PLR 1320022: IRS grants more time to recharacterize Roth IRA conversions

Plain-English summary

An individual asked the IRS for more time to recharacterize two Roth IRA conversions as contributions to traditional IRAs. The individual relied on a tax attorney's advice and later learned that the reported basis in the traditional IRAs was incorrect. The IRS found that the individual acted reasonably and in good faith, and that granting relief would not prejudice the government because the statute of limitations remained open. It granted a 60-day extension from the ruling date to recharacterize the two contributions.

Ruling snapshot

• Question: May the taxpayer receive more time to recharacterize two Roth IRA conversions as traditional IRA contributions?
• Outcome: Approved
• Key authorities: IRC §§ 408 and 408A; Treas. Reg. §§ 1.408A-5 and 301.9100-1 through 301.9100-3

Full text (IRS public release)

DEPARTMENT OF THE TREASURY 201320022

INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND FEB 1 9 2013

GOVERNMENT ENTITIES

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

Legend: TEP: Pk <T2.

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Taxpayer
Custodian
Attorney
Amount A

• Amount B
  Amount C
  Amount D
  Year 1
  Year 2
  Year 3
  IRA X,
  IRA X₂
  IRA Y₁
  IRA Y₂

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Dear ***:

This is in response to your letter dated September 6, 2012, submitted on your
behalf, by your authorized representative, 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 requested that Amount A and Amount B be transferred from IRA X,
and IRA X₂, traditional IRAs described in section 408 of the Internal Revenue Code (the
“Code”), on May 4 and 26 of Year 1, respectively, to IRA Y₁ and IRA Y₂, Roth IRAs
described in section 408A of the Code, respectively, as Roth IRA conversions.

Taxpayer relied on the advice of his attorney, Attorney, regarding the overall tax
consequences of converting a Traditional IRA to a Roth IRA. Per the submission,
Taxpayer was first notified of the error in his Roth IRA conversions on June 1, Year 3.

On February 18, Year 1, Taxpayer consulted with Attorney regarding whether
Taxpayer was eligible to convert his traditional IRAs, (IRA X₁ and IRA Xz) to Roth IRAs

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201320022

(IRA Y₁ and IRA Y₂). On this same date, Attorney advised Taxpayer that he was
eligible to convert his traditional IRAs to Roth IRAs.

Attorney advised Taxpayer that more information would be needed to determine
the actual tax consequences of the Roth IRA conversions. Attorney further advised that
Roth IRA conversions made in Year 1 could be re-characterized on or before October
17, Year 2. Taxpayer and Attorney agreed that Taxpayer could proceed with the Roth
IRA conversions with the understanding that the conversions may be re-characterized if
necessary.

Subsequent to the conversions, on May 26, Year 1, Taxpayer and Attorney held
a teleconference to discuss the tax consequences of the Roth IRA conversions.
Attorney and Taxpayer discussed how the calculation of Taxpayer’s basis in IRA X₁ and
IRA X₂ ultimately determines the tax consequences of the Roth IRA conversions. As a
result of the teleconference, Taxpayer believed that only Amount C of the total amount
converted would be taxed.

In Year 2, during the tax preparation of Taxpayer's Year 1 income tax return,
Attorney acquired the Taxpayer’s basis in IRA X₁ and IRA X₂ from Custodian.
_ Custodian provided Attorney with information showing the total cost basis as Amount D.
Attorney included this amount in the Year 1 tax return as the adjusted basis for IRA X₁
and IRA X₂.

On June 1, Year 3, Attorney reviewed the Year 1 income tax return in preparation
for the filing of the Year 2 income tax return and noticed that the adjusted basis reported
on the Taxpayer’s Form 8606 appeared to be unusually high. Attorney immediately
contacted the Taxpayer about his concerns. Attorney contacted Custodian to discuss
the irregularity in the basis amounts and it was ultimately determined that the cost basis
information received by Custodian was the cost basis of the securities held by IRA X₁
and IRA X₂ and not the adjusted tax basis of IRA X₁ and IRA X₂. All parties agreed that
the adjusted basis was actually $0. Attorney represented that he did not realize this and
“mistakenly understood” that the unusually high figure received from Custodian was not
Taxpayer's adjusted basis until after the deadline for re-characterizing Taxpayer's Roth
IRA conversions.

Per the submission, if Taxpayer had been informed that his basis in IRA X₁ and
IRA X₂ was $0 rather than Amount D before making the Roth IRA conversions,
Taxpayer would not have elected to make the conversions. Taxpayer further
represented that he would have timely re-characterized his Roth IRAs, (IRA Y₁ and IRA
Y2), if he was advised of the error prior to the deadline for re-characterizing his Roth IRA
conversions.

The statute of limitations on Taxpayer's Year 1 Federal Income Tax Return
remains open.

Page 3 201320022

Based on the foregoing facts and representations, you have requested a ruling
that, pursuant to section 301.9100-3 of the Regulations, Taxpayer may be granted an
extension to make an election under section 1.408A-5 of the Income Tax Regulations
(the “I.T. Regulations”) to recharacterize Amounts A and B as contributions to traditional
IRAs.

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.
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 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
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

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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.

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, including
an affidavit by Attorney admitting his error, is consistent with his assertion that after
excising reasonable diligence, his failure to elect to recharacterize the Roth IRAs, (IRA
Y; and IRA Y₂) 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 as a result of relying upon incorrect
information provided to him by Attorney.

Based on the above, Taxpayer meets the requirements of section 301.9100-
3(b)(1) of the Regulations, clauses (i) and (iii), for the Year 1 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 is granted an extension of 60 days as measured from the
date of the issuance of this ruling letter to recharacterize Amount A and Amount B
contributions to traditional IRAs.

“Page 5 | 201320022

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 letter assumes that the above IRAs qualify under either section 408 of the
Code or section 408A of the Code at all relevant times.

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 this office, a copy of this letter ruling
is being sent to your authorized representative.

If you wish to inquire about this ruling, please contact *** 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, Notice 437

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