PLR 200850052: six months requested, sixty days granted, for a recharacterization the custodian never received

Plain-English summary

Taxpayer A converted Amount 1 from traditional IRA X into Roth IRA Y, both held with Custodian C. The couple's modified adjusted gross income was over the $100,000 ceiling, so Taxpayer A was never eligible to make the conversion. Told of the problem in September, Taxpayer A asked Custodian C to recharacterize the Roth back to a traditional IRA, completed and mailed the form, and believed it was done in time. The joint return left Amount 1 out of income, reporting $0 on line 15b, and the preparer attached a statement saying the recharacterization had occurred. In December a custodian statement showed Roth IRA Y still holding everything. Custodian C had never received the request and refused to act after the deadline without a ruling. The Service granted relief under sections 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations.

The grant is narrower than the request and the letter says nothing about it. Taxpayer A asked for a period not to exceed 6 months from issuance to complete the election. The conclusion grants a period of 60 days. Nothing between the request and the conclusion explains the cut, and the ruling makes no mention that it is giving a third of what was sought for a transaction that has already failed once through a custodian's paperwork.

The ground of decision is equally narrow. Section 301.9100-3(b)(1) lists five ways a taxpayer is deemed to have acted reasonably and in good faith, and the letter quotes all five. It then rests on clause (i) alone, that the request was filed before the Service discovered the failure. That clause is a timing rule, not a finding about anyone's conduct. Clause (v), reasonable reliance on a qualified tax professional who failed to make or advise the election, fits these facts directly, since the representative identified the problem and directed the recharacterization and the preparer handled the return. It is quoted and left unused.

The return itself is the part the letter records and declines to discuss. The preparer appended a statement to the return "mistakenly disclosing that Roth IRA Y had been recharacterized" when it had not been, and the income line was reported as zero on that basis. The letter treats this only as the reason the Service's Forms 1099-R and 5498 are inconsistent with the return, notes the discrepancy could have triggered an audit adjustment or an inquiry, and passes no judgment on the statement. Footnote 2 contradicts itself inside a single sentence, representing that Taxpayer A successfully recharacterized a Roth IRA for another year with the same custodian using the same procedures he followed here, "but without success". Footnote 3 records that the estimated payment of Amount 3, made for this very conversion, was credited by the Service to the wrong thing and refunded, with the year the payment belonged to lost to redaction.

The precedent paragraph cites "Code section 6110(k)" without the paragraph (3), a third variant in this corpus alongside the documents that cite 6110(j)(3) and those that cite 6110(k)(3). The date stamp on the letterhead is broken across two lines and rendered unreadable, so issue_date is left empty here rather than guessed; the release date comes from the index. Section 301.9100-3 is printed five different ways in the scan, and the regulation cited as the recharacterization rule appears once as "4.408A-5". Corrections applied and recorded: "4099-R" to "1099-R" in the form number, "4.408A-5" to "1.408A-5", the pipe standing in for a capital I in "|.T. Regs." and "|. T. Regs." (two each), the four broken renderings of section 301.9100-3, three missing word spaces in "IRA Xto", "Roth IRA Ytoa" and "Roth IRA Y asa", and the colon in "Carlton A: Watkins", whose name is printed correctly in 0850053 in this release. Left as scanned: the scrambled letterhead and page bands, the salutation reading "Dear Gi", and the lowercase sentence openings.

Ruling snapshot

Relief granted. The Service found the requirements of sections 301.9100-1 and 301.9100-3 met under clause (i) of section 301.9100-3(b)(1), and granted 60 days from issuance to recharacterize Amount 1 plus earnings from Roth IRA Y to a traditional IRA. Taxpayer A had asked for up to 6 months.

Full text (IRS public release)

EASURS 2UU85 005 2

DEPARTMENT OF THE TR

INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224
TAX EXEMPT AND S 2 08
GOVERNMENT ENTITIES EP ] 0 0
DIVISION

Uniform Issue List Number: 9100.00-00

KKK KKKREEKKEREEEKEEREREREREEE EER

KRARKKKKKKAKEHKKA AKER KEK EKEKEREKEAEEE

KHRREKKEKAKKKRAEEKERE EERE

Legend:

