Question: I attended the seminar with you, Dyches Boddiford, and Hugh Bromma about a year ago. I was reading the transcript of your February 4 radio interview which was very interesting. You mentioned the need to file a 990T for your 401K with regard to a debt financed shopping center that your plan owns. I wondered if that is correct because I thought it was unnecessary to file a 990T for a 401K, especially since there is no UDFI tax on a 401K. Is there an advantage to filing one in such a situation?
Any insight you could give me on this would be much appreciated. I have a debt financed property in my 401K so this is a particular topic of interest to me.
Answer: Yes, the information about the 990T is correct in this case. The exception you refer to requires either direct ownership by the 401(k), ownership through a special type of corporation, or ownership through a specially designed partnership. Since most partnerships where non-retirement plans are also partners do not meet the special requirements to maintain the exemption, as mine does not, your plan may still owe UBIT and have to file a 990T. As noted in the interview, this can still work out great, but you should always go in with your eyes open. And yes, even if you do not owe UBIT taxes filing the 990T may be of some benefit, since you can carry forward a loss to offset future UBIT from the investment. For the past two years the partnership my 401(k) invested in has shown a slight loss, but this year it will show a fairly decent profit, and I will use my loss carry forward from the last couple of years to offset the tax.
I have some articles I wrote on the topic, but right now I am in an airport on my way to Florida, so I can’t access them. I will be back in the office next Wednesday. The exemption and the restrictions on it may be found in Internal Revenue Code Section 514(c)(9).
I hope that helps some. Have a great weekend!