Federal Income Tax Update
By I. IRS Cannot Impose Tax on Withdrawals from an IRA It Seized; Hubbard v. Commissioner, 135 AFTR 2d 2025-484 (6th Cir).
Mr. Hubbard was a Kentucky pharmacist. He was convicted on drug and money laundering offenses for operating a pill mill. The court allowed the IRS to seize a number of Mr. Hubbard’s financial accounts, including his IRA. The IRS withdrew over $427,000 from the IRA. The IRS treated the IRA withdrawal as a taxable distribution to Mr. Hubbard and made an assessment against him of over $180,000 of tax, interest and penalties.
Courts have recognized two types of forfeitures. One is specific property forfeiture where the government becomes the new owner of specific assets at the time of conviction. The second type of forfeiture is a personal money judgment where the defendant is forced to pay a specific sum of money. With the second type of forfeiture, the court calculates the money that a defendant owes based on the value of forfeitable property involved in specific crimes.
Mr. Hubbard’s criminal case involved specific property forfeiture. The Sixth Circuit held the IRA withdrawal was not taxable to Mr. Hubbard. When the IRS liquidated Mr. Hubbard’s IRA, the IRA funds were not used to satisfy any specific money judgment against Mr. Hubbard, nor did the seizure specifically discharge Mr. Hubbard’s debt. Mr. Hubbard received no economic gain from the IRA distribution because, at the time of liquidation, that IRA already belonged to the IRS. Instead, the IRS was effectively withdrawing the IRA funds for its own benefit.
II. Bankruptcy Trustee Cannot Claw Back a Debtor’s Funds Used to Satisfy Tax Debts of its Shareholders; U.S. vs. Miller, 145 S.Ct. 839 (2025).
All Resort Group Inc. filed for bankruptcy. Previously, All Resort Group paid tax debts owed by two of its principals. The bankruptcy trustee sued the IRS to recover those prebankruptcy transfers, alleging IRS debt payments were voidable transfers under Section 544(b)(1) of the Bankruptcy Code and fraudulent conveyances under Utah’s Uniform Fraudulent Transfers Act. The Supreme Court, however, determined the IRS has sovereign immunity. Therefore, the IRS is not subject to U.S. bankruptcy law or Utah fraudulent conveyance law.
III. CFO Not Liable for 6672 Responsible Person Penalty; Williams vs. US, 135 AFTR 2025 (2025).
Mr. Williams was the CFO of a nonprofit company named The Arc. It failed to remit certain employment taxes it withheld from its employees’ wages. The IRS assessed the Section 6672 trust fund penalty against Mr. Williams. Mr. Williams paid the Section 6672 assessment and filed a refund suit in Federal District Court. Mr. Williams demanded the matter be determined by a jury.
The jury found Mr. Williams, as CFO of The Arc, was a responsible person under Section 6672. However, the jury determined Mr. Williams did not willfully fail to pay the withheld employment taxes. Mr. Williams asserted he did not have the actual authority to control The Arc’s finances. Instead, his role was limited to providing advice and recommendations relating to The Arc’s financial difficulties to its chief operating officer and chief executive officer. It was the COO and CEO who made the final decision as to which bills The Arc would pay. Mr. Williams would then prepare the checks and present them to the CEO and COO for signature. Although Mr. Williams was an authorized signature on The Arc’s bank accounts, two signatures were required for all checks written on The Arc’s bank account. Therefore, even though Mr. Williams was an authorized signatory on the account, he did not have independent authority to sign checks without the CEO or COO cosigning them.
IV. Equitable Relief Did Not Save a Late Filed Refund Claim; Applegarth vs. Comm’r, TC Memo 2024-107.
The Tax Court recently ruled that the Supreme Court decision in Boechler, P.C. vs. Comm’r, 596 US 199 (2022), which holds equitable remedies may be heard by the Tax Court in collection due process cases, does not extend to late filed refund claims. The Tax Court’s jurisdiction to review a Section 6511 refund claim is jurisdictional and not procedural. Therefore, the Tax Court is barred from hearing equitable relief arguments for late filed refund claims.
V. IRS Can Foreclose on Dental Practice to Satisfy Tax Liabilities of Only One Dentist; US v. Driscoll, 135 AFTR2d 2025-332.
