UBTI - royalties from mineral rights


G

Gary Goodman

According to the conclusion in Rev. Rul. 69-179 (http://www.irs.gov/pub/irs-tege/rr69-179.pdf), income from a mineral interest is subject to taxation when the organization (in this case a private foundation) is liable for the operating expenses associated with its interest.

I'm looking at the materials from Mesabi Trust, North European Oil Royalty Trust, and BP Prudhoe Bay Royalty Trust. It appears that each of these produces a booklet or letter about the income and expenses on a per-unit basis. Am I jumping to a bad conclusion if I take that to mean the net income is UBTI?

Thanks for any help.
Gary
 
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A

Alan

According to the conclusion in Rev. Rul. 69-179 (http://www.irs.gov/pub/irs-tege/rr69-179.pdf), income from a mineral interest is subject to taxation when the organization (in this case a private foundation) is liable for the operating expenses associated with its interest.

I'm looking at the materials from Mesabi Trust, North European Oil Royalty Trust, and BP Prudhoe Bay Royalty Trust. It appears that each of these produces a booklet or letter about the income and expenses on a per-unit basis. Am I jumping to a bad conclusion if I take that to mean the net income is UBTI?

Thanks for any help.
Gary
The two entities you list are not tax-exempt non-profit corporations
under IRC Sec. 501, that one needs to worry about UBTI. These entities
operate as a grantor trust, a pass-thru entity. As such, they merely
pass through to their unit holders all the trust income, trust expenses
and depletion allowance that gets posted to the unit owners Schedule E.
Typically, this is expressed as $X per unit owned.
 
G

Gary Goodman

The two entities you list are not tax-exempt non-profit corporations
under IRC Sec. 501, that one needs to worry about UBTI. These entities
operate as a grantor trust, a pass-thru entity. As such, they merely
pass through to their unit holders all the trust income, trust expenses
and depletion allowance that gets posted to the unit owners Schedule E.

Typically, this is expressed as $X per unit owned.

--

Alan

http://taxtopics.net
Alan, you may have misread my question. I'm referring to the income FROM the trusts to the private foundation. The 990-PF and 990-T have been extended and will likely have to be extended again in February because the foundation also owns units in a few PTPs.

Gary
 
A

Alan

Alan, you may have misread my question. I'm referring to the income FROM the trusts to the private foundation. The 990-PF and 990-T have been extended and will likely have to be extended again in February because the foundation also owns units in a few PTPs.

Gary
Same answer except that it is investment income to the foundation. UBT
come about when an exempt organization "actively engages" in an activity
not related to the exempt purpose of the organization.
 
G

Gary Goodman

According to the conclusion in Rev. Rul. 69-179 (http://www.irs.gov/pub/irs-tege/rr69-179.pdf), income from a mineral interest is subject to taxation when the organization (in this case a private foundation) is liable for the operating expenses associated with its interest.



I'm looking at the materials from Mesabi Trust, North European Oil Royalty Trust, and BP Prudhoe Bay Royalty Trust. It appears that each of these produces a booklet or letter about the income and expenses on a per-unit basis. Am I jumping to a bad conclusion if I take that to mean the net income is UBTI?



Thanks for any help.

Gary
Straight from Rev. Rul. 69-179, 1969-1 C.B. 158:

An exempt organization's income from a mineral interest is not a royalty excluded from the computation of unrelated business taxable income by section 512(b)(2) of the Code where the organization is liable for the operating expenses associated with its interest.

If income from something is not a royalty excluded from the computation of UBTI, then it must be UBTI.
 
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A

Alan

Straight from Rev. Rul. 69-179, 1969-1 C.B. 158:

An exempt organization's income from a mineral interest is not a royalty excluded from the computation of unrelated business taxable income by section 512(b)(2) of the Code where the organization is liable for the operating expenses associated with its interest.

If income from something is not a royalty excluded from the computation of UBTI, then it must be UBTI.
Here's what the ruling says:

An exempt organization's income from a mineral interest is

not a royalty excluded from the computation of unrelated business

taxable income by section 512(b)(2) of the Code where the

organization is liable for the operating expenses associated with

its interest.

Advice has been requested whether certain income received

from a mineral lease by an organization exempt from Federal

income tax under section 501(a) of the Internal Revenue Code of

1954, but subject to tax under section 511 on its unrelated

business taxable income, is excluded in computing unrelated

business taxable income by section 512(b)(2).

The organization owned a working interest in oil and gas

producing property. Under the terms of an agreement with an

independent operator, it was relieved of liability for the

development costs associated with the interest, but remained

liable for the expenses of operating the property.
============================================================

Buying units or shares in the royalty trust is not a working interest in
oil and gas producing property such that the unit holders are liable for
the operating expenses. You are not liable for the operating expenses.
Therefore, there is no UBTI to the unit/shareholders.
 
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