Taxation on Sale of MLPs in an IRA

Comments on “Making Sense of Master Limited Partnership Tax Rules,” by Mary Lyman, in the November 2012 AAII Journal:

What’s missing in this article is taxation on sale of an MLP [master limited partnership] in an IRA. Also, how is the tax paid? Meaning, who prepares the tax statement?

— Gerald Lanois from Florida

Mary Lyman responds:

Thanks for your comment. I generally don’t get into the issue of taxation on the sale of an MLP in an IRA unless specifically asked because it is not a completely settled issue (the IRS has never ruled on this question) and I am not a tax adviser.

It is clear that the portion of gain from the sale that would be taxed at the capital gains rate in a capital account will not be taxable to the IRA. The question is: Does the IRA have to pay tax on the recapture portion, the amount that is taxed as ordinary income in a sale from a taxable account? Of the MLP tax experts I’ve consulted—some tax lawyers, some accountants—some feel that there’s an argument to be made that the transaction would be completely tax free to the

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