I am looking for advice on whether early withdrawal penalty applies here and if a loss is deductible as a miscellaneous deduction in this situation. I have written about this situation last year. In essence, a 2009 Roth conversion was done, taxes paid on the conversion, then the couple filed taxes as Married Filing separate status. This made this conversion an excess contribution. The 6% excess contribution penalty was paid for 2009, 2010, and 2011. To put an end to the excess contribution penalties, the Roth was distributed 100% in December 2012. At the time of distribution, the Roth value was less than the amount converted and taxed in 2009. This was the client’s only Roth account, if it is even called that under the “failed conversion” status. Two questions for this go round:

1) Is an early withdrawal penalty still owed on this distribution as client was under age 59.5? 1099-R shows a “J” in Box 7 for early withdrawal, but have read elsewhere on this forum that is always there as Custodian only knows the age. Or, since this is underwater and has no earnings, is this 10% not applicable?

2) Given the loss versus conversion amount, and this being the only Roth IRA, it seems this loss can be used as a miscellaneous itemized deduction?

Any help on these questions is much appreciated, as this seems to be a fairly rare combination of circumstances. Thanks so much.