PLR 1230029: IRS grants more time to recharacterize an ineligible Roth IRA conversion

Plain-English summary

A married couple asked the IRS for more time to recharacterize a traditional IRA conversion as a contribution to a traditional IRA after their income made them ineligible for the Roth IRA conversion. The couple had been advised to recharacterize the conversion, but the custodian delayed providing the required paperwork, and one taxpayer became ill before the filing deadline. The IRS concluded that the taxpayers acted reasonably and in good faith and that relief would not prejudice the government because the statute of limitations remained open. It granted 60 days from the ruling date to complete the recharacterization.

Ruling snapshot

• Question: May the taxpayer recharacterize an ineligible Roth IRA conversion after the filing deadline?
• Outcome: Approved
• Key authorities: IRC §§ 408(a), 408A(c)(3), 408A(d)(3), 408A(d)(6), and 6110(k)(3); Treas. Reg. §§ 1.408A-5 and 301.9100-3

Full text (IRS public release)

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

201230029

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

MAY 1 2012

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

SE:T:EP:RA:T2

Legend:

Taxpayer A = ****

Taxpayer B = **

Custodian M = ******

Amount A = ******

IRA X = ********

IRA Y = ********

Date 1 = ****

Year 1 = ****

Dear ****:

This is in response to your request dated August 2, 2011, in which you request relief
under section 301.9100-3 of the Procedure and Administrative Regulations (the "P&A
Regulations"). The following facts and representations have been submitted under
penalty of perjury in support of the ruling requested.

Taxpayer A and Taxpayer B ("the Taxpayers") file Form 1040, U.S. Individual Income
Tax Return, jointly as a married couple. Taxpayer A owns IRA Y, an individual
retirement account described in section 408(a) of the Internal Revenue Code ("Code"),

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and maintained by Custodian M. On Date 1, Taxpayer A transferred Amount A from his
traditional IRA X to IRA Y, a Roth IRA described in section 408A of the Code, as a Roth
IRA conversion.

Taxpayer A represents that at the time of the conversion, the Taxpayers were unaware
that their modified adjusted gross income for the Year 1 taxable year exceeded
$100,000.00, thus making them ineligible to convert the traditional IRA to a Roth IRA.
The Taxpayers federal income tax extension of time to file a Federal Income Tax Return
for Year 1 was prepared by a tax professional who had advised Taxpayers prior to filing
their tax return that they would be required to recharacterize the Roth conversion back
to a traditional IRA. Prior to the extended due date for filing the return, Taxpayer B
contacted Custodian M for instructions as to how to recharacterize the IRA. Despite her
request, Custodian M failed to remit the proper paperwork to Taxpayer B until the
deadline for filing the return had passed. Soon after contacting Custodian M, Taxpayer
B had fallen ill for a period of time ending after the filing date of the Taxpayers’ tax
return.

The Taxpayers' request for relief under section 301.9100-3 of the P&A Regulations was
filed after discovering that they had missed the deadline to recharacterize Roth IRA Y
back to IRA X, and prior to the Internal Revenue Service (the "Service") discovering that
Taxpayer A had not timely elected to recharacterize Roth IRA Y to a traditional IRA. The
statute of limitations on Taxpayers’ Federal Income Tax Return for Year 1 is still open.

Based on the foregoing facts and representations, you have requested a ruling that,
pursuant to section 301.9100-3 of the P&A 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.

With respect to your request for relief under section 301.9100-3 of the P&A Regulations,
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 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

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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, as in effect for years prior to 2010, 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 P&A 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 P&A Regulations 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 P&A 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 P&A 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 P&A 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 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 P&A Regulations provides that ordinarily the interests
of the Government will be treated as prejudiced and that ordinarily the Service will not

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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 intervening events beyond Taxpayers’
control, thus making it impossible for Taxpayer A timely to elect to recharacterize his
Roth IRA conversion back to a traditional IRA. Taxpayers made a good faith effort to
make the election, but Custodian M had failed to provide proper paperwork to
Taxpayers to make the election and Taxpayer B had fallen ill during the time in which
Taxpayers had the ability to make the election.

Based on the above, Taxpayer A meets the requirements of section 301.9100-3(b)(1) of
the P&A Regulations, clauses (i), (ii) and (v). In addition, since the statute of limitations
is still open, under section 301.9100-3(c)(1)(ii) of the P&A 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, I.T., or P&A 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.

If you wish to inquire about this ruling, please contact ** (ID# -*) at
()*-***. Please address all correspondence to SE:T:EP:RA:T2.

Sincerely yours,

Donzell H. Littlejohn, Manager,

Employee Plans Technical Group 2

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