This article provides a technical analysis of the recent Sixth Circuit Court of Appeals decision in Lonnie W. Hubbard v. Commissioner of Internal Revenue,[^1] offering insights for tax practitioners dealing with the complex intersection of criminal forfeiture and federal income tax law, particularly concerning individual retirement accounts (IRAs).

Facts of the Case

Lonnie W. Hubbard, a pharmacist, owned and operated Rx Discount of Berea, PLLC, in Kentucky, which generated significant income through illegal activities, including the sale of oxycodone and pseudoephedrine. Hubbard utilized over $2 million of this illicit income for an extravagant lifestyle and also had his company establish a Simplified Employee Pension (SEP) IRA on his behalf, which grew to $427,518 by 2017. Contributions to this IRA were not taxed at the time of deposit, with the understanding that withdrawals would be subject to income tax in the future.

Following a criminal indictment, Hubbard was convicted of drug and money-laundering offenses and sentenced to 30 years in prison. As part of the criminal case, the government pursued criminal forfeiture of assets allegedly derived from his illegal activities, including his homes, vehicles, watercraft, financial accounts, and the IRA. In 2017, the IRS seized the $427,518 held in Hubbard’s IRA.

The IRS subsequently treated this seizure as a taxable “distribution” to Hubbard for the 2017 tax year and issued a notice of deficiency, proposing $274,979.91 in taxes, penalties (including a 10% early withdrawal penalty), and interest. This assessment included $122,601 for income taxes owed on the withdrawal.

Taxpayer’s Request for Relief

Hubbard challenged the notice of deficiency in the Tax Court, arguing that the tax liability “should be paid by [the] feds” because his IRA account “was forfeited to” them during his criminal case. While the Commissioner of the IRS conceded that Hubbard should not be liable for the 10% early withdrawal penalty and a small portion of other penalties, they moved for summary judgment on the remaining tax and penalty amounts.

Court’s Analysis of the Law

The Sixth Circuit began its analysis by differentiating between the two general types of criminal forfeiture recognized by federal courts. The first type involves the government obtaining ownership of specific property connected to the crime, effective upon conviction, and in some cases, relating back to the time of the criminal act. This type is often considered an in rem judgment targeting the “tainted property”. The second type involves a personal money judgment against the defendant for the value of the forfeitable property, which the government can then collect from any of the defendant’s assets; this is akin to an in personam judgment.

The court emphasized that Hubbard’s case involved the first type of forfeiture, where the district court specifically identified and ordered the IRS to seize Hubbard’s assets, including the IRA, and the subsequent order stated that these assets “shall be forfeited to the United States and no right, title, or interest in the property shall exist in any other party”. Thus, the government became the owner of the IRA.

The court then reviewed the fundamental principles of federal income taxation. Gross income is defined broadly under Internal Revenue Code (IRC) § 61(a) as “all income from whatever source derived”. This includes not only lawful gains but also unlawful ones. Furthermore, income can be realized when a taxpayer receives a benefit or avoids a burden, such as the discharge of an obligation, as established in Old Colony Trust Co. v. Commissioner [23, 24, 279 U.S. 716 (1929)].

Regarding the tax treatment of IRAs, the court noted that Congress provides tax deductions for contributions to encourage retirement savings [26, IRC § 219(a)]. However, this is a deferral, not an exemption, as IRC § 408(d)(1) mandates that “any amount paid or distributed out of an individual retirement plan shall be included in gross income by the payee or distributee”.

Application of the Law to the Facts

The central question before the court was whether the IRS’s withdrawal of funds from the forfeited IRA constituted taxable income to Hubbard. The Tax Court had relied on precedent holding that IRA funds qualify as income even when involuntarily distributed to a third party to satisfy an obligation of the owner. These cases involved situations like garnishment for child support [Vorwald v. Comm’r, 73 T.C.M. (CCH) 1697 (1997)], seizure for tax debts [Schroeder v. Comm’r, 78 T.C.M. (CCH) 566 (1999); Larotonda v. Comm’r, 89 T.C. 287 (1987)], and garnishment for restitution [Rodrigues v. Comm’r, 110 T.C.M. (CCH) 265 (2015)]. In these instances, the IRA withdrawals served to discharge a pre-existing obligation of the IRA owner.