Taxpayer A = MKKKKKKKREIKKEKKEREEAEREKERAEEEREREREKE
KKKKKAKKKEKNEREKEKEKRHENEKEKA

Taxpayer B = HK KKKKKEREREKEREKEEREREKEREEE
KREKKKKKRAKEEKKEEKEKEKEEREREREER

Custodian C = HAH KKKKKEKKKKEEHEAKEAKKEERAEREREATEEEE

IRA X = HRKK HAKKAR EKEEEEK EKER RARER REE EERE ENEEERER

IRA Y = Hee Ke Be KKH KA KEKE IKEA KERERKRERIKERERE KEE EERE EKERE

Amount 1 ns = KEKKKEARKKKERKEREKEKEEK

Amount 2 = KXKKKAKKEKEKKEKKKKHKKKEEKE

Amount 3 = KAIKKKAAKKKEKKAEKKEKKCENRKEEKEEEEK

KEKKKKKHKKAEEEE .
Dear Gi

This is in response to a letter dated ***********7"""", submitted by your authorized
representative on your behalf, as supplemented by correspondence dated **** **,
sees ae sees and August **, ****, in which you request relief under sections
301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations
(“regulations”).

in support of your request for relief you have submitted the following facts and
representations:

Taxpayers A and B (“Taxpayers”) are spouses and filed a joint federal income tax return
for calendar year ****. The time for filing the return was extended to October **, ****.

During ****, Taxpayer A converted Amount 1 from IRA X, a traditional “individual
retirement arrangement,” to IRA Y, a Roth IRA. Taxpayer A maintained both IRA X and
IRA Y with Custodian C.

20850052

De

in September ****, the Taxpayers were informed by their authorized representative that
Amount 2 (their **** modified adjusted gross income (“AGI”)) exceeded the amount for
a taxable year during which a taxpayer may convert funds from a traditional IRA to a
Roth IRA. As directed by his authorized representative, Taxpayer A then contacted
Custodian C requesting that IRA Y be recharacterized as a traditional IRA. Taxpayer A
represents that he received, completed and mailed a form provided by Custodian C
confirming his request for recharacterization of Roth IRA Y. as a traditional IRA. Both
Taxpayer A and his tax preparer understood and believed that the recharacterization of
Roth IRA Y as a traditional IRA for **** was effective as of ********* ** **** Therefore,
the attempted recharacterization of Roth IRA Y would have been within the time
allowed by statute for recharacterizing an amount that previously had been converted
from a traditional IRA to a Roth IRA.” Also, because Taxpayer A and the tax preparer
believed they had completed a valid recharacterization, Amount 1, as reported to the
IRS by Custodian C as a taxable IRA distribution on a **** Form 1099-R (“Distributions
From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance
Contracts, etc.”), Was not included in the Taxpayers’ income when they filed their ****
federal income tax return. Instead, the tax preparer appended a statement to the
Taxpayers’ return, mistakenly disclosing that Roth IRA Y had been recharacterized. The
amount then included in income on line 15b of the Taxpayers’ **** Form 1040 was $0.

in December ****, Taxpayer A noted that his November statement from Custodian C
appeared to be in error because it showed Roth IRA Y still retaining all its assets, rather
than having been transferred to a traditional IRA. Taxpayer A contacted Custodian C
about this matter and was informed that Custodian C had not received his
recharacterization request. Also, Custodian C now denied Taxpayer A's request for
recharacterization because it was after the deadline for completion of such transactions
established under sections 408A(d)(6) of the Internal Revenue Code (“Code”) and
1.408A-5 of the Income Tax Regulations (“I.T. Regs.”). Custodian C informed Tax-
payer A that Roth IRA Y would not be recharacterized without a ruling from the Internal
Revenue Service (“Service”).

As previously stated, Taxpayer A received a Form 1099-R from Custodian C for ****,
reporting Amount 1 as a taxable distribution. Custodian C also issued a Form 5498
(“IRA Contribution Information”) to Taxpayer A for **** reporting a contribution of
Amount 1 to Roth IRA Y. However, since Custodian C did not then transfer the assets
of Roth IRA Y into a traditional IRA, it has not issued a subsequent Form 1099-R or
Form 5498 showing that Roth IRA Y has been recharacterized.> Had Custodian C

ee
‘ie, Amount 1 plus earnings accrued between the time of conversion of Amount 1in IRA X into IRA Y and
the time of the attempted recharacterization of IRA Y as a traditional IRA.

? Taxpayer A represents that he successfully recharacterized a Roth IRA as a traditional IRA for ****
(which was also maintained with Custodian C) using the same procedures he followed for “***, but without
success.

3 Documents submitted by Taxpayer A's authorized representative indicate that he made an estimated tax
payment of Amount 3 on **"**"*, ****, for the original **** conversion of traditional IRA X to Roth IRA Y.
However, the IRS credited Amount 3 as a payment for Taxpayer A’s taxes, rather than for . By
check dated ******** *, ****, the IRS refunded Amount 3 to Taxpayer A.

