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Here is a post at Investor Village that purports to provide the correct information:

If your IRA invests in an MLP, it becomes a limited partner in that MLP, just as you would if you invested directly. Because of the pass-through nature of an MLP--or any partnership (no tax paid by the partnership, all tax items flow through to the limited partners/shareholders, who pay tax on their share), the partners are treated by the tax code as if they are directly earning the MLP’s income. Thus, as a partner in the MLP, the IRA, 401(k), or other account is considered to be “earning” its share of the MLP’s business income. The MLP's business is not related to the retirement account's tax-exempt purpose; therefore the IRA's share of the MLP's income is treated as UBTI and is taxed accordingly.

The tax is owed on the retirement account’s share of the MLP’s taxable business income, minus its share of depreciation and other deductions related to the business, as reported on the K-1 form (not on the quarterly distributions). The tax rate is the top corporate rate, currently 35%. There is a deduction that covers the first $1,000 of UBTI from all sources; after that, the retirement account will owe tax.

It is important to remember that you are not the one who will owe any unrelated business income tax on MLP units held in your retirement account. The tax is owed by the IRA or other retirement account itself, as it is the partner in the MLP. It is the responsibility of the custodian of the account to file a tax return (form 990, the return for tax-exempt organizations) and pay any tax owed out of the account’s funds.

Seems reasonable to me, but I'm no tax expert. :)

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