Extension granted to recharacterize a Roth IRA conversion

Plain-English summary

The IRS granted a taxpayer 60 additional days to recharacterize a Roth IRA conversion as a contribution to a traditional IRA. An examination later increased the taxpayers' modified adjusted gross income above the Roth IRA conversion limit, making the taxpayer retroactively ineligible for the conversion. The IRS found that the taxpayer reasonably failed to make the election because the need for it was not known when the normal deadline passed, and the statute of limitations remained open. The extension was limited to the stated recharacterization and did not change other IRA requirements.

Ruling snapshot

• Question: Could the taxpayer receive more time to recharacterize a Roth IRA conversion under the § 301.9100-3 rules?
• Outcome: Approved
• Key authorities: IRC §§ 408A and 408; Treas. Reg. §§ 1.408A-5 and 301.9100-1 through 301.9100-3

Full text (IRS public release)

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

201022026

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION MAR 8 2010

SE:T:EP:RA:T2

Uniform Issue List: 9100.00-00; 408A.00-00

Legend:

Taxpayer A

Taxpayer B

Custodian M

Amount A

IRA X

Account Number: * maintained by ***** on behalf of

Roth IRA Y

Account Number: * maintained by *** on behalf of

Date 1

Dear :

This is in response to your request dated ** , * as supplemented by correspondence dated * *** , *** and *** *** in which you request relief under section 301.9100-3 of the Procedure and Administrative Regulations (the "Regulations"). The following facts and representations have been submitted under penalty of perjury in support of the ruling requested.

Taxpayer A and Taxpayer B (collectively the Taxpayers) are married and file a joint Federal Income Tax Return. As the result of suffering certain losses during the
* tax year, the Taxpayers became aware during *** ** that their joint “modified adjusted gross income” as defined in section 408A(c)(3)(C)(i) of the Internal

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Revenue Code (“Code”) for **** was less than $100,000. Taxpayer A maintained IRA X, a traditional IRA described in section 408 of the Code, with Custodian M. Taxpayer A was advised by his financial advisor that as a result of his modified adjusted gross

income being below $100,000 he was eligible to convert all or a portion of IRA X into a Roth IRA.

On Date 1, Taxpayer A directed Custodian M to perform a trustee-to-trustee rollover of the entire balance of IRA X, Amount A, to Roth IRA Y, a Roth IRA described in section 408A of the Code. The Taxpayers correctly reported the conversion as a distribution of Amount A when computing their tax liability for the **** tax year.

In *e the Internal Revenue Service began an examination of the Taxpayers’ Federal Income Tax Return. As a result of this examination, the Internal Revenue Service proposed adjustments to the Taxpayers’ income that resulted in the Taxpayers’ modified adjusted gross income exceeding $100,000, thereby rendering Taxpayer A retroactively ineligible to make a Roth IRA conversion for . Taxpayer A represents that he was unable to make a timely election to recharacterize Roth IRA Y as a traditional IRA, because at the time the election would have been required to be made the Taxpayers reasonably believed that their modified adjusted gross income for
was less than $100,000, and they had no reason to believe that the occurrence of proposed adjustments in would cause their *** modified adjusted gross income to exceed $100,000.

In connection with the examination the Taxpayers agreed to extend the statute of limitations on their **** Federal Income Tax Return.

Based on the foregoing facts and representations, you have requested a ruling that, pursuant to section 301.9100-3 of the Regulations Taxpayer A may be granted a period not to exceed 60 days from the date of issuance of this ruling to make an election under section 1.408A-5 of the Income Tax Regulations (the “I.T. Regulations”) to recharacterize Amount A as a contribution to a traditional IRA.

Section 408A(d)(6) of the Code and section 1.408A-5 of 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 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 I.T. 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 Return for the year of contribution.

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

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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 408A(c)(3) of the Code provides, in relevant part, that a taxpayer generally is not allowed to make a rollover contribution to a Roth IRA from an individual retirement plan other than a Roth IRA during any taxable year if the taxpayer's adjusted gross income for that year exceeds $100,000.

Section 408A(d)(3)(C) provides that a conversion of a traditional IRA to a Roth IRA is treated as a rollover from the traditional IRA to the Roth IRA.

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
****. 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 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.

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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.

The information presented and documentation submitted by Taxpayer A is consistent with his assertion that his failure to elect to recharacterize the Roth IRA on or before the date prescribed by law, including extensions, for filing his Federal Income Tax Return for the year of contribution, was caused by his lack of awareness of the necessity of making an election thus making it impossible for Taxpayer A timely to elect to recharacterize his Roth IRA conversion back to a traditional IRA.

Based on the above, Taxpayer A meets the requirements of section 301.9100- 3(b)(1) of the Regulations, clause (iii), for the **** tax year. In addition, since the statute of limitations is still open, under section 301.9100-3(c)(1)(ii) of the Regulations, granting relief will not prejudice the interests of the Government.

Accordingly, Taxpayer A is granted an extension of 60 days as measured from the date of the issuance of this ruling letter to recharacterize Amount A as a contribution to 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 directed only to the taxpayer who requested it. Section 6110(k)(3) of the Code provides that it may not be used or cited by others as precedent.

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

If you wish to inquire about this ruling, please contact ** ***** (ID

**) at () -***. Please address all correspondence to

Sincerely yours,

Donzell H. Littlejohn, Manager,
Employee Plans Technical Group 2

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Enclosures:

CC:

Deleted copy of this letter
Notice of Intention to Disclose, Notice 43