Unexpected UBTI tax liability in IRA and Roth IRA after MLP bankruptcy - How is this possible?

This is definitely concerning, but unfortunately not uncommon with MLPs held in retirement accounts. Here's what's likely happening: When an MLP goes through bankruptcy restructuring, debt forgiveness is often treated as income to the partners (which includes IRA accounts that held the MLP). This "phantom income" can trigger UBTI even when you suffered a complete investment loss. It's one of the cruel ironies of tax law - you can lose everything and still owe taxes. As for the huge difference between the Rollover and Roth accounts, this likely comes down to the tax brackets applied. UBTI in retirement accounts is taxed using trust tax rates, which escalate very quickly. The Roth likely hit a much higher bracket than the Traditional IRA, causing the disproportionate tax liability. The first thing you should do is request a detailed explanation from Fidelity about how these UBTI calculations were determined. Ask specifically about the breakdown between ordinary income, capital gains/losses, and debt forgiveness income. You need to understand exactly what generated this liability. You should also consider consulting with a tax professional who specializes in UBTI issues. This is complex territory, and the penalties for missteps can be substantial.

I went through something similar last year with an MLP in my IRA. Check out https://taxr.ai - it saved me so much headache. I uploaded my 990-T forms and investment docs, and their AI analyzed everything and found several mistakes in how the custodian calculated the UBTI. They even helped draft a letter to my custodian explaining why the calculations were incorrect. The problem is that most custodians use standard templates for these calculations and don't properly account for the specific bankruptcy settlement terms of each MLP. In my case, they were treating debt cancellation as 100% income when the bankruptcy settlement actually classified most of it as return of capital.

Just wanted to report back - I took the advice and tried taxr.ai for my UBTI issue with my oil & gas MLP in my IRA. Best decision ever! They found that my custodian was incorrectly allocating ordinary income that should have been classified as return of capital after the partnership's restructuring. Their analysis showed exactly which parts of the bankruptcy agreement applied to my shares and how the income should have been properly classified. The most amazing part was that they generated a detailed letter citing specific tax laws that I sent to my custodian, who then revised the 990-T. My tax liability went from over $12,000 down to just $1,800! I was skeptical at first since this seemed like such a specialized tax issue, but they clearly have experts who understand the complexities of MLP bankruptcy and UBTI. Wish I'd known about them months ago instead of losing sleep over this.

Listen, I've spent countless hours trying to get through to the IRS about UBTI issues in my retirement accounts. Their "specialized" departments are impossible to reach. After weeks of frustration, I used https://claimyr.com to connect with the IRS. You can see how it works here: https://youtu.be/_kiP6q8DX5c They essentially wait on hold with the IRS for you and call you when an agent picks up. I was connected to an actual UBTI specialist who explained that custodians often miscalculate UBTI from bankruptcies because they don't properly apply the bankruptcy court rulings to the tax calculations. The agent confirmed that I needed to have my custodian review the actual bankruptcy settlement terms, which apparently specify how income should be allocated. This was crucial information I couldn't get anywhere else.

I need to apologize to everyone and especially to Profile 3. I tried Claimyr today after being skeptical, and it actually worked exactly as described. I've been trying to reach someone at the IRS about UBTI in my retirement accounts for three weeks with no success. Claimyr connected me within 90 minutes (versus the 3+ hours I spent on previous attempts without ever reaching anyone). The IRS agent I spoke with confirmed that custodians often apply standard calculation methods to bankruptcy-related UBTI that don't reflect the specific terms of each bankruptcy settlement. She advised me to request the complete bankruptcy settlement documents and have my tax professional review the specific terms regarding how debt forgiveness and restructuring should be treated for tax purposes. This could significantly reduce my liability. I'm still annoyed about owing taxes on an investment where I lost everything, but at least now I understand what's happening and have a path forward. Sometimes it's worth admitting when you're wrong about something!

I dealt with this exact issue last year as a tax professional. Here's what most people don't realize: when an MLP goes through bankruptcy, the settlement usually includes specific terms about how debt forgiveness is allocated among partners. In many cases, a substantial portion is classified as return of capital rather than income, which reduces or eliminates UBTI. The problem is that custodians often apply a "default" calculation that doesn't account for these specifics. Request these documents from your custodian: 1. Complete bankruptcy settlement agreement 2. K-1 package from the final year 3. Detailed calculation worksheet showing how they determined UBTI The huge disparity between your Rollover and Roth accounts strongly suggests a calculation error. The proportional UBTI should generally align with your ownership percentages. Also, file Form 5329 to request a waiver of the penalties due to reasonable cause. The fact that the custodian filed late provides good grounds for this.

Has anyone successfully contested a 990-T prepared by their custodian? My Schwab account had an MLP that generated UBTI through a similar bankruptcy situation, and I think they calculated it wrong, but I don't know if I have any recourse.

This is such a frustrating situation, and unfortunately you're not alone in dealing with UBTI surprises from bankrupt MLPs. The key issue here is that bankruptcy debt forgiveness often gets misclassified by custodians. A few immediate steps I'd recommend: 1. **Request the complete bankruptcy settlement documents** from Fidelity - specifically look for how debt cancellation income was allocated between return of capital vs. taxable income. Many bankruptcy settlements classify a significant portion as return of capital, which shouldn't generate UBTI. 2. **Challenge the disproportionate allocation** between your accounts. With only 22% more shares in the Roth but 12x the tax liability, something is clearly wrong. The UBTI should be allocated proportionally to your ownership. 3. **File Form 5329 immediately** to request penalty relief due to reasonable cause (the custodian's late filing). This alone could save you significant money. 4. **Get professional help** - given the $20K+ potential liability, spending $500-1000 on a tax pro who specializes in UBTI/partnership taxation could save you thousands. The fact that multiple people in this thread have successfully contested similar situations with their custodians is encouraging. Don't just accept these numbers - the calculations are often wrong, especially for complex bankruptcy situations. Time is critical though - you typically have 60-90 days to contest these assessments, so act quickly.

This is exactly why I always warn people about holding MLPs in retirement accounts - the UBTI complications can be nightmarish, especially during bankruptcy situations. What you're experiencing is unfortunately common: when MLPs restructure debt during bankruptcy, the forgiven debt often gets treated as taxable income to partners, even when you've lost your entire investment. It's one of the most unfair aspects of tax law. The massive difference between your IRA and Roth tax liability is a red flag though. UBTI calculations should generally be proportional to ownership, so having 12x the tax on only 22% more shares suggests a calculation error. Here's what I'd do immediately: 1. **Don't pay anything yet** - you likely have 60-90 days to contest these calculations 2. **Request the bankruptcy Plan of Reorganization** from Fidelity - this document will show exactly how debt forgiveness was supposed to be allocated (often much of it is return of capital, not income) 3. **Get the detailed UBTI calculation worksheets** - custodians often use generic templates that don't account for specific bankruptcy terms 4. **File Form 5329 for penalty relief** - the custodian's late filing gives you strong grounds for "reasonable cause" I've seen many cases where initial UBTI calculations from bankruptcies were wrong by tens of thousands of dollars. The custodians just don't have the expertise to properly interpret complex bankruptcy settlements. Given the amounts involved, this is definitely worth hiring a tax professional who specializes in partnership taxation. A $1,000 consultation could easily save you $15,000+ in taxes and penalties. Don't let Fidelity brush you off - escalate to their UBTI specialists if needed. You have rights here, and these calculations are often wrong.