Discussion:UBIT and investment in limited partnership by qualified plan

From TaxAlmanac, A Free Online Resource for Tax Professionals
Note: You are using this website at your own risk, subject to our Disclaimer and Website Use and Contribution Terms.

From TaxAlmanac

Jump to: navigation, search

Discussion Forum Index --> Advanced Tax Questions --> UBIT and investment in limited partnership by qualified plan

Discussion Forum Index --> Tax Questions --> UBIT and investment in limited partnership by qualified plan

Thisisace (talk|edits) said:

19 April 2011
I am currently researching the tax implications associated with an investment in a limited partnership by a qualified plan.

My client occasionally makes private placement offerings of oil & gas limited partnership interests, and is considering re-structuring its offerings to make them more attractive to the qualified plan marketplace. Because oil and gas interests are non-REITable and the responsibility for creating "blocker" arrangements to block UTBI ultimately lies with the qualified plan itself, I am trying to determine whether there is a limited partnership structure that can avoid UBTI (or, at the very least, minimize it).

I realize that the ultimate determination is highly fact specific, but, assuming there is no debt-financed property or acquisition indebtedness that could trigger section 514, could (1) distributions to the qualified plan partners be excluded from UBIT as a return of capital, and (2) if the partnership assets were sold prior to the time the qualified plan partner exceeded its basis, would the resulting capital gain not be treated as UBIT?

Let me explain further. What if the limited partnership, instead of distributing income currently to a qualified plan partner, declared such distributions as a return of capital (decreasing the investor's basis) - would this avoid UBIT? I found an article that said that if a tax-exempt entity acquired stock in a taxable corporation, distributions by the corporation would be excluded from UBIT either as dividends, returns of capital or capital gains. Unfortanutely, I am unable to find any support for this proposition in the Code or Regs. Is a return of capital excluded from UBIT??If so, where does it say this in the Code/Regs?

Assuming that the distributions are declared a return of capital, what if the limited partnership sells the partnership assets prior to the time that the qualified plan investor exceeds its basis (once it is reduced to 0) resulting in a capital gain - would this avoid UBIT? The only support I could find for this proposition is section 512(b)(5), which applies to gains realized in connection with capital gains-type property (not ordinary income property). Per section 512(b)(5), gains or losses from the sale or other disposition of property are generally not taxed as unrelated income. Under this provision, all income that would normally be considered capital gain income is excluded from UBTI. Is this the provision you were referring to in your article? Also, I looked at Reg section 1.1245-6(b), which provides that depreciation recapture overrides the exclusion from gains under section 512(b)(5) - what does this mean?

Thanks in advance for your comments and suggestions. Your assistance is greatly appreciated.

LH2004 (talk|edits) said:

April 21, 2011
No, the way that partnership distributions are labeled doesn't matter. No, that question is not even a little bit fact-specific. Yes, partnership distributions are generally excluded from income -- regular or UBTI. It is partnership distributive shares that are more likely the issue.

If you can't find the page in the Code that says that corporate distributions aren't subject to UBIT, may I gently suggest that you refer your client to someone who is more experienced with these issues?

To join in on this discussion, you must first log in.
Personal tools