"My question is whether my IRR to Roth 401K is considered part of bucket-1 when the rollover to Roth IRA happens, or is it considered part of bucket-2? I think it should be part of bucket-1."
No, it's bucket #2.
The 2007 Treasury Decision that you referenced predates the permissibility of IRRs. Prior to September 28, 2010, rollovers from a designated Roth account could consist only of regular contribution basis and earnings (because prior to that date there could be no basis in IRRs). IRRs became available for only those distribution made after September 27, 2010. See IRS Notice 2010-84 issued after the passing of the law that added IRRs to the tax code.
As I said in my previous reply, basis in IRRs becomes Roth conversion basis in the Roth IRA. Note, however, that your IRR was, absent any investment gains, a nontaxable IRR so that when rolled over to the traditional IRA it becomes basis in nontaxable Roth conversions, nearly equivalent to Roth IRA contribution basis because a distribution of basis in nontaxable Roth conversions is not subject to any early-distribution penalty; only taxable distributions are potentially subject to an early-distribution penalty. Under the ordering rules, though, basis in nontaxable Roth conversions is distributed after basis in taxable Roth conversions from the same taxable year, so if there is any basis in taxable Roth conversions from the same year, perhaps because there was an investment gain prior to the IRR that made some portion of the IRR taxable, the basis in taxable Roth conversions would come out first, potentially subject to an early distribution penalty. After the 5-year clock for the particular Roth conversion basis has run out the penalty on the distribution of that basis in taxable Roth conversions is no longer subject to any early-distribution penalty.
