PLR 200116057: Delayed IRA recharacterization treated as timely

Plain-English summary

A taxpayer converted a traditional IRA to a Roth IRA for 1998 despite exceeding the income limit then in effect. He instructed the custodian to recharacterize the account, but the custodian used an incorrect account number and did not complete the transfer by the announced deadline. After discovering the error, he requested the transfer again, and it was completed in 2000. The IRS found that the taxpayer acted reasonably and in good faith and sought relief before the IRS discovered the error. It ruled that the completed recharacterization would be treated as timely under the election relief regulations.

Ruling snapshot

• Question: Could a 2000 IRA recharacterization count as timely when the custodian failed to process the earlier request?
• Outcome: Approved; the completed transfer was treated as timely.
• Key authorities: IRC § 408A(d)(6); Treas. Reg. §§ 1.408A-5, 301.9100-3; Announcements 99-57 and 99-104.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
200116057
Washington, DC 20224
UIC: 9100.00-00

Contact Person:
Telephone Number:
In Reference to:
Date: T:EP:RA:T3
JAN 26 2001

LEGEND:
Taxpayer A:
Taxpayer B:
IRA X:
IRA Y:
Company M:
Sum N:
Date 1:
Month 2:
Date 3:

Dear :

This is in response to the , letter, submitted by your authorized representative, in which you request relief under section 301.9100-3 of the Procedure and Administration Regulations. The following facts and representations support your ruling request.

Taxpayer A maintained IRA X, an individual retirement arrangement described in Code section 408(a), with Company M. In April, 1998, Taxpayer A converted IRA X to a Roth IRA, IRA Y, also with Company M. The amount transferred to IRA Y was Sum N. Taxpayers A and B’s adjusted gross income for 1998 exceeded the limit found at section 408A(c)(3)(B) of the Internal Revenue Code. On Date 1, 1999, Taxpayer A notified Company M that he was ineligible to convert his IRA X to a Roth IRA, and requested that IRA Y be recharacterized as a traditional, non-Roth, IRA. However, due to a processing error, which consisted of Company M’s referencing an incorrect account number, Company M did not recharacterize IRA Y as a “traditional” IRA by December 31, 1999. Taxpayer A did not discover Company M’s failure to recharacterize his IRA Y until early 2000. During Month 2, 2000, Taxpayer A notified Company M of its failure to recharacterize his IRA Y. On Date 3, 2000, IRA Y was recharacterized as a traditional, non-Roth, IRA.

Taxpayers A and B timely filed their calendar year 1998 Federal Income Tax Return.

This request for relief under section 1.9100 of the regulations was submitted prior to the Service’s discovering Taxpayer A’s ineligibility to convert his traditional IRA to a Roth IRA and prior to the Service’s discovering that his Roth IRA “recharacterization” was untimely.

Based on the above, you, through your authorized representative, request the following letter ruling:

That, pursuant to section 301.9100-3 of the regulations, the recharacterization of

Taxpayer A’s IRA Y, which occurred during calendar year 2000, which was after the date(s) prescribed by Announcements 99-57 and 99-104, to a traditional IRA, was timely.

With respect to your request for relief under section 301.9100-3 of the regulations, section 408A(d)(6) of the Internal Revenue Code and section 1.408A-5 of the Income Tax Regulations provide that, except as otherwise provided by the Secretary, a taxpayer may elect to recharacterize an IRA contribution made to one type of IRA as having been made to another type of IRA by making a trustee-to-trustee transfer of the IRA contribution, plus earnings, to the other type of IRA. In a recharacterization, the IRA contribution is treated as having been made to the transferee IRA and not the transferor IRA. Under section 408A(d)(6) and section 1.408A-5, this recharacterization election generally must occur on or before the date prescribed by law, including extensions, for filing the taxpayer’s federal income tax returns for the year of contributions.

Section 1.408A-5, Question and Answer-6, describes how a taxpayer makes the election to recharacterize the IRA contribution. To recharacterize an amount that has been converted from a traditional IRA to a Roth IRA: (1) the taxpayer must notify the Roth IRA trustee of the taxpayer’s intent to recharacterize the amount, (2) the taxpayer must provide the trustee (and the transferee trustee, if different from the transferor

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trustee) with specified information that is sufficient to effect the recharacterization, and (3) the trustee must make the transfer.

Code section 408A(c)(3), provides, in relevant part, that an individual with adjusted gross income in excess of $100,000 for a taxable year is not permitted to make a qualified rollover contribution to a Roth IRA from an individual retirement plan other than a Roth IRA during that taxable year.

Section 1.408A-4, Q&A-2, provides, in summary, that an individual with modified adjusted gross income in excess of $100,000 for a taxable year is not permitted to convert an amount to a Roth IRA during that taxable year.

