PLR 200228035: Six months allowed to undo an ineligible Roth IRA conversion

Plain-English summary

A taxpayer converted a traditional IRA to a Roth IRA in 1998 without realizing that stock-sale gains pushed the couple's income above the conversion limit. The couple filed their 1998 return late, so earlier announced extensions for recharacterizing conversions did not apply. The IRS found that the taxpayer sought relief before the IRS discovered the missed election, had been unaware of its necessity, and that 1998 remained an open tax year. It granted six months from the ruling date to recharacterize the Roth IRA as a traditional IRA under the regulatory relief rules.

Ruling snapshot

• Question: May the taxpayer make a late election to recharacterize an ineligible Roth IRA conversion?
• Outcome: Approved, six-month extension granted
• Key authorities: IRC § 408A(c)(3), (d)(6); Treas. Reg. §§ 1.408A-5, 301.9100-3

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE 200228035
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES

UIC:

DIVISION APR 19 2002
9100.00-00

LEGEND:
Taxpayer A:
Taxpayer B:
Sum C:

IRA X:

Roth IRA Y:
Company M:
Month 1:
Dear

This is in response to the
, letter,
submitted by your authorized representative on your behalf, in which you request relief under section 301.9100-3 of the Procedure and Administration Regulations.

Taxpayer A is married to Taxpayer B. During 1998, Taxpayer A converted his traditional individual retirement account (IRA X) maintained with Company M to a Roth IRA, Roth IRA Y. Subsequent to the purported conversion, Taxpayer A discovered that his adjusted gross income for calendar year 1998 exceeded the limit found at section 408A(c) (3) (B) of the Internal Revenue Code because of capital gains Taxpayers A and B received from the sale of stock. At the time of the purported conversion, Taxpayer A was unaware that capital gains from the sale of stock constituted

income for purposes of determining their adjusted gross income for IRA conversion purposes.

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Taxpayers A and B discovered the time limits found in Announcements 99-57 and 99-104 (cited below) after said time limits had expired. Additionally, Taxpayers A and B did not file their joint calendar year 1998 Federal Income Tax Return until Month 1, 2002. Their 1998 Federal Income Tax Return shows adjusted gross income in excess of $100,000. The late filing was due, in part, to the difficulty Taxpayers A and B had in determining the basis of the stock that they sold during calendar year 1998.

The Form 8606, Nondeductible IRAs, attached to the calendar year 1998 Federal Income Tax Return of Taxpayers A and B indicates, at Item 14b, that Taxpayer A has “recharacterized” Roth IRA Y as a traditional IRA. However, Company M has advised Taxpayer A that it will not so recharacterize without Taxpayers A and B receiving a letter ruling from the Internal Revenue Service.

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 his Roth 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 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

200228035

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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 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.

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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.

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.

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.

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Taxpayers A and B did not timely file their joint 1998 Federal Income Tax Return. As a result, Taxpayer A was ineligible for relief under either Announcement 99-57 or Announcement 99-104. 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 traditional IRA X to Roth IRA Y since his and his wife's adjusted gross income exceeded $100,000. However, until he discovered otherwise, which discovery occurred after he “converted” his IRA X to Roth IRA Y, Taxpayer A erroneously believed that gains from the sale of his stock did not count toward the threshold for determining his eligibility to convert his traditional IRA X to Roth IRA Y. Taxpayer A filed this request for section 301.9100 relief shortly after filing his (and Taxpayer B’s) joint 1998 Federal Income Tax Return. With respect to Taxpayers A and B, 1998 is not a "closed" tax year. Finally, prior to Taxpayer A’s and B’s filing their calendar year 1998 Federal Income Tax Return, the Internal Revenue Service had not discovered Taxpayer A’s ineligibility to convert his IRA X to Roth IRA Y.

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 (iii) 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 6100(j) (3) of the Code provides that it may not be used or cited as precedent.

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If you have any questions concerning this ruling letter, please contact (ID: ) of this Group at (202) 283-9618.

Pursuant to a power of attorney on file with this office, the original of this ruling letter is being sent to your authorized

representative.
Sincerely yours,
Frances V. Sloan
Manager, Technical Branch 3
Tax Exempt and Government
Entities Division

Enclosures:

Deleted copy of ruling letter
Notice of Intention to Disclose