Form 1065 K-1 in IRA

[JG EA]

Why do partnerships that are inside an IRA send the K-1 to the individual? I've asked the investment company this two years in a row and last year they said it was a mistake and should have been sent to the investment company. This year there was another sent with a letter saying this is important tax information and should be on their tax return.

I called again and the investment company said it was sent because they don't really care (my words not his) it is just an investment they buy and don't care about how it is reported. He also said that the individual needed to report any ordinary income over $1000 on Form 990T. This doesn't seem to make any sense since an individual is not a non-profit organization.

Do they just send it because it has to go somewhere? Is is a way to see how the investment is doing? I don't understand and the words in the letter that it needs to go on the client's tax return are unsettling.

[Bees Knees]

Form 990-T is used by a tax exempt organization to pay tax on unrelated business income. Example: Church sets up a hair salon in the basement and charges customers to get their hair done. The activity is unrelated to the tax-exempt function of the church, and since it is a business, the church has to pay tax at normal corporate tax rates on profits made, even if those profits were used to fund the church.

I have read in the past that an IRA itself is a tax-exempt organization that could be subject to the unrelated business income tax. An S corporation cannot have an IRA as a shareholder, but a partnership can. I’m not sure exactly what could require an IRA to pay unrelated business income tax on K-1 profits, but even if it were, I think it would be the IRA that would be required to to file Form 990-T and pay the tax, not the IRA owner.

[Bees Knees]

I found the answer in the 990-T instructions. On page 2 under “Who Must File” it gives a long list of who must file. One on the list says:

Fiduciaries for the following trusts that
have $1,000 or more of unrelated trade or
business gross income must file Form 990-T:
1. Individual Retirement Accounts
(IRAs) described under section 408(a),
2. Simplified Employee Pensions
(SEPs) described under section
408(k)
3. Simple Retirement Accounts
(SIMPLE) described under section
408(p),
4. Roth IRAs described under section
408A(b),
5. Coverdell education savings
Accounts (ESAs) described under
Section 530(b)
6. Archer Medical Savings Accounts
(Archer MSAs) described under
section 220(d), and
7. Qualified tuition programs described
under section 529.

Note that it is the fiduciary or the trustee of the IRA that must file Form 990-T, not the individual IRA owner.

[JG EA]

Thanks, yes I absolutely agree. So why do they send them?

[thomtax]

I have this situation personally. Although I did not realize it at the time, when I was buying shares in a company that paid royalties from oil and gas shares, it was organized as a trust, not a corporation. I had read, after my purchase, in the past that it is not a good idea to put these shares in an IRA since it causes tax complications.

I received these forms this year, from Charles Schwab, with a letter enclosed. The letter said that if I received more than $1000 of this type of income, I needed to forward the K1s to them. It said something about them paying any taxes out of the IRA. Naturally, since it was mine, it has been put off until everyone else's work is done and I haven't studied it real closely.

After I get further info, I will pass it along.

LT

[JG EA]

Thanks very good information and I look forward to hearing after tax season what you found out.