PLR 200310023: Taxpayers receive time to recharacterize ineligible Roth conversions

Plain-English summary

Two spouses converted traditional IRAs to Roth IRAs, but their joint income exceeded the section 408A(c)(3)(B) limit. They relied on tax professionals who did not identify the restriction, then moved the funds temporarily to non-IRA accounts after discovering the problem. The IRS granted up to 60 days to recharacterize both Roth IRAs as traditional IRAs. It found that the taxpayers acted reasonably and in good faith and that the tax year was not closed under the statute of limitations. The ruling applied the relief rules under section 301.9100-3.

Ruling snapshot

• Question: May the taxpayers recharacterize Roth IRA conversions that were barred by their income?
• Outcome: Approved, with up to 60 days to recharacterize both accounts
• Key authorities: IRC § 408A(d)(6); Treas. Reg. §§ 1.408A-5, 301.9100-3

Full text (IRS public release)

200310023

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

UIC: 9100.00-00

Legend:

Taxpayer A = ******* Taxpayer B = ******* IRA U = ******* ******* IRA V = ******* ******* Roth IRA W = ******* ******* Roth IRA X = ******* ******* Account R = ******* ******* Account S = ******* ******* Company M = ******* Sum L = ******* Sum M = ******* Sum N = ******* Sum O = ******* Sum P = ******* Sum Q = ******* Individual A = ******* Individual B = ******* Company E = ******* Individual C = ******* Individual D = *******

Dear

This letter is in response to the letter dated April 29, 2002, submitted by your authorized representative, as supplemented by correspondence dated June 11, 2002, July 23, 2002, July 29, 2002, and December 6, 2002, in which you request relief under section 301.9100-3 of the Procedure and Administration Regulations (“the Regulations”). The following facts and representations have been made in support of your ruling request:

Taxpayers A and B maintained IRAs U and V, individual retirement arrangements described in section 408(a) of the Internal Revenue Code (“Code”), with Company M. On November 8, 2000, per the advice of Individual A, Taxpayer A and Taxpayer B's former broker at Company M, Taxpayer A converted IRA U, in the amount of Sum L to Roth IRA W with Company M. Likewise, Taxpayer B converted IRA V, in the amount of Sum M to Roth IRA X also with Company M. Taxpayer A is married to Taxpayer B.

Subsequently, Taxpayers A and B employed the services of Individual B, a certified public accountant, to prepare their joint Federal income tax return for the 2000 taxable year. Individual B was provided information concerning the Roth conversions and included the distributions as income on their Federal income tax return for 2000. Taxpayer A and Taxpayer B's adjusted gross income for 2000, before the Roth conversions, exceeded the limit prescribed in section 408A(c)(3)(B) of the Code. Individual B did not inform Taxpayer A and Taxpayer B of the income limitations on Roth conversions. Taxpayer A and Taxpayer B believed that they had each made qualified Roth conversions.

In 2001, Taxpayer A and Taxpayer B used the services of Company E to prepare their tax returns. While discussing prior year tax information, Individual C, of Company E, noticed that Taxpayer A and Taxpayer B's combined adjusted gross income for 2000 exceeded the limit found at Code section 408A(c)(3)(B). The failed conversion was not discovered until April 1, 2002, which did not allow sufficient time to obtain a ruling on the issue.

On April 15, 2002, on the advice of Individual D of Company M and Individual C, Taxpayer A transferred Sum N from Roth IRA W to Account R, a non-IRA account with Company M, and Taxpayer B transferred Sum O from Roth IRA X to Account S, a non-IRA account with Company M to avoid exposure to additional penalties. On June 5, 2002, Taxpayer A transferred Sum P from Account R back to Roth IRA W and Taxpayer B transferred Sum Q from Account S back to Roth IRA X. The

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RREKEKEKKRK EKER

difference between the amounts of the original distributions and the rollover of funds was due to the decline in the value of the investments.

This request for relief under section 301.9100-3 of the regulations was submitted prior to the Service’s discovering Taxpayers A and B’s ineligibility to convert their traditional IRAs U and V into Roth IRAs W and X.

Taxpayers A and B timely filed their joint 2000 Federal Income Tax Return. Based on the foregoing information you request the following letter ruling:

That, pursuant to section 301.9100-3 of the regulations, Taxpayer A and Taxpayer B are granted a period not to exceed sixty (60) days from the date of this ruling letter to recharacterize Roth IRAs W and X, respectfully, to traditional IRAs.

With respect to your request for relief under section 301.9100-3 of the regulations, section 408A(d)(6) of the Code and section 1.408A-5 of the Income Tax Regulations ("I.T. 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, of the I. T. Regulations, 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 (as modified within the meaning of subparagraph (c)(3)(C)) 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 of the I. T. Regulations, 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 adjusted gross income derived from the joint return using the couple's combined income.

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Sections 301.9100-1, 301.9100-2, and 301.9100-3 of the 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 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 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 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.

In this case, Taxpayer A and Taxpayer B were not eligible to convert traditional IRAs U and V to Roth IRAs W and X since Taxpayer A and Taxpayer B's combined modified adjusted gross income for 2000 exceeded $100,000. Taxpayer A and Taxpayer B timely filed their joint 2000 Federal Income Tax Return. Taxpayer A and Taxpayer B were unaware that they were ineligible for the Roth IRA conversions until April 2001. Therefore, it is necessary to determine if they are eligible for relief under the provisions of section 301.9100-3 of the regulations.

In this case, Taxpayers A and B were ineligible to convert IRAs U and V to Roth IRAs W and X, respectively, since their modified adjusted gross income exceeded
$100,000. However, until they discovered otherwise Taxpayers A and B believed they were eligible to convert their traditional IRAs U and V to Roth IRAs. Upon

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discovering that they were ineligible to convert IRAs U and V to Roth IRAs W and X, Taxpayers A and B directed Individual C and Individual D to take all necessary steps to recharacterize their Roth IRAs W and X to traditional IRAs. Taxpayers A and B filed this request for relief under section 301.9100-3 of the regulations shortly after discovering that they were ineligible to convert IRAs U and V to Roth IRAs W and X, and before the Service discovered that Taxpayer A and Taxpayer B were ineligible to convert IRAS U and V to Roth IRAS W and X. The 2000 taxable year is not a closed year under the statute of limitations.

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 IRAs W and X to traditional IRAs. Specifically, the Service has concluded that you have met the requirements of clauses (i), and (v) of section 301.9100-3(b)(1) of the regulations. Therefore, Taxpayers A and B are granted a period not to exceed sixty (60) days from the date of this ruling to recharacterize Roth IRAs W and X back to traditional IRAs.

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.

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

If you wish to inquire about this ruling, please contact * eee Hen

Sincerely yours,
(signed) JOYCE E. FLOYD

Joyce E. Floyd, Manager
Employee Plans Technical Group 2
Tax Exempt and Government
Entities Division
Enclosures:
Deleted Copy of Ruling Letter
Notice of Intention to Disclose