7772 / Can a tax-exempt organization that would become subject to the unrelated business income tax because of its investment in a master limited partnership (MLP) avoid this tax?

Tax-exempt organizations can avoid the UBIT issue Q 7771 by indirectly investing in MLPs through the use of what is known as a “UBIT blocker.” In order to “block” the UBIT, the tax-exempt organization invests in a corporation that owns units in a MLP. The corporation distributes any income received from the MLP as dividends to its shareholders (including the tax-exempt organization). Since the IRC provides that any dividend distribution received by a tax-exempt organization is excluded from UBIT, the tax-exempt organization is able to avoid UBIT.¹

Most commonly, the UBIT blocker corporation is a regulated investment company (RIC, most commonly a mutual fund). The mutual fund acts as a UBIT blocker by investing directly in the MLP and paying dividends that are not subject to the UBIT.² Through the use of the RIC UBIT blocker, the tax-exempt organization is able to avoid taxation at the rates applicable to trusts.³ See Q 7773 for more information on RIC investments in MLPs.

1. IRC § 512(b)(1); see also Internal Revenue Service Publication 598.