donation.

    Here is a good summary :
    http://onforb.es/HTVCbn


    Treatment upon charitable donation
    Question: “Is an MLP an ideal asset for charitable donation?”
    Answer: Probably not.

    Donating an MLP to a charity may not be the ideal strategic approach for a taxpayer to take. Although the tax code permits a client to make a charitable contribution of MLP assets, the actual amount of the charitable deduction will be reduced by the amount of depreciation deductions that would have been subject to recapture (and subject to tax at ordinary income rates) upon
    donation.

    However, in most cases, the fact pattern that arises is that taxpayers will own MLPs for many years and consider donating them only after their basis has declined substantially and is at, or near, zero. At that point, the value of any charitable donation will generally be substantially reduced due to the impact of the above rule.

    Tip: Charitable entities that receive MLPs as a result of a donation should also carefully assess whether or not they wish to divest themselves of the asset or continue holding it and risk exposure to the potential tax consequences associated with UBTI.

    Tip: Clients seeking to make a charitable donation to a tax-exempt entity can normally obtain a superior tax result by gifting an asset other than an MLP from within their portfolio. Working with a tax advisor can normally provide the best insight regarding which investments might prove to be the appropriate candidates for philanthropic giving.

    26 Mar, 08:47 PMReply! Report AbuseLike0
  • Hi Fred,

    You cannot deduct the full FMV. You have to reduce it by any recapture that you would have incurred had you sold them prior to donating. I don't know what happens when the charity sells them, but I would deduce they don't have to realize recapture at that juncture. You, in effect, have.

    A donee's basis depends on the FMV and your basis. It has many possible outcomes.

    Here's a link (http://bit.ly/11Jdp2M).

    Good luck

    26 Mar, 08:26 PMReply! Report AbuseLike0
  • Thanks Ken for your comment above,

    Accountant asked for the same. I do believe I would like to contribute and article on my experience in late April.

    all the best....

    26 Mar, 11:35 PMReply! Report AbuseLike0
  • I'm a corporate tax guy, and a bit fuzzy on the whole MLP area of investing, but anxious to learn more. This discussion has been great.

    I have two simple scenarios, both in after-tax accounts:

    1. Tax basis in LINE (or any MLP) is approaching zero, and taxpayer is considering adding to his basis (buying additional units) in 2013 to avoid capital gain treatment required on distributions when your tax basis is zero. I know the K-1 is a cumulative basis of all units held, but would the IRS expect the basis to be tracked on a lot by lot basis? If so, would it then be better to sell all units, and buy back the next day and create a new basis and lot? His sale would generate a large income recapture, plus a capital gain that would be due sometime in the future either way - only pulling them into 2013, but would avoid the double taxation of "negative" basis. He also is currently in the 15% tax bracket.

    2. Is the 751 statement required for MLP sales in all accounts, or only for IRA accounts? The link above suggests not if covered by a 1099-B, which is any after tax account

    Outstanding info here.

    27 Mar, 12:53 PMReply! Report AbuseLike0
  • Hi taxman,

    1. MLPs are not tracked on a lot by lot basis. All units have a shared average basis. See Rev Rul 84-53.

    2. A 751 Statement is required on all accounts. The sole exception is if the recapture is reported to the IRS, which no MLP that I know of does.
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