n-00-39.pdf

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing.

This collection currently includes the publisher’s available advance-release directory. Historical bulletin renditions are discovered separately; an advance-release record alone does not certify the collection archive complete.

# Part III -- Administrative, Procedural, and Miscellaneous Earnings Calculation for Returned or Recharacterized IRA Contributions

Notice 2000-39

## I. PURPOSE

This notice permits a new method to be used for calculating the net income
attributable to IRA contributions made after 1999 that are distributed as a returned
contribution pursuant to § 408(d)(4) of the Internal Revenue Code ("Code") or
recharacterized pursuant to § 408A(d)(6). However, until further guidance is issued,
net income may continue to be calculated under the existing method set forth in the
Income Tax Regulations.

## II. BACKGROUND

### A. Returned Contributions under § 408(d)(4)

Section 408(d)(4) provides that an IRA contribution will not be included in the
IRA owner's gross income when distributed as a returned contribution if (1) it is
received by the IRA owner on or before the day prescribed by law, including
extensions, for filing the owner's Federal income tax return for the year of the
contribution, (2) no deduction is allowed with respect to the contribution, and (3) the
distribution is accompanied by the amount of net income attributable to the contribution.

Section 1.408-4(c)(2)(ii) of the Income Tax Regulations prescribes the method
for calculating the amount of net income attributable to a contribution distributed
pursuant to § 408(d)(4). That method, referred to in this notice as the "old method,"
bases the calculation of the amount of net income attributable to a contribution on the
income earned by the IRA during the period beginning on the first day of the taxable
year in which the contribution is made and ending on the date of the distribution from
the account. Under the old method, net income cannot be a negative amount.

### B. Recharacterizations under § 408A(d)(6)

Section 408A(d)(6) provides that a contribution made to one type of IRA may be
recharacterized as having been made to another type of IRA if (1) the
recharacterization transfer occurs on or before the date prescribed by law for filing the
IRA owner's Federal income tax return for the year for which the contribution was
made, (2) no deduction is allowed with respect to the contribution to the transferor IRA,

and (3) the transfer is accompanied by any net income allocable to the contribution.

Section 1.408A-5, Q&A-2(c), provides that if a contribution being recharacterized
is in an IRA that at any time contained other contributions, the net income attributable
to the contribution being recharacterized is calculated in the manner prescribed by
§ 1.408-4(c)(2)(ii) (the old method), except that net income can be a negative amount.
Section 1.408A, Q&A-2(b), provides that if an IRA is established with a contribution and
no other contributions or distributions are made, then the subsequent
recharacterization transfer of the entire account balance of the IRA will satisfy the
requirement that the transfer be accompanied by any net income allocable to the
contribution.

### C. Requests for Alternative Method

The Internal Revenue Service has received comments that the old method for
calculating net income attributable to an IRA contribution often does not reflect the
actual earnings and losses of the IRA during the time it held the contribution. This is
because, under the old method, account activity in the part of the year that precedes
the date the contribution is made is taken into account in the calculation of the net
income attributable to the contribution. In addition, IRA owners and other interested
parties have indicated that net income should be permitted to be a negative amount.

In response to these comments, the Service and Treasury are providing a new
method for calculating net income that generally bases the calculation of the amount of
net income attributable to a contribution on the actual earnings and losses of the IRA
during the time it held the contribution. Until further guidance is issued, net income
may be calculated under either the new method or the old method. However, it is
intended that future guidance will provide that the new method is the only method for
calculating net income, and comments are requested regarding the new method and
the effective date of mandatory use of the new method.

## III. NEW METHOD FOR NET INCOME CALCULATION UNDER § 408(d)(4)

Under the new method, for purposes of returned contributions under § 408(d)(4),
the net income attributable to a contribution made to an IRA after December 31, 1999,
is determined by allocating to the contribution a pro-rata portion of the earnings
accrued by the IRA during the period the IRA held the contribution. The new method is
represented by the following formula:

Net Income = Contribution x
Adjusted Closing Balance - Adjusted Opening Balance
Adjusted Opening Balance

The "adjusted opening balance" is the fair market value of the IRA at the
beginning of the computation period plus the amount of any contributions made to the

IRA during the computation period (including the contribution that is distributed as a
returned contribution pursuant to § 408(d)(4)).

The "adjusted closing balance" is the fair market value of the IRA at the end of
the computation period plus the amount of any distributions made from the IRA during
the computation period.

The "computation period" is the period beginning immediately prior to the time
the particular contribution is made to the IRA and ending immediately prior to the
removal of the contribution being returned.

For purposes of the above calculation, when an IRA asset is not normally valued
on a daily basis, the fair market value of the asset at the beginning of the computation
period is deemed to be the most recent, regularly determined, fair market value of the
asset, determined as of a date that coincides with or precedes the first day of the
computation period. In addition, solely for purposes of determining net income,
recharacterized contributions are taken into account for the period they are actually
held in a particular IRA.

Under the new method set forth above, net income may be a negative number.