Two New Jersey dentists, Dr. Driscoll and Dr. Vockroth, were 50/50 members in a limited liability company that operated their dental practice. Dr. Driscoll and Dr. Vockroth owned their dental office building as tenants-in-common. The IRS attempted to force a foreclosure sale of the dental practice and the office building even though Dr. Vockroth owed no tax debts. Dr. Vockroth argued the government’s foreclosure should be limited to sales of only Dr. Driscoll’s 50% LLC interest and his one-half tenant-in-common interest in the building.
Granting summary judgment in favor of the IRS, the District Court allowed the IRS to proceed with a foreclosure sale of the LLC’s dental practice as well as the entire office building, notwithstanding Dr. Vockroth’s one-half ownership interest in each. Under US vs. Rogers, 461 US 677 (1983), Section 7403 contemplates the IRS has the power to sell not only the delinquent taxpayer’s interest in subject property but also the sale of the entire property to satisfy the interests of the government. That is the case notwithstanding the possibility that innocent third parties will be harmed by the government’s foreclosure efforts.
Dr. Vockroth argued only the foreclosure sale of Dr. Driscoll’s 50% LLC interest and tenants-in-common interest was appropriate. Under New Jersey law, the only appropriate remedy to a creditor of one of the members is a charging order. The court held although New Jersey law allowed a charging order as the sole remedy of a judgment creditor, the IRS is not bound by state law when exercising foreclosure remedies under Section 7403. Instead, even in the case of an LLC, a forced sale of the entire LLC may be appropriate under Section 7403 as long as the Rogers factors are satisfied.
The court then applied the Rogers four-factor balancing test to determine whether the interests of the government would justify a sale of the entire LLC dental practice and the office building. Under the Rogers test, before a court allows the government to foreclose under Section 7403, it must take into account both the government’s interest in prompt and certain collection of delinquent taxes and the possibility that innocent third parties will be unduly harmed.
Factor one is the extent to which the government’s financial interest will be prejudiced if it is relegated to a forced sale of only a partial interest. As the court noted, no one would be willing to purchase only a 50% share of real property or a 50% interest in a dental practice. Any buyer of a 50% LLC interest would either have to practice alongside Dr. Vockroth or merely receive payments from the LLC. Therefore, this factor weighed heavily in favor of the government.
Factor two is whether the non-liable third party would have a legally recognized expectation that his separate property is not subject to a forced sale. This factor also clearly favored a forced sale of the dental office. When Dr. Vockroth acquired a 50% interest in the office building with Dr. Driscoll, he clearly contemplated the tenancy-in-common could be subject to a forced sale, either through a partition action or otherwise. With respect to the LLC, however, Dr. Vockroth clearly anticipated any sale would require the joinder of both dentists. Therefore, the second factor weighed against a forced sale of the LLC.
Factor three weighs the potential prejudice to the non-liable party, in terms of the personal dislocation costs and under-compensation of interests. Since Dr. Vockroth would receive 50% of the sales proceeds from the sale of the real estate, this factor favored a forced sale. He would then be free to practice dentistry in a new location. The court noted people frequently move their homes and businesses. Dr. Vockroth was not unduly prejudiced by having to sell the current location of the dental practice.
The third factor also weighed in favor of a forced sale of the LLC. The court recognized it is common for LLCs and partnerships to change, fail, dissolve, and be bought and sold. Also, Dr. Vockroth would receive 50% of sales proceeds, which he could then use to find a new location for his dental practice.
Factor four compares the relative character and value of the non-liable and liable property interest holders. It is most often implicated when the liable party owns a relatively small fraction of the entire property. Since Dr. Vockroth and Dr. Driscoll equally owned the dental office and the LLC, this factor was neutral.
The weight of the factors favored allowing the foreclosure sale of the real estate and the LLC. The court reasoned “the Rogers Court has explicitly highlighted the limited discretion accorded by Section 7403 and how such discretion should be exercised rigorously and sparingly, keeping in mind the Government’s paramount interest in prompt and certain collection of delinquent taxes.”
Keith Wood is an attorney with Carruthers & Roth, P.A. in Greensboro, North Carolina.