LONNIE W. HUBBARD v. COMMISSIONER OF INTERNAL REVENUE - Articles

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LONNIE W. HUBBARD v. COMMISSIONER OF INTERNAL REVENUE

Posted by: Tanja Trezise on Mar 19, 2025

Court: 6th Circuit Court (Published Opinions)

Attorneys 1: ON BRIEF: Bruce R. Ellisen, Anthony T. Sheehan, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee.

Attorneys 2: ON BRIEF: Lonnie W. Hubbard, Memphis, Tennessee, pro se.

Judge(s): GIBBONS, LARSEN, and MURPHY, Circuit Judges

Court Appealed: United States Tax Court

MURPHY, Circuit Judge. After a jury convicted Lonnie Hubbard of operating an illegal “pill mill,” the government punished him in the expected ways. The district court ordered Hubbard to serve decades in prison. The government also confiscated his homes, vehicles, watercraft, and financial accounts using the criminal-forfeiture laws. Years later, though, the Internal Revenue Service (IRS) sought to punish Hubbard in an unexpected way. As part of the earlier forfeiture, the IRS had seized over $400,000 from Hubbard’s individual retirement account (or IRA, in the vernacular of retirement planning). The IRS suggested that the transfer of this money into its own coffers qualified as “income” for Hubbard that he should have paid taxes on from prison. The tax court agreed and ordered Hubbard to pay over $180,000 in taxes and penalties.

We reverse. The tax court found that the transfer of the IRA funds qualified as Hubbard’s income because it discharged an “obligation” that Hubbard owed. This conclusion misunderstood the type of forfeiture at issue. When courts impose a forfeiture, they can either grant the government ownership of a specific asset or enter a money judgment that allows the government to collect on any of the defendant’s property. The forfeiture order in Hubbard’s case granted the IRS ownership of his IRA; it did not enter a money judgment against him. So when the IRS withdrew the funds from the IRA, it was not taking Hubbard’s money to discharge a debt. It was simply transferring its own money. The tax code provides that the “payee or distributee” of withdrawn IRA funds should pay these taxes. 26 U.S.C. § 408(d)(1). Because the IRS owned and controlled the IRA and received the funds, it qualified as the payee or distributee.

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