UBIT paid by IRA Trustee | Ed Slott and Company, LLC

UBIT paid by IRA Trustee

An IRA trustee recommended an investment to the IRA holder and that investment generated UBTI. The IRA trustee will be preparing Form 990-T for the IRA and wishes to pay the UBIT on behalf of the IRA in order to make amends for its perceived mistake in recommending the investment to the client. The investment has since been disposed of. I note that payment of the UBIT by the IRA owner can disqualify the IRA, but would payment of the tax by the IRA trustee cause any problems? The payment of the UBIT by the IRA Trustee is basically a client relationship concession in order to keep the client happy. Any advice appreciated on this point.

Reimbursing the IRA for the UBIT tax bill would be a prohibited transaction, but it would probably be OK to reimburse the customer outside the IRA as a form of errors and omissions settlement. 

I would expect that the reimbursement paid to the customer by the trustee would be taxable income to the customer, reportable on Form 1099-MISC.  If the account is a traditional IRA, being taxable income is equitable since the UBIT payment from the IRA reduces the balance in the IRA on which taxes would eventually be owed.  If this is a Roth IRA, it might be appropriate for the trustee to gross up the amount paid to the customer so that the net result to the customer is equivalent to a tax-free reimbursement. 

 

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