PLR 1024071: IRS denied extra time to recharacterize a Roth IRA as a traditional IRA

Plain-English summary

The IRS denied a request for extra time to recharacterize a Roth IRA as a traditional IRA after the election period had expired. The taxpayer had converted traditional IRAs to a Roth IRA after relying on a tax advisor's advice about eligibility for the conversion, but the advisor did not explain the recharacterization deadline. The IRS concluded that the conversion itself contained no taxpayer error and that the facts did not meet any of the regulatory grounds for relief under Treas. Reg. § 301.9100-3. The taxpayer therefore was not granted an additional period to make the recharacterization election.

Ruling snapshot

• Question: Could the taxpayer receive additional time to recharacterize the Roth IRA as a traditional IRA?
• Outcome: Denied
• Key authorities: IRC § 408A(d)(6); Treas. Reg. §§ 1.408A-5, 301.9100-3

Full text (IRS public release)

DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE 201024071

WASHINGTON, D.C. 20224

TAX EXEMPT AND

GOVERNMENT ENTITIES MAR 2 5 2010 Uniform Issue List: 9100.00-00

SE:T:EP:RA:T3

Legend:

Taxpayer A:

Tax Advisor K:

Date 1:

Date 2:

Date 3:

IRA X:

IRA Y:

Roth IRA Z:

Amount M:

Dear

This is in response to letters dated December 17, 2008, June 11, 2009,
September 28, 2009, December 11, 2009, and December 28, 2009, in which
your authorized representative, on your behalf, requests relief under section
301.9100-3 of the Procedure and Administration Regulations (the "regulations").
Following conversion of your traditional individual retirement accounts to your
Roth IRA, you request a ruling to allow the recharacterization of your Roth IRA as
a traditional IRA after the expiration of the election period under Code section
408A(d)(6) and section 1.408A-5 of the Federal Income Tax Regulations (the

“Regulations”).

You submitted the following facts and representations in connection with your
request.

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Taxpayer A, age 60, is sole proprietor of a consulting and repair business which
generated a net operating loss in year 2006 resulting in negative adjusted gross
income for said year 2006. Taxpayer A’s business continued to struggle during
year 2007 and his modified adjusted gross income for year 2007 was less than
$100,000. Taxpayer A separated from his wife in calendar year 20. and, as a
result, lived separate and apart from her for all of calendar year 20.

Taxpayer A maintained individual retirement accounts (IRAs), IRA X, and IRA Y.
On Date 1, 2007, Taxpayer A sent an e-mail to Tax Advisor K inquiring whether
Taxpayer A should convert IRA X and IRA Y to a new Roth IRA account. Tax
Advisor K responded on Date 2, 2007, by advising Taxpayer A that he could
make the conversion of his IRAs to a Roth IRA without incurring excise taxes or
penalties. Specifically, Tax Advisor K noted in his Date 2, 2007, response that
since Taxpayer A was not generating business operating profits and that he and
his wife had been separated for the entire year of 20, a conversion of the
traditional IRAs would be permitted under the Code and Regulations.

On Date 3, 2007, Taxpayer A caused the holder of IRAs X and Y to convert, by
means of trustee-to-trustee transfers, his entire interest in IRAs X and Y to Roth
IRA Z. On the conversion date the value of Taxpayer A’s IRAs was Amount M,
approximately double the value of the Roth IRA at the end of year 2008.

During year 2008, Taxpayer A requested that Tax Advisor K file an automatic
extension of the due date for filing his year 2007 Federal income tax return.
Taxpayer A did not provide tax information or communicate his tax plans with
Tax Advisor K until late in year 2008 which was after the expiration of the period
of automatic extension of the due date for filing his year 2007 Federal income tax
return. Tax Advisor K, upon learning that the Date 3 conversion had occurred,
informed Taxpayer A that Taxpayer A missed the October 15, 2008 deadline for
any recharacterization of Roth IRA Z 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 90 days from the date of this letter ruling to
recharacterize Roth IRA Z as a traditional IRA.

With respect to your ruling request, Code section 408A(d)(6) and section 1.408A-
5 of the 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

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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 & Answer-6 of the 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)(B) 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, or an individual that is married and files a separate
return 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 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.

Section 408A(c)(3)(D), as applicable to calendar year 2007, referred to section
219(g)(4) and provided that a married individual who files a separate return and
who lives apart from his spouse for the entire taxable year shall not be treated as
a married individual for purposes of section 408A(c)(3).

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 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

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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.

Taxpayer A's ruling request requires the Internal Revenue Service to determine
whether he is eligible for relief under the provisions of section 301.9100-3 of the
Regulations.

Taxpayer A represents that he was unaware of the deadline for recharacterizing
Roth IRA Z because Tax Advisor K did not mention the section 408A(d)(6) and
section 1.408A-5 recharacterization deadline in his initial Date 2, 2007, response
to Taxpayer A’s inquiry about converting his IRAs to a Roth IRA. Taxpayer A
also asserts that complicated divorce proceedings during year 20 _ contributed
to his failure to file his Federal income tax return timely and to communicate with
Tax Advisor K about his tax return preparation. Tax Advisor K has represented
that had there been such communication in a timely manner, Tax Advisor K
would have discussed the recharacterization election deadline before the due
date for filing Taxpayer A’s year 2007 Federal income tax return including any
extension.

Based upon the representations made, the Service notes that Taxpayer A was
eligible to convert his IRAs to a Roth IRA and that Taxpayer A received correct
advice from Tax Advisor K concerning the conversion. The correct advice

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Page 5

provided by Tax Advisor K included Taxpayer A’s eligibility to convert IRAs X and
Y based upon Taxpayer A having an adjusted gross income of below $100,000
and Taxpayer A’s marital status for the tax year (2007) in question.

The Service further notes that an election to recharacterize Roth IRA Z was not
required to avoid tax penalties or liabilities because there is no evidence of an
error in the conversion of IRAs X and Y to Roth IRA Z. Consequently the Service
concludes that since there was no evidence of taxpayer error in the original
conversion, there was no necessity for a timely election to recharacterize and, as
a result, there was no failure to make a timely election which could be discovered
by the Service. A discovery by the Service, within the meaning of section 301-
9100-3(b)(1)(i) of the regulations, necessarily requires some element of taxpayer
error in the conversion.

Additionally, under the set of circumstances described above Taxpayer A has not
presented to the Service a set of facts that comes within any of the five clauses
of section 301-9100-3(b)(1) of the regulations.

Accordingly, we rule that Taxpayer A is not granted, under section 301.9100-3 of
the Regulations, an additional period beyond the expiration of the election period
described in Code section 408A(d)(6) and section 1.408A-5 of the Regulations to
recharacterize Roth IRA Z as a traditional IRA.

This letter assumes that the above IRAs qualify under either Code section 408 or
Code section 408A 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.

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.
Please address all

correspondence to SE:T:EP:RA:T3.

Frances V. Sloan, Manager
Employee Plans Technical Group 3

Enclosures:
Deleted copy of ruling letter
Notice of Intention to Disclose