I did some testing with TurboTax and it appears that TurboTax puts this in bucket 1. However, it's my belief that an amount attributable to an IRR retains its character when rolled over to a Roth IRA, which would mean that in this case it becomes basis in nontaxable conversions and would comes under the Roth IRA ordering rules as an amount attributable to a nontaxable Roth conversion, bucket 2. I don't have a reference that I can use to justify this belief. TurboTax does treat a rollover of after-tax funds from a traditional 401(k) account to a Roth IRA as nontaxable conversion basis (bucket 2), which I agree with, so I think it's unreasonable to be able to cause the basis to be treated instead as contribution basis in the Roth IRA by first sending it through the designated Roth account by performing an IRR before rolling the designated Roth account over to a Roth IRA.
I agree that the IRS Notices do not really address this issue.
