PLR 200211048: Six extra months granted to reverse an ineligible Roth IRA conversion

Plain-English summary

A taxpayer converted a traditional IRA to a Roth IRA in 1999, but her income exceeded the conversion limit then in effect. Her investment adviser had not told her she was ineligible, and her tax preparer discovered the error after the ordinary deadline to recharacterize the conversion. The IRS found that she had acted reasonably and in good faith and that the 1999 tax year was still open. It granted her six months from the ruling's issuance to recharacterize the Roth IRA as a traditional IRA under the election relief regulation.

Ruling snapshot

• Question: Could the taxpayer receive more time to recharacterize an ineligible Roth IRA conversion?
• Outcome: Approved: six months from the ruling's issuance to make the recharacterization.
• Key authorities: IRC § 408A(d)(6); Treas. Reg. §§ 1.408A-5, 301.9100-3.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
200211048
WASHINGTON, D.C. 20224
TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION

DEC 17 2001
UIL: 408.00-00
9100.00-00

Legend:
Taxpayer A:
Individual B:
Traditional IRA X:
Roth IRA Y:
Company M:
Month L:

Dear

In letters dated June 26, 2001 and October 17, 2001, your authorized representative requested a ruling on your behalf 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. During Month L, 1999, pursuant to the advice of her investment advisor, Individual B, Taxpayer A converted Traditional IRA X to Roth IRA Y, also with Company M. Taxpayer A's adjusted gross income for 1999 exceeded the limit found at section 408A(c) (3) (B) of the Internal Revenue Code. However, prior to the IRA “conversion”, Taxpayer A was not advised by her investment advisor that Taxpayer A was ineligible to convert IRA X to Roth IRA Y. The error was discovered in the year 2001, by Taxpayer A’s tax preparer. However, when it was discovered, the date for the election to recharacterize the Roth IRA Y to the Traditional IRA X had passed.

Taxpayer A timely filed the calendar year 1999 Federal Income Tax Return. Based on the above you request the following letter ruling: That, pursuant to section 301.9100-3 of the regulations, Taxpayer A is granted a period not to exceed six months from the date of this

ruling letter to recharacterize her Roth IRA,
Roth IRA Y, to a traditional IRA.

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

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. Section 1.408A-4, Q&A-2, further provides, in summary, that an individual and his spouse must file a joint Federal Tax Return to convert a traditional IRA to a Roth IRA, and that the modified adjusted gross income subject to the $100,000 limit for a taxable year is the modified AGI derived from the joint return using the couple’s combined income.

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 the 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

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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.

Section 301.9100-3(c) (1) (ii) 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

In 1999, Taxpayer A was ineligible to convert her traditional IRA X to Roth IRA Y. Therefore, it is necessary to determine if she is eligible for relief under the provisions of Section 301.9100-3 of the regulations.

In this case, Taxpayer A was ineligible to convert Traditional IRA X to Roth IRA Y since Taxpayer A’s adjusted gross income exceeded $100,000. However, Taxpayer A believed that she was eligible to convert her Traditional IRA X to a Roth IRA until she discovered otherwise at which time the time limit in section 1.408A-5 of the regulations had passed. Taxpayer A filed this request for section 301.9100 relief shortly after discovering that Taxpayer A was ineligible to convert Traditional IRA X to a Roth IRA. Calendar year 1999 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 section 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 a traditional IRAs. Specifically, the Service has concluded that you have met the requirements of clauses (1), (iii), and (v) of section 301.9100-3(b) (1) of the regulations. Therefore, you are granted an extension of six months from the date of the issuance of this letter ruling to so recharacterize.

No opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section or 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.

If you have any questions concerning this ruling, please contact Mr. Val Cognetta (ID 50-01400) at (202) 283-9656. Please refer to T:EP:RA:T3.

A copy of this letter has been sent to your authorized representative in accordance with a power of attorney on file in this office.

Sincerely yours,

Frances V. Sloan, Manager
Employee Plans Technical Group 3
Tax Exempt and Government
Entities Division