Tax Byte
Sixth Circuit Reverses Tax Court: IRA Distributions Taxable to Current Owner Even if IRS Took the Money (Lonnie W. Hubbard v. Comm., No. 24-1450, US Court of Appeals for the Sixth Circuit (March 19, 2025))
In a significant decision, the Sixth Circuit reversed a Tax Court ruling that had treated the government’s forfeiture of an IRA as a taxable distribution to the account’s former owner. The Appellate Court held that when the government seizes an IRA through criminal forfeiture, the original owner does not recognize taxable income from the account’s liquidation.
Background:
Lonnie Hubbard, a Kentucky pharmacist, was convicted of operating a “pill mill” and laundering proceeds from the illegal operation. He was sentenced to 30 years in prison, and the government initiated criminal forfeiture proceedings against his assets—including his $427,518 IRA.
The IRS treated the forfeiture of the IRA as a taxable distribution to Hubbard in 2017, issuing a notice of deficiency totaling $274,979. After conceding the early withdrawal penalty, the Tax Court upheld $180,836 in taxes and penalties against Hubbard.
The Sixth Circuit's Reasoning:
The appellate court focused on the nature of the forfeiture. It distinguished between:
- Specific asset forfeiture – where the government takes direct ownership of identified property, and
- Personal money judgments – where a defendant must satisfy a general monetary obligation.
Because the government seized the IRA directly (a specific asset forfeiture), ownership transferred before the funds were distributed. Under IRC §408(d)(1), IRA distributions are taxable to the “payee or distributee.” Since the government became the account’s owner before withdrawal, Hubbard was no longer the distributee and thus owed no tax on the liquidation.
The court rejected the IRS’s argument that the forfeiture satisfied a debt and created taxable income for Hubbard. It noted this logic would imply taxable income from any forfeited asset, including homes and vehicles—a result Congress never intended.
Key Takeaway:
The Sixth Circuit clarified that when the government seizes an IRA through specific property forfeiture, the tax burden from subsequent liquidation does not fall on the former account holder. Instead, the government, as the new owner, is responsible for any tax consequences of distribution.
Tax professionals should be aware of this distinction when advising clients involved in forfeiture proceedings, particularly when retirement accounts are at stake.