In the case of multiple regular contributions to an IRA, the last regular
contribution made to the IRA for a particular taxable year is deemed to be the
contribution that is distributed as a returned contribution under § 408(d)(4), up to the
amount of the contribution identified by the IRA owner as the amount distributed as a
returned contribution. For purposes of this notice, a "regular contribution" is an IRA
contribution made by the IRA owner that is neither a trustee-to-trustee transfer from
another IRA nor a rollover from another IRA or retirement plan.

In the case of an individual who owns multiple IRAs, the net income calculation
is performed only on the IRA designated by the owner as containing the contribution
that is to be distributed as a returned contribution, and that IRA is the IRA that must
distribute the contribution.

Under the new method described above, if an IRA is established with a
contribution and no other contributions or distributions are made to or from that IRA,
then the subsequent distribution of the entire account balance of the IRA pursuant to
§ 408(d)(4) will satisfy the requirement of that Code section that the return of a
contribution be accompanied by the amount of net income attributable to the
contribution.

The following examples illustrate the new method net income calculation under
§ 408(d)(4):

Example 1. (i) On May 1, 2000, when her IRA is worth $4,800, Taxpayer A
makes a $1,600 regular contribution to her IRA. Taxpayer A requests that $400
of the May 1, 2000, contribution be returned to her pursuant to § 408(d)(4).
Pursuant to this request, on February 1, 2001, when the IRA is worth $7,600, the
IRA trustee distributes to Taxpayer A the $400 plus attributable net income.
During this time, no other contributions have been made to the IRA and no
distributions have been made.

(ii) The adjusted opening balance is $6,400 [$4,800 + $1,600] and the
adjusted closing balance is $7,600. Thus, the net income attributable to the
$400 May 1, 2000, contribution is $75 [$400 x ($7,600 - $6,400) + $6,400].
Therefore, the total to be distributed on February 1, 2001, pursuant to
§ 408(d)(4) is $475.

Example 2. (i) Beginning in 2000, Taxpayer B contributes $200 on the 15th of
each month by payroll deduction to an IRA for 2000, resulting in an excess
regular contribution of $400 for the year. Taxpayer B requests that the $400
excess regular contribution be returned to her pursuant to § 408(d)(4). Pursuant
to this request, on March 1, 2001, when the IRA is worth $16,000, the IRA
trustee distributes to Taxpayer B the $400 plus attributable net income. The
excess regular contributions to be returned are deemed to be the last two made
in 2000: the $200 December 15 contribution, when the IRA was worth $12,000
immediately prior to the contribution; and the $200 November 15 contribution,
when the IRA was worth $11,000 immediately prior to the contribution. No
distributions have been made from the IRA and no contributions, other than the
payroll deduction contributions (including $200 in January and February 2001),
have been made.

(ii) For the December 15 contribution, the adjusted opening balance is
$12,600 [$12,000 + $200 + $200 + $200] and the adjusted closing balance is
$16,000. Thus, the net income attributable to the December 15 contribution is
$54 [$200 x ($16,000 - $12,600) + $12,600]. For the November 15 contribution,
the adjusted opening balance is $11,800 [$11,000 + $200 + $200 + $200 +
$200] and the adjusted closing balance is $16,000. Thus, the net income
attributable to the November 15 contribution is $71 [$200 x ($16,000 - $11,800)
\+ $11,800]. Therefore, the total to be distributed as returned contributions on
March 1, 2001, to correct the excess regular contribution is $525 [$200 + $200 +
$54 + $71].

## IV. NEW METHOD FOR NET INCOME CALCULATION UNDER § 408A(d)(6)

Under the new method, for purposes of recharacterizations under § 408A(d)(6),
the net income allocable to a contribution made to an IRA after December 31, 1999, is

determined by allocating to the contribution a pro-rata portion of the earnings accrued
by the IRA during the period the IRA held the contribution. The new method is
represented by the following formula:

Net Income = Contribution x
Adjusted Closing Balance - Adjusted Opening Balance
Adjusted Opening Balance

The "adjusted opening balance" is the fair market value of the IRA at the
beginning of the computation period plus the amount of any contributions made to the
IRA during the computation period (including the contribution that is recharacterized
pursuant to § 408A(d)(6)).

The "adjusted closing balance" is the fair market value of the IRA at the end of
the computation period plus the amount of any distributions made from the IRA during
the computation period.

The "computation period" is the period beginning immediately prior to the time
the particular contribution being recharacterized is made to the IRA and ending
immediately prior to the recharacterizing transfer of the contribution.

In the case of an individual with multiple IRAs, the net income calculation is
performed only on the IRA designated by the owner as containing the particular
contribution to be recharacterized, and that IRA is the IRA from which the
recharacterizing transfer must be made.

As under the old method, net income may be a negative amount. Also, as under
the old method, in the case of multiple contributions made to an IRA for a particular
year that are eligible for recharacterization, the IRA owner can choose (by dollar
amount, not by specific assets acquired with those dollars) which contribution, or
portion thereof, is to be recharacterized.

