Sixth Circuit Reverses Tax Court; Forfeiture Did Not Trigger Additional Taxes for Felon

(Parker Tax Publishing April 2025)

The Sixth Circuit reversed the Tax Court and held that the forfeiture of funds from a taxpayer's individual retirement account (IRA) to the IRS did not result in constructive income to the taxpayer because the forfeiture order at issue granted the IRS ownership of the IRA. Thus, when the IRS withdrew the funds from the taxpayer's IRA, it was not taking the taxpayer's money to discharge a debt, it was simply transferring its own money and, under Code Sec. 408(d)(1), the IRS thus qualified as the payee. Hubbard v. Comm'r, 2025 PTC 98 (6th Cir. 2025).

Background

In 2017, a jury convicted Lonnie Hubbard, a Kentucky pharmacist, of operating an illegal "pill mill" and he was sentenced to decades in prison. The district court overseeing the trial also identified certain property belonging to Hubbard that the IRS could seize, including homes, cars, financial accounts, and Hubbard's T. Rowe Price individual retirement account (IRA). The district court did not identify a lump-sum amount that Hubbard owed.

The government used the criminal forfeiture laws to confiscate the assets listed by the district court, including Hubbard's $427,518 IRA. According to the IRS, the transfer of the amount in Hubbard's IRA account to the IRS resulted in constructive income to Hubbard. Thus, the IRS said, Hubbard was responsible for income taxes on the distribution, as well as the Code Sec. 72(t) 10-percent penalty since the IRA funds were withdrawn before Hubbard turned 59 and a half.

Hubbard challenged the IRS's position in the Tax Court, arguing that he was not liable for the tax on the withdrawn IRA income because he did not take any willful or voluntary acts to distribute the IRA that was forfeited. The IRA funds, he said, were transferred directly to the government and he never constructively received them. The IRS filed a motion for summary judgment. In response, Hubbard argued that summary judgment was inappropriate because the parties disagreed over whether Hubbard constructively received the funds from his T. Rowe Price IRA.

In Hubbard v. Comm'r, T.C. Memo. 2024-16, the Tax Court agreed with the IRS that Hubbard had constructively received the IRA funds and granted summary judgment. The court concluded that, although the IRA transfer was not under Hubbard's control, it discharged an obligation Hubbard owed. The fact that Hubbard did not willfully or purposefully cause the distribution was, in the court's view, irrelevant. The court observed that it has consistently applied the constructive receipt doctrine to cases involving both voluntary and involuntary forfeitures. The parties agreed on the underlying facts, the court said, including that Hubbard's IRA was forfeited to the government and he never physically received the funds in the account. The court found that whether the doctrine of constructive receipt was properly applied to these facts was a question of law, not fact, and since Hubbard raised no genuine dispute of material fact, and the disagreements between the parties related to disputes about the law rather than facts, summary judgment was appropriate.

Hubbard appealed to the Sixth Circuit.

Analysis

The Sixth Circuit reversed the Tax Court after concluding that the district court's forfeiture order granted the IRS ownership of Hubbard's IRA but did not grant the IRS a money judgment against Hubbard. Thus, the court held that when the IRS withdrew the funds from the IRA, it was not taking Hubbard's money to discharge a debt but was simply transferring its own money.

The Sixth Circuit explained that there are two general types of forfeitures. The first type identifies the "specific property" that a defendant must relinquish and, in that case, the government becomes the owner of this property at the time of a conviction. The second type allows courts to impose a "personal money judgment" identifying a sum that the defendant must pay. Under this type of forfeiture, the court calculates the money that a defendant owes based on the value of the forfeitable property involved in the crimes. Hubbard's criminal case, the court observed, involved the first (not the second) type of forfeiture judgment. The Sixth Circuit noted that the district court did not identify a lump-sum amount that Hubbard owed and that the IRS could thus collect on by seizing any of Hubbard's assets. Rather, the district court identified the specific property subject to forfeiture - including homes, cars, and financial accounts - and ordered the IRS to seize only these assets and dispose of them in accordance with the law.

Citing Code Sec. 408(d)(1), the Sixth Circuit observed that any amount paid or distributed out of an individual retirement plan must be included in gross income by the payee or distributee, as the case may be. While noting that the Code does not define the words "payee" or "distributee," the court looked to Black's Law Dictionary and Code Sec. 408(d)(1) to find that, under the ordinary meaning or those words, the IRS was the "payee or distributee" of Hubbard's IRA funds as it was the "beneficiary entitled to payment." While agreeing with the Tax Court that the payee or distributee of an IRA will presumptively be the named participant or beneficiary who is eligible to receive funds from the IRA, the Sixth Circuit cited the Tax Court's decision in Balint v. Comm'r, T.C. Memo. 2023-118, in noting that this is not always the case. In Balint, the Tax Court refused to treat a named participant in an IRA as the payee or distributee when someone else fraudulently withdrew funds out of the participant's IRA without the participant's knowledge. Hubbard's case, the Sixth Circuit said, warranted the same result. Thus, the Sixth Circuit concluded that, when the IRS became the owner of Hubbard's IRA and took control of the account, it became the payee or distributee.

For a discussion of criminal and forfeiture penalties, see Parker Tax ¶265,100.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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