PLR 200428035: Extra time to undo an ineligible Roth IRA conversion

Plain-English summary

A taxpayer converted a traditional IRA to a Roth IRA even though the couple's income exceeded the $100,000 conversion limit. He thought the conversion was ineffective and did not know he needed to recharacterize the Roth IRA until a financial company representative told him the Roth account existed. After the extended recharacterization deadlines passed, he requested relief before the IRS discovered the mistake. The IRS granted 60 days from the ruling letter to recharacterize the Roth IRA back to a traditional IRA under the § 301.9100 regulations. He had asked for six months; the ruling granted a shorter period and assumed the IRAs otherwise qualified under § 408.

Ruling snapshot

• Question: Could the taxpayer receive more time to recharacterize an ineligible Roth IRA conversion?
• Outcome: Approved for 60 days from the letter.
• Key authorities: IRC § 408A; Treas. Reg. §§ 1.408A-5, 301.9100-3.

Full text (IRS public release)

200428035

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION
APR 13 2004

UIL No.: 9100.00-00

Legend:

Taxpayer A................................................ Taxpayer B................................................ IRA T.................................................... IRA U.................................................... Company M................................................ Sum O....................................................

Dear Mr.

This is in response to a letter dated October 11, 2003, as supplemented by correspondence dated April 1, 2004, in which you request relief under section 301.9100-3 of the Procedure and Administration Regulations (the “regulations”). You submitted the following facts and representations in connection with your request.

Taxpayer A maintained an individual retirement arrangement, IRA T, described in section 408 of the Internal Revenue Code (the “Code”), with Company M. In , Taxpayer A converted IRA T into Roth IRA U, which was also with Company M. Taxpayer A was ineligible for the _ Roth conversion due to the $100,000 limitation in section 408A(c)(3)(B). Taxpayer A timely filed a joint federal income tax return with his spouse, Taxpayer B, for calendar year . The amount converted from IRA T was Sum O. No portion of Sum O was included as taxable income on the return.

Taxpayer A believed the Roth conversion was merely an attempted conversion which was ineffective because Taxpayer A and Taxpayer B exceeded the $100,000 limitation. Thus, he was unaware of the need to recharacterize Roth IRA U, until the year

when he spoke with a representative from Company M who informed him that he in fact had a Roth IRA. Therefore, Taxpayer A missed the deadlines provided in Announcement 99-57, 1999-24 I.R.B. 50 (June 14, 1999) and Announcement 99-104, 1999-44 I.R.B. 555 (November 1, 1999), which would have allowed Taxpayer A to

200428035

2
recharacterize the failed Roth conversions until December 31, . This request for section 301.9100 relief was submitted prior to the Service’s discovering Taxpayer A's ineligibility to convert his traditional IRA into a Roth IRA and prior to discovering that IRA U had not been recharacterized back to a traditional IRA.

Based on your submission and the above facts and representations, you request a ruling that pursuant to section 301.9100-3 of the regulations, Taxpayer A be granted a period not to exceed six months from the date of this ruling letter to recharacterize Roth IRA U back to a traditional IRA.

With respect to your ruling request, Code section 408A(d)(6) and section 1.408A-5 of the federal Income Tax Regulations (the “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 originally 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, Q&A-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 that an individual with an 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 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 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 (AGI) 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 regulations provide guidance concerning requests for relief submitted to the Service on or after December

200428035

3
31, 1997. Section 301.9100-1(c) 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.

Section 301.9100-2 of the regulations lists certain elections for which automatic extensions of time to file are granted. Section 301.9100-3 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 Internal Revenue Service (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 provided that a taxpayer who timely filed his or 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 provided that a taxpayer who timely filed his or 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.

200428035

4
In this case, Taxpayer A was not eligible to convert his traditional IRA into a Roth IRA since the combined modified adjusted gross income of Taxpayer A and his spouse, Taxpayer B, exceeded $100,000. Taxpayer A timely filed a joint federal income tax return. Thus, he was eligible for relief under Announcements 99-57 and 99-104. However, he missed the deadlines provided under these announcements because he was unaware that he had a Roth IRA and thus was unaware of the need to recharacterize Roth IRA U back into a traditional IRA until the year when a professional advised him that he had a Roth IRA account with Company M. Therefore, it is necessary to determine whether he is eligible for relief under the provisions of section 301.9100-3 of the regulations.

Although Taxpayer A was ineligible for the Roth IRA conversion, he was unaware of the need to recharacterize until the year . Upon realizing his mistake, Taxpayer A requested relief from the Service before the Service discovered the failure to make a timely election to recharacterize Roth IRA U back to a traditional IRA pursuant to Announcements 99-57 and 99-104. Thus, Taxpayer A satisfies the requirements of clauses (i) and (iii) of section 301.9100-3(b)(1) of the regulations. Accordingly, we rule that, pursuant to section 301.9100-3 of the regulations, Taxpayer A is granted a period not to exceed 60 days from the date of this letter to recharacterize his Roth IRA U back to a traditional IRA.

This letter assumes that the above IRAs qualify under Code section 408 at all relevant times.

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

Should you have any concerns regarding this ruling, please contact Sincerely yours,

Carlton A. Watkins, Manager
Employee Plans Technical Group 1

Enclosures:
Deleted copy of letter
Notice 437