Also as under the old method, if an IRA is established with a contribution and no
other contributions or distributions are made to or from that IRA, then the subsequent
recharacterization transfer of the entire account balance of the IRA pursuant to
§ 408A(d)(6) will satisfy the requirement of that Code section that the transfer be
accompanied by any net income allocable to the contribution.

The following examples illustrate the new method net income calculation under
§ 408A(d)(6):

Example 3. (i) On March 1, 2000, when her Roth IRA is worth $80,000,
Taxpayer C makes a $160,000 conversion contribution to the Roth IRA.
Subsequently, Taxpayer C discovers that she was ineligible to make a Roth
conversion contribution in 2000 and so she requests that the $160,000 be
recharacterized to a traditional IRA pursuant to § 408A(d)(6). Pursuant to this
request, on March 1, 2001, when the IRA is worth $225,000, the Roth IRA
trustee transfers to a traditional IRA the $160,000 plus allocable net income. No
other contributions have been made to the Roth IRA and no distributions have
been made.

(ii) The adjusted opening balance is $240,000 [$80,000 + $160,000] and
the adjusted closing balance is $225,000. Thus the net income allocable to the
$160,000 is -$10,000 [$160,000 x ($225,000 - $240,000) + $240,000].
Therefore, in order to recharacterize the March 1, 2000, $160,000 conversion
contribution on March 1, 2001, the Roth IRA trustee must transfer from Taxpayer
C's Roth IRA to her traditional IRA $150,000 [$160,000 - $10,000].

Example 4. (i) On April 1, 2000, when her traditional IRA is worth $100,000,
Taxpayer D converts the entire amount, consisting of 100 shares of stock in ABC
Corp. and 100 shares of stock in XYZ Corp., by transferring the shares to a Roth
IRA. At the time of the conversion, the 100 shares of stock in ABC Corp. are
worth $50,000 and the 100 shares of stock in XYZ Corp. are also worth $50,000.
Taxpayer D decides that she would like to recharacterize the ABC Corp. shares
back to a traditional IRA. However, D may choose only by dollar amount the
contribution or portion thereof that is to be recharacterized. On the date of
transfer, November 1, 2000, the 100 shares of stock in ABC Corp. are worth
$40,000 and the 100 shares of stock in XYZ Corp. are worth $70,000. No other
contributions have been made to the Roth IRA and no distributions have been
made.

(ii) If D requests that $50,000 (which was the value of the ABC Corp.
shares at the time of conversion) be recharacterized, the net income allocable to
the $50,000 is $5,000 [$50,000 x ($110,000 - $100,000) + $100,000]. Therefore,
in order to recharacterize $50,000 of the April 1, 2000, conversion contribution
on November 1, 2000, the Roth IRA trustee must transfer from Taxpayer D's
Roth IRA to a traditional IRA assets with a value of $55,000 [$50,000 + $5,000].

(iii) If, on the other hand, D requests that $40,000 (which was the value of
the ABC Corp. shares on November 1) be recharacterized, the net income
allocable to the $40,000 is $4,000 [$40,000 x ($110,000 - $100,000) +

$100,000]. Therefore, in order to recharacterize $40,000 of the April 1, 2000,
conversion contribution on November 1, 2000, the Roth IRA trustee must
transfer from Taxpayer D's Roth IRA to a traditional IRA assets with a value of
$44,000 [$40,000 + $4,000].

(iv) Regardless of the amount of the contribution recharacterized, the
determination of that amount (or of the net income allocable thereto) is not
affected by whether the recharacterization is accomplished by the transfer of
shares of ABC Corp. or of shares of XYZ Corp.

## V. REQUEST FOR COMMENTS

The Service and Treasury invite comments and suggestions concerning the new
method described in this notice for calculating net income under §§ 408(d)(4) and
408A(d)(6) and also concerning the effective date for a rule that would establish the
new method as the only method for calculating net income under §§ 408(d)(4) and
408A(d)(6). Any correspondence received will be evaluated, together with appropriate
considerations relating to tax administration, to determine the scope of future guidance.

Comments can be submitted to CC:DOM:CORP:R (Notice 2000-39), room 5226,
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044.
Comments may be hand delivered between the hours of 8 a.m. and 5 p.m. to
CC:DOM:CORP:R (Notice 2000-39), Courier's Desk, Internal Revenue Service, 1111
Constitution Avenue NW., Washington, DC. All comments will be available for public
inspection and copying.

## DRAFTING INFORMATION

The principal author of this notice is Roger Kuehnle of Employee Plans (Tax
Exempt and Government Entities Division). For further information regarding this
notice, please contact the Employee Plans' taxpayer assistance telephone service at
(202) 622-6074/6075 (not toll-free numbers) between the hours of 1:30 and 3:30 p.m.
Eastern Time, Monday through Thursday.

Setzen Sie Ihre Recherche in ChatGPT oder Claude fort