PLR 200330045: Late Roth IRA recharacterization granted after ineligible conversion

Plain-English summary

A taxpayer converted a traditional IRA to a Roth IRA in 1999 even though the married couple's income exceeded the conversion limit. They said the financial company had not explained the limit and that they learned of the problem only after consulting an accountant. The IRS granted 60 additional days to recharacterize the amount remaining in the Roth IRA, finding that the couple sought relief before the IRS discovered the improper conversion and had acted reasonably and in good faith. The couple also had to amend the relevant income tax return if they had not already done so. The ruling did not cover money previously withdrawn from the Roth IRA.

Ruling snapshot

• Question: Could the couple recharacterize the remaining Roth IRA funds after the usual deadline?
• Outcome: Approved: a 60 day extension for the remaining Roth IRA balance.
• Key authorities: IRC § 408A(c)(3)(B) and (d)(6); Treas. Reg. §§ 1.408A-5 and 301.9100-3.

Full text (IRS public release)

200330045

MAY 01 2003

Uniform Issue List: 408.00-00

Legend:
Taxpayer A =

Taxpayer B =
Company Q =
IRA X =
Roth IRA Y =
Dear ***:

This is in response to a ruling request dated , as supplemented by correspondence dated , and ***, submitted on your behalf 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 a thrift savings plan account, an investment arrangement described in section 401(a) of the Internal Revenue Code (“Code”). In March 1999, Taxpayer A rolled the amount in the thrift savings plan account into a traditional IRA. Thereafter, in April 1999, Taxpayer A converted her traditional IRA X to a Company Q Roth IRA Y.

Prior to the Roth IRA conversion, Company Q did not advise Taxpayer A of any adverse tax consequences that would follow from the conversion of her traditional IRA to a Roth IRA. Taxpayer A is married to Taxpayer B. Their adjusted gross income for 1999 exceeded the limit found at section 408A(c)(3)(B) of the Code. Specifically, Company Q did not advise Taxpayer A and Taxpayer B that they were ineligible to convert the traditional IRA X to the Roth IRA Y because their income exceeded the limit allowable under section 408A(c)(3)(B) of the Code.

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In , Taxpayer A withdrew $from her Roth IRA. Taxpayer A and Taxpayer B failed to report this withdrawal on their *** Federal tax return because they were unaware that these moneys had not been previously taxed.

On , the Internal Revenue Service issued a 30-day letter for proposed changes to the 2000 tax year for additional tax on the premature distribution from Taxpayer A’s Roth IRA Y and an accuracy related penalty for $. On ***, Taxpayer A and Taxpayer B

paid the total balance due to the United States Treasury.

On ***, Taxpayer A and Taxpayer B retained the services of a Certified Public Accountant who informed them that in 1999 they were ineligible to convert Taxpayer A’s traditional IRA X to the Roth IRA Y. Taxpayer A and Taxpayer B represent that until *** they were both unaware of the 408A(c)(3)(B) limitation and they also believed that the traditional IRA X had been properly converted. In addition, as of the date of this ruling request, the Internal Revenue Service has not made Taxpayer A aware of her improper IRA conversion.

Based on the above, you, through your authorized representative, request the following letter ruling: that Taxpayer A and Taxpayer B are granted the authority, under section 301.9100-3 of the Procedure and Administration Regulations, to recharacterize Taxpayer A’s Roth IRA Y as a traditional IRA.

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 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 return for the year of contribution.

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.

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

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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)(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 taxpayers 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)(i) 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

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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 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 taxpayers receipt of a ruling granting relief under this section.

In this case, Taxpayer A and Taxpayer B were ineligible to convert Taxpayer A’s traditional IRA X into Roth IRA Y because Taxpayer A and Taxpayer B ’s combined modified adjusted gross income exceeded $100,000 for tax year 1999. Therefore, it is necessary to determine whether Taxpayer A and Taxpayer B are eligible for relief under the provisions of section 301.9100-3 of the regulations.

Although Taxpayer A and Taxpayer B were ineligible for the 1999 Roth IRA conversion, they both were unaware of their ineligibility to do so until October 2002 when they were so informed by their accountant and through their own investigation. Upon realizing their error, Taxpayer A and Taxpayer B requested relief from the Service before the Service discovered Taxpayer A's ineligibility to convert 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 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 Roth IRA Y back to a traditional IRA. Specifically, the Service has concluded that you have met the requirements of clause (i), (iii), and (v) of section 301.9100-3(b)(1) of the regulations. Therefore, pursuant to section 301.9100-3 of the regulations, Taxpayer A and Taxpayer B are granted an extension of sixty (60) days from the date of the issuance of this letter ruling to recharacterize Roth IRA V and Roth IRA X back to a traditional IRA.

Please note that in conjunction with recharacterizing Taxpayer A's Roth IRA Y, Taxpayer A and Taxpayer B must file an amended calendar year *** Federal Income Tax Return consistent with this ruling letter if they have not already done so. In addition, this letter ruling applies solely to the amount remaining in the Roth IRA Y as of the date of the recharacterization.

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 that may be applicable thereto.

This letter is directed only to the taxpayers who requested it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.

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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.

Pursuant to a power of attorney on file with this office, a copy of this ruling letter is being sent to your authorized representative.

Should you have any concerns with this letter, please contact ****.

Sincerely,

Andrew E. Zuckerman, Manager

Employee Plans Technical Group 1