Lonnie Hubbard, sitting in prison and stripped of his assets from an illegal drug operation, was stunned to receive a letter from the IRS. It claimed he owed $275,000 in taxes and penalties—on money he no longer had. Hubbard v. Commissioner
Even though the government had seized his IRA as part of his criminal sentence, the IRS argued that the account’s forfeiture counted as a taxable distribution. But can you really be taxed on money you no longer own or control?
In 2017, Hubbard—a former pharmacist in Kentucky—was convicted of 57 counts related to illegally dispensing hundreds of thousands of prescription pills and pseudoephedrine used to manufacture methamphetamine. He was also found guilty of 13 counts of money laundering. From 2013 to 2015, he ran an illegal “pill mill” that earned him about $2.2 million in cash.
Hubbard lived large: three homes, jet skis, a boat, several Corvettes, a Mercedes, and more—all of which were confiscated after his conviction. Among the seized assets was a traditional IRA worth just over $420,000.
When the IRS sent him a notice of tax liability for the IRA distribution, Hubbard ignored it (later claiming he never received it). As a result, he was assessed not only income tax but also early withdrawal penalties and late payment fees. The Tax Court upheld the IRS’s decision, finding that Hubbard had “constructively received” the funds—even though he had no access to them.
The Sixth Circuit’s Decision
Hubbard appealed—and the Sixth Circuit took a closer look at the nature of the forfeiture. The court concluded that the IRS became the legal owner of the IRA through the government’s seizure, meaning Hubbard was no longer the payee of the funds.
Since the IRS had taken control of the account, the court ruled that Hubbard was not liable for taxes on the seized IRA. The earlier Tax Court decision was reversed.
Legal Significance
This ruling clarifies that when assets are forfeited to the government, the original owner is not automatically responsible for taxes on them. In Hubbard v. Commissioner, the Sixth Circuit emphasized that tax liability depends on who controls or receives the funds—not simply who once owned them. The decision sets an important precedent at the intersection of criminal forfeiture and tax law.
Tax Reminder: Know the Rules Before You Withdraw from an IRA
While most people won’t face criminal forfeiture, the Hubbard case is a powerful reminder of how seriously the IRS takes retirement account rules.
Traditional IRAs are tax-deferred, meaning you don’t pay taxes when you contribute—but you do pay income tax when you withdraw. Withdrawals made before age 59½ typically incur a 10% early withdrawal penalty in addition to regular income tax.
If you miss a tax filing deadline or fail to pay on time, the IRS will also charge interest and penalties. Even a simple mistake or delay can result in a costly bill.
To avoid surprises:
- Know when you’re eligible to withdraw from your IRA penalty-free.
- Report all distributions on your tax return.
- Pay any taxes due by the deadline to avoid interest and penalties.
If you would like to learn more about IRA rules to effectively accumulate your retirement assets or develop a tax efficient withdrawal strategy, please contact us on info@kamitanifs.com. We look forward to hearing from you!