PLR 200214033: Taxpayer may recharacterize an ineligible Roth IRA conversion

Plain-English summary

A taxpayer converted a traditional IRA to a Roth IRA without knowing that the household's adjusted gross income exceeded the conversion limit. The taxpayer and spouse also failed to report the conversion distribution on their return. The IRS granted six months from the ruling date to recharacterize the Roth IRA as a traditional IRA. The IRS found that the taxpayer acted reasonably and in good faith, including reliance on a qualified tax professional, and that the affected tax year was still open. The ruling applied only to the described facts and conditions.

Ruling snapshot

• Question: Could the taxpayer receive extra time to recharacterize an ineligible Roth IRA conversion?
• Outcome: Approved: six months of relief was granted under the section 9100 regulations.
• Key authorities: IRC §§ 408A(c)(3), 408A(d)(6), and 408; Treas. Reg. §§ 1.408A-4, 1.408A-5, and 301.9100-3.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE 200214033

WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

JAN 8 2002
Uniform Issue List: 9100.00-00

T:EP:RA:T4

Legend:

Taxpayer A=
Taxpayer B=
Individual C=
Individual D=

IRA X=
IRA Y=

Company M=

Dear

This is in response to the October 30, 2001 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

section 408(a) of the Internal Revenue Code. During calendar year 1998, Taxpayer A’s broker at Company M, Individual C, advised Taxpayer A that she should convert IRA X,

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a traditional IRA account, to a Roth IRA account. Upon such advice, Taxpayer A converted IRA X, to IRA Y, a Roth IRA, in calendar year 1998. Taxpayer A was unaware of the adjusted gross income limit found at section 408A(c)(3)(B) of the Code and was not informed of such limit by Individual C.

At the time of the conversion and throughout calendar year 1998, Taxpayer A believed that she was qualified to make the conversion described above under Code section 408A.

Taxpayer A and her husband, Taxpayer B, timely filed their calendar year 1998 Federal Income Tax Return. Taxpayer A and Taxpayer B employed the services of Individual D, a certified public accountant, to prepare their joint 1998 income tax return. Taxpayer A provided Individual D with the 1998 1099-R concerning the IRA distribution resulting from the conversion described above. Individual D failed to include the IRA distribution as income on the 1998 tax return and did not inform Taxpayer A or Taxpayer B that their adjusted gross income exceeded the limit found at section 408A(c)(3)(B).

In 2001, Taxpayer A and Taxpayer B, through independent research, realized that their combined adjusted gross income for 1998 exceeded the limit found at section 408A(c)(3)(B) of the Code and thus Taxpayer A had been ineligible to convert her traditional IRA, IRA X, to a Roth IRA, IRA Y, in 1998.

This ruling request was submitted before the Internal Revenue Service discovered the failure to recharacterize.

As of the date of this ruling request, Taxpayer A had not recharacterized her Roth IRA, IRA Y, as a traditional IRA.

Based on the above, you, through your authorized representative, 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, IRA Y, to a traditional IRA.

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

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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.

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. Section 1.408A-4, Q&A-2, further provides, in summary, that an individual and his spouse must file a joint Federal Income 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 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(a) 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)) to establish that (1) the taxpayer acted reasonably and in good faith, and (2) granting relief would not prejudice the interests of the government.

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Section 301.9100-3(b)(1) of the 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.

Section 301.9100-3(c)(1)(ii) of the 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 her 1998 Federal Income Tax Return. As a result, she was eligible for relief under either Announcement 99-57 or Announcement 99-104. However, she missed the deadlines found in said Announcements. 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 her IRA X to Roth IRA Y since her adjusted gross income exceeded $ 100,000. However, until she discovered otherwise, Taxpayer A believed that she was eligible to convert her IRA X to a Roth IRA. Taxpayer A filed this request for section 301.9100 relief shortly after discovering that she was ineligible to convert IRA X to a Roth IRA and, as noted above, before the Service discovered her failure to comply with the Announcements referenced above. Calendar year 1998 is not a “closed” tax year.

With respect to your request for relief, we believe that, based on the information

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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 a traditional IRA. Specifically, the Service has concluded that you have met the requirements of clauses (i), (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 of either the Code or regulations which may be applicable thereto.

This letter is directed only to the taxpayer who requested it. Section 6110(k)(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.

If you wish to inquire about this ruling, please contact _at
. Please address all correspondence to T:EP:RA:T4.

Sincerely yours,

[illegible]

Alan C. Pipkin
Manager, Technical Group 4
Employee Plans, TE/GE Division