PLR 200234073: Extra time granted to recharacterize two Roth IRAs

Plain-English summary

A taxpayer validly converted two traditional IRAs to Roth IRAs for 2000, then decided to recharacterize them as traditional IRAs. Circumstances including the September 11, 2001 events in New York City prevented her from completing the recharacterizations by the deadline. She sought relief soon after the missed deadline, and documentation showed that she had intended to act on time. The IRS found that she acted reasonably and in good faith and granted 60 days from the letter date to recharacterize the two Roth IRAs. The ruling assumed the IRAs met the applicable requirements and that an amended 2000 return consistent with the ruling would be filed.

Ruling snapshot

• Question: May the taxpayer recharacterize two Roth IRAs after the deadline?
• Outcome: Approved: 60-day extension to recharacterize both IRAs
• Key authorities: IRC § 408A(d)(6); Treas. Reg. §§ 1.408A-5, 301.9100-1, 301.9100-3

Full text (IRS public release)

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

200234073

TAX EXEMPT AND
GOVERNMENT ENTITIES MAY 28 2002
DIVISION

UIC: 9100.00-00
LEGEND:
Taxpayer A:
Taxpayer B:
Company C:
CPA D:

IRA W:
IRA X:
Roth IRA Y:
Roth IRA Z:

Month 1:

Amount 1:
Amount 2:
Amount 3:
Amount 4:
Amount 5:

Amount 6:

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Dear

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

Taxpayer A is married to Taxpayer B. During calendar year 2000, Taxpayer B converted two traditional individual retirement arrangements (IRAs), IRA W and IRA X, maintained with Company C to two Roth IRAs (Roth IRA Y and Roth IRA Z) also maintained with Company C. Taxpayer B was eligible to convert her two traditional IRAs to Roth IRAs since the adjusted gross income of Taxpayers A and B with respect to calendar year 2000 did not exceed the limit found in § 408A(c)(3)(B) of the Internal Revenue Code. Taxpayers A and B timely filed their joint calendar year 2000 Federal Income Tax Return.

Sometime prior to the end of Month 1, 2001, Taxpayer B decided to “recharacterize” Roth IRA Y and Roth IRA Z, as traditional IRAs. However, due to a series of circumstances, some of which were related to the events of September 11, 2001 in New York City, Taxpayer B did not so recharacterize prior to To date, Roth IRA Y and Roth IRA Z remain in existence.

On September 30, 2001, the value of Roth IRA Y was Amount 1; on October 31, 2001, the value was Amount 2, which exceeded Amount 1; and on November 30, 2001, it was Amount 3, which exceeded Amount 2.

On September 30, 2001, the value of Roth IRA Z was Amount 4; on October 31, 2001, it was Amount 5, which exceeded Amount 4; and on November 30, 2001, it was Amount 6, which exceeded Amount 5.

Taxpayers A and B contacted CPA D regarding Taxpayer B’s failure to recharacterize her Roth IRAs Y and Z shortly after This request for

relief under § 301.9100-3 of the regulations was filed shortly thereafter during calendar year 2001.

Based on the above facts and representations, the following letter ruling is requested:

That, pursuant to § 301.9100-3 of the regulations, Taxpayer B is granted a period not to exceed sixty (60) days from the date of this letter ruling to recharacterize her Roth IRAs Y and Z as one or more traditional IRAs.

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With respect to the above 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) of the Code and section 1.408A-5 of the regulations, 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 of the regulations, 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)(B) provides, in short, that a taxpayer shall not be permitted to make a qualified rollover contribution from a traditional IRA to a Roth IRA if his adjusted gross income for the taxable year of conversion exceeds $100,000.

Section 1.408A-4 of the regulations, 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 Internal Revenue, 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.

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Section 301.9100-2 of the regulations 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 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(b)(3)(iii) of the regulations provides that a taxpayer will be deemed to have not acted reasonably and in good faith if the taxpayer uses hindsight in requesting relief. If specific facts have changed since the due date for making the election that make the election advantageous to the taxpayer, the Internal Revenue Service will not ordinarily grant relief. In such a case, the Service will grant relief only when the taxpayer provides strong proof that the taxpayer’s decision to seek relief did not involve hindsight.

Section 301.9100-3(c)(1)(ii) of the regulations provides that the interests of the Government are prejudiced if granting relief would result in a taxpayer having a lower tax liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made (taking into account the time value of money). Similarly, if the tax consequences of more than one taxpayer are affected by the election, the Government’s interests are prejudiced if extending the time for making the election may result in the affected taxpayers, in the aggregate, having a lower tax liability then if the election had been timely made.

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

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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 this case, Taxpayer B converted her traditional IRAs, IRA W and IRA X, to Roth IRA Y and Roth IRA Z during Taxpayer B was eligible to convert said traditional IRAs to Roth IRAs.

Taxpayers A and B timely filed their Federal Tax Return. However, Taxpayer B was eligible to “recharacterize” her Roth IRAs Y and Z as traditional IRAs until As noted above, she failed to do so. Furthermore, as noted

above, the value of her Roth IRAs, Roth IRA Y and Roth IRA Z had increased between September, 2001 and the date that this request for relief was filed with the Service. 7

Taxpayer B filed this request for section 301.9100 relief shortly after

Furthermore, documentation submitted on behalf of Taxpayer B indicated that she intended to recharacterize her Roth IRAs, Roth IRA Y and Roth IRA Z, as traditional IRAs prior to . Finally, calendar year is not a “closed” tax year.

Thus, 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 IRAs as traditional IRAs. Therefore, you (Taxpayer B) are granted an extension of sixty (60) days 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 taxpayers who requested it. Section 6100(j)(3) of the Code provides that it may not be used or cited as precedent.

This letter ruling assumes that all of the IRAs referenced herein will meet the requirements of either Code section 408 or Code section 408A (to the extent applicable) at all times relevant thereto. It also assumes that an amended calendar year 2000 Federal Income Tax Return consistent with the ruling letter will be filed.

This ruling letter was prepared by Lawrence W. Heben (ID: 50-03192) of this Group. He may be contacted at (202-283-9618).

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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,
[signature]

Frances V. Sloan

Manager, Employee Plans
Technical Group 3

Tax Exempt and Government
Entities Division

Enclosures:

Deleted copy of ruling letter
Notice of Intention to Disclose