2UU85005 2

transferred the assets in Roth IRA Y to a traditional IRA, it would have reissued Form
1099-R and Form 5498 to reflect the recharacterization of Roth IRA Y as a traditional
IRA. Because Custodian C did not reissue either Form 1099-R or Form 5498, the
forms that the Service has received are inconsistent with the Taxpayers’ statement in
their **** tax return claiming that recharacterization had occurred on ********* **| ****,
Moreover, the Forms 1099-R and 5498 on file with the Service continue to show a
taxable event of Amount 1 that was not included in the Taxpayers’ **** income, a
discrepancy which could have triggered an audit adjustment or at least an inquiry from
the Service. Taxpayer A’s ******** *, **** request for relief under section
301.9100-3(b)(1)(i) of the regulations was submitted to the Service prior to the Service
discovering that Taxpayer A had failed to make a timely recharacterization of Roth
IRA Y as a traditional IRA.

Based on the facts and representations provided above, Taxpayer A requests a ruling
that, pursuant to section 301.9100-3 of the regulations, he be granted a period not to
exceed 6 months from the date of issuance of this ruling letter to complete an election
under section 1.408A-5 of the I.T. Regs. to recharacterize his 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 I.T. Regs. 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 contributions, 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 contributions.

Section 1.408A-5, Question and Answer —6 of the I.T. Regs. describes how a taxpayer
makes the election to recharacterize the IRA contribution. To recharacterize an amount
that either has been contributed to a Roth IRA or 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 specific

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 modified AGI
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.

4. “VU85 0058

Section 1.408A-4, Q&A-2 of the I.T. Regs. provides, in summary, that an individual with
modified AGI in excess of $100,000 for a taxable year is not permitted to convert an
amount to a Roth IRA during that taxable year. Furthermore, Q&A-2(b) provides that in
the case of a husband and wife who file a joint Federal Income Tax Return, the
modified AGI is the modified AGI derived from the joint return using the couple’s
combined income.

Section 1.408A-5, Q&A-2(a) of the I. T. Regs. provides guidance with respect to the
calculation of income attributable to recharacterized amounts.

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 Internal Revenue, in his discretion, may grant a reasonable extension
of the time fixed by a regulation, revenue ruling, revenue procedure, 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 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)) 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 if: (i) the taxpayer’s request for section
301.9100-1 relief is filed before the failure to make a timely election is discovered by the
Service; (ii) the taxpayer inadvertently failed to make the election because of
intervening events beyond the taxpayer's control; (iii) 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.

& 2UU85 005 2

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 was ineligible to convert his traditional IRA X to Roth IRA Y in
**** because the Taxpayers’ modified AGI exceeded the $100,000 limit specified in
section 408A(c)(3)(B) of the Code. Taxpayer A attempted, but failed to recharacterize
Roth IRA Y within the time provided by the Code and the I. T. Regs. It was only in
December of ****, after the deadline of ******* **, **** had passed, that Taxpayer A
became aware that Custodian C had not yet transferred the assets in Roth IRA Y to a
traditional IRA. However, with the understanding that a successful conversion took
place in **** of Amount 1 in traditional IRA X to Roth IRA Y, on ***** **, ****, Taxpayer
A made a payment of Amount 3 to the IRS, which amount was not refunded to him until
November of ****. Taxpayer A filed this request for a private letter ruling seeking
additional time to complete the recharacterization of Roth IRA Y as a traditional IRA
before the failure to make a timely election was discovered by the Service. The ****
calendar year is not a closed tax year.

With respect to your request for relief, we believe that, based on the information
submitted and the representations contained herein, you have met the requirements of
sections 301.9100-1 and 301.9100-3 of the regulations, and that you have acted
reasonably and in good faith with respect to making the election to recharacterize your
failed conversion as a traditional IRA. Specifically, the Service has concluded that you
have met the requirements of clause (i) of section 301.9100-3(b)(1) of the regulations.
Therefore you are granted a period of 60 days from the date of the issuance of this
letter ruling to recharacterize Amount 1, plus earnings thereon, of Roth IRA Y as a
traditional IRA.

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 ruling is based on the assumption that traditional IRA X and Roth IRA Y meet the
requirements of Code sections 408 and 408A, respectively, at all relevant times.

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

Copies of this letter and related documents have been sent to your authorized
representative in accordance with a power of attorney on file in this office. If you have

2UU850052

any questions pertaining to the ruling, please contact HEEHKERERERAAKK KEARREAKACERREEE

EEKKKEKAREKKARKKIAK KAMERTEREEEREEEKEEREEEREEKEAEEEA SE:T:EP: RA:T1 KAKKKEKEERRACHKKE Hk for fu rther

information.

Sincerely,

Carlton A. Watkins, Manager
Employee Plans Technical Group 1