Sections 301.9100-1, 301.9100-2, and 301.9100-3 of the Procedure and Administration Regulations, in general, provide guidance concerning requests for relief submitted to the Service on or after December 31, 1997. Section 301.9100-1(c) of the regulations provides that the Commissioner of the Internal Revenue Service, in his discretion, may grant a reasonable extension of the time fixed by a regulation, a revenue ruling, a revenue procedure, a notice, or an announcement published in the Internal Revenue Bulletin for the making of an election or application for relief in respect of tax under, among others, Subtitle A of the Code.

Section 301.9100-2 lists certain elections for which automatic extensions of time to file are granted. Section 301.9100-3 of the regulations generally provides guidance with respect to the granting of relief with respect to those elections not referenced in section 301.9100-2. The relief requested in this case is not referenced in section 301.9100-2.

Section 301.9100-3 of the regulations provides that applications for relief that fall within section 301.9100-3 will be granted when the taxpayer provides sufficient evidence (including affidavits described in section 301.9100-3(e)(2)) to establish that (1) the taxpayer acted reasonably and in good faith, and (2) granting relief would not prejudice the interests of the government.

Section 301.9100-3(b)(1) of the temporary regulations provides that a taxpayer will be deemed to have acted reasonably and in good faith (i) if its request for section 301.9100-1 relief is filed before the failure to make a timely election is discovered by the Service; (ii) if the taxpayer inadvertently failed to make the election because of intervening events beyond the taxpayer's control; (iii) if the taxpayer failed to make the election because, after exercising reasonable diligence, the taxpayer was unaware of the necessity for the election; (iv) the taxpayer reasonably relied upon the written advice of the Service; or (v) the taxpayer reasonably relied on a qualified tax professional, including a tax professional employed by the taxpayer, and the tax professional failed to make, or advise the taxpayer to make, the election.

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Section 301.9100-3(c)(1)(i) of the temporary regulations provides that ordinarily the interests of the government will be treated as prejudiced and that ordinarily the Service will not grant relief when tax years that would have been affected by the election had it been timely made are closed by the statute of limitations before the taxpayer's receipt of a ruling granting relief under this section.

Announcement 99-57, 1994-24 I.R.B. 50 (June 14, 1999) provided that a taxpayer who timely filed his/her 1998 Federal Income Tax Return would have until October 15, 1999 to recharacterize an amount that had been converted from a traditional IRA to a Roth IRA.

Announcement 99-104, 1999-44 I.R.B. 555 (November 1, 1999), provided that a taxpayer who timely filed his/her 1998 Federal Income Tax Return would have until December 31, 1999 to recharacterize an amount that had been converted from a traditional IRA to a Roth IRA.

Taxpayer A timely filed his 1998 Federal Income Tax Return. As a result, he was eligible for relief under either Announcement 99-57 or Announcement 99-104. However, he missed the deadlines found in said Announcements. Therefore, it is necessary to determine if he is eligible for relief under the provisions of section 301.9100-3 of the regulations.

In this case, Taxpayer A was ineligible to convert his IRA X to Roth IRA Y since his adjusted gross income exceeded $100,000. However, until he discovered otherwise, Taxpayer A believed that his IRA Y had been converted to a traditional, non-Roth, IRA no later than December 31, 1999, the date required under Announcement 99-104. Upon discovering that the recharacterization of his IRA Y had not been accomplished timely, Taxpayer A immediately re-requested Company M, the custodian of IRA Y, his Roth IRA, to recharacterize IRA Y as a non-Roth IRA. Shortly thereafter, Company M did so. Taxpayer A filed this request for section 301.9100 relief shortly after discovering that Company M had not complied with his initial, timely, request for recharacterization. 1998 is not a "closed" tax year.

With respect to your request for relief, we believe that, based on the information submitted and the representations contained herein, the requirements of sections 301.9100-1 and 301.9100-3 of the regulations have been met, and that you have acted reasonably and in good faith with respect to making the election to recharacterize your Roth IRA as traditional IRAs. Specifically, the Service has concluded that you have met the requirements of clauses (i),and (ii) of section 301.9100-3(b)(1) of the regulations.

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Therefore, with respect to your ruling request, the Service concludes as follows:

That, pursuant to section 301.9100-3 of the regulations, the recharacterization of Taxpayer A’s IRA Y, which occurred during calendar year 2000, which was after the date(s) prescribed by Announcements 99-57 and 99-104, to a traditional IRA, was timely.

No opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the Code or regulations which may be applicable thereto.

This letter is directed only to the taxpayer who requested it. Section 6100(j)(3) of the Code provides that it may not be used or cited as precedent.

Pursuant to a power of attorney on file with this office, a copy of this ruling letter is being sent to your authorized representative.

Sincerely yours,

Kenneth T. Yednock
Manager, Employee Plans
Technical

Tax Exempt and Government

Entities Division
Enclosures:

Deleted copy of ruling letter
Notice of Intention to Disclose