However, the Sixth Circuit distinguished Hubbard’s case, emphasizing that the forfeiture order did not create a debt or obligation for Hubbard to the IRS in the same way a money judgment would. Instead, the government became the owner of the specific asset, the IRA. When the IRS withdrew the funds, it was acting as the owner of its own property, not taking Hubbard’s money to satisfy a debt.

The court focused on the language of IRC § 408(d)(1), which requires the “payee or distributee” of IRA funds to include them in gross income. Applying the ordinary meaning of these terms, the court concluded that the IRS was the payee or distributee of the funds once it became the owner and controlled the IRA. The court acknowledged the Tax Court’s presumption that the named participant or beneficiary is typically the payee or distributee [Roberts v. Comm’r, 141 T.C. 569, 576 (2013)], but held that this presumption must yield to the specific facts of the case, similar to situations involving fraudulent withdrawals [Balint v. Comm’r, T.C.M. (RIA) 2023-118; Roberts v. Comm’r, 141 T.C. 569 (2013)].

The Sixth Circuit rejected the IRS’s argument that the withdrawal relieved Hubbard of a debt, stating that the forfeiture transferred ownership, not created a debt. They questioned why this logic wouldn’t apply to the forfeiture of Hubbard’s homes and cars, leading to the absurd conclusion that he received "income" equal to the value of all seized assets.

Finally, the court addressed the IRS’s public policy argument that taxing Hubbard would reduce the “sting” of the forfeiture [42, Wood v. United States, 863 F.2d 417, 422 (5th Cir. 1989)]. The court asserted that it is Congress’s role to make such policy judgments, and the court’s duty is to interpret and apply the law as written [42, 43, Ysleta Del Sur Pueblo v. Texas, 596 U.S. 685, 706 (2022); Harrington v. Purdue Pharma L. P., 603 U.S. 204, 226 (2024)]. They also distinguished Wood, noting that it dealt with the taxability of illegally obtained income in the year it was earned, where the taxpayer had dominion and control, unlike Hubbard’s situation after the IRA was forfeited.

Court’s Conclusions

The Sixth Circuit reversed the Tax Court’s decision. The court concluded that because the IRA was forfeited to the IRS, the agency became the owner and controller of the funds. Consequently, when the IRS withdrew the money, it was acting as the “payee or distributee” under IRC § 408(d)(1), not Hubbard. Hubbard did not receive an economic benefit or a discharge of indebtedness that would constitute taxable income at the time of the withdrawal.

Implications for Tax Practitioners

The Hubbard decision provides important clarity on the tax treatment of forfeited retirement accounts. Key takeaways for tax practitioners include:

Distinction between Forfeiture Types is Crucial: The tax consequences hinge on whether the forfeiture is a transfer of ownership of a specific asset or the imposition of a monetary judgment.
Ownership Matters for IRA Distributions: When the government becomes the legal owner of an IRA through forfeiture, it is likely considered the “payee or distributee” for tax purposes upon withdrawal.
Discharge of Indebtedness Doctrine Limited in Forfeiture Context: The discharge of indebtedness doctrine may not apply when the government directly seizes and becomes the owner of an asset, as opposed to seizing it to satisfy a monetary obligation of the taxpayer.
Focus on Statutory Language: Courts will prioritize the plain language of the IRC, such as the “payee or distributee” provision in IRC § 408(d)(1), over broad interpretations of “income” or policy arguments not explicitly supported by the statute.

Tax advisors should carefully analyze the specific nature of forfeiture orders when advising clients on the potential tax implications of seized retirement funds. The Hubbard case signals a departure from a broad application of taxability to the original IRA owner in all involuntary distribution scenarios involving government seizure through forfeiture of specific property.

Prepared with the assistance of NotebookLM.

The full text of the case can downloaded from the following link:

Hubbard v. Commissioner of Internal Revenue, CA6

[^1]: Lonnie W. Hubbard v. Commissioner of Internal Revenue, CA6, No. 24-1450, March 19, 2025