1040 Reporting on Roth contribution made in error

[bzorc]

I have a client who made a $2,000 Roth contribution for 1999 and invested the cash in stock. Realizes in March 2000 that he has no earned income to base the contribution on. Takes the Roth account (which has the shares in it)and converts it to a personal account. At the time of conversion, the stock has appreciated so that the value of the account is $2,300 (no dividends have been paid). Does the client pay tax on the $300 of appreciation? If so, in what year, 1999 or 2000? And where is it classified on the individual's Form 1040?

And, for the sake of arguement, what happens if the stock had depreciated to $1,700? Could the client claim the $300 loss on his personal return?

Any help would be appreciated. Thanks!