A Pharmacist-Turned Drug Dealer Gets Good Tax News

He doesn’t owe tax after his IRA was forfeited to the federal government.  He went to jail, and the feds took the IRA funds.  The IRA custodian sent a form 1099-R, reporting the retirement account distribution.  Last year, the Tax Court ruled that the forfeited amount is a constructive distribution of which he is taxed, even though the withdrawal was not voluntary and he did not personally control or receive the IRA funds.

 An appeals court has now reversed that decision, saying the forfeiture order in the felon’s criminal case granted the IRS ownership of the IRA, so when the IRS withdrew the funds, it wasn’t taking his money to discharge a debt.  Instead, the IRS was transferring its own money from the IRA to itself.  As a result, the IRS owned and controlled the IRA and is the payee for tax purposes.