Washington ― The U.S. Supreme Court ruled Tuesday against a Michigan family in finding they’re only owed the surplus proceeds of the tax sale of their former home in Isabella County ― that is, the difference between the tax debt and the sale price, not the property’s fair market value.
But the high court sent the family’s case back to a lower court for further proceedings, allowing their challenge to Isabella County’s process to continue.
The justices concluded “neither history nor precedent” supported the Pung family’s arguments that, under the Fifth Amendment, the baseline for determining the just compensation for the taking and sale of their home near Mount Pleasant should be the $192,000 fair-market value of the property after the tax debt payment and not the $74,000 surplus profit the home’s sale generated at public auction.
“We conclude that the proper baseline under the Takings Clause is the price obtained in a tax sale, at least when the sale is fairly conducted in light of our country’s history of tax sales,” Justice Samuel Alito wrote in the court’s opinion.
Alito wrote that Pung’s fair-market-value theory would impose “unprecedented burdens” on jurisdictions that want to collect unpaid taxes and “might well make tax sales impractical.”
“Under Pung’s rule, a tax sale would often net the government a loss, paid out to the delinquent taxpayer himself, rendering tax sales infeasible as a debt-collection mechanism,” Alito wrote.
The justices also rejected the argument that the Michigan county’s “disproportionate” forfeiture of more than $190,000 of equity the Pung family had in the home to satisfy a $2,200 tax debt constituted an excessive fine prohibited by the Eighth Amendment, concluding that such a rule would entail “the same drastic consequences” as imposing it under the Fifth Amendment.
The justices, however, declined to resolve the family’s contentions that the procedure followed by Isabella County in seizing and selling the Pung home was unfair, vacating the decision of the U.S. Court of Appeals for the Sixth Circuit and remanding those issues to the appeals court to take up.
Alito’s opinion was joined by seven other justices, with Justices Sonia Sotomayor and Clarence Thomas writing separate, concurring opinions.
Thomas, in his concurrence, joined by Justice Neil Gorsuch, said his preliminary view is that Isabella’s process in handling the Pung case “likely” violated the Constitution.
“Whatever utilitarian desire the state may have for a tax-collection system that effectively confiscates citizens’ homes based on small tax debts, citizens such as the Pungs have an antecedent and higher right to those homes,” Thomas wrote.
“What Isabella County did to the Pungs was wrong, and, on my initial view, likely unconstitutional.”
Pung family said it received ‘inadequate compensation’
The Pung family had argued that, under the U.S. Constitution, the government must pay them just compensation for the taking and sale of their home outside of Mount Pleasant, which the Pungs argued was the $192,000 fair-market value of the property after the payment of the $2,200 tax debt.
“An owner is owed just compensation, not inadequate compensation,” Pung family attorney Philip Ellison told the nine justices during oral arguments in February.
Isabella County officials countered that the Pungs could have avoided the sale of their home if they’d just paid the taxes owed on their property.
Lawyer Matthew Nelson, representing Isabella County, had asked the justices to uphold the ruling of the Sixth Circuit that determined surplus proceeds from an auction sale minus the tax debt establish just compensation, as the U.S. Supreme Court held in a 2023 ruling.
“Even though the government has been selling properties at auction and returning the over-plus for centuries, not a single case has ever suggested that the surplus proceeds are equal to the property’s fair market value, less the debt,” Nelson told the high court in February.
Nelson applauded the high court’s ruling on Tuesday, saying that communities need all property owners to pay their fair share to fund essential government services.
“This decision ensures that government retains an important tool to promote the equitable allocation of the cost of government services to all property owners,” Nelson said in a statement.
He also expressed confidence in the process that Isabella County followed in the case, saying it “exceeded what the law required.”
“The simple fact is that Mr. Pung refused to pay the property tax due after litigating the matter through the entirety of the Michigan court system,” Nelson said.
“After filing the federal lawsuit, Mr. Pung never challenged the adequacy of the auction procedures for the simple reason that the auction was conducted in a manner consistent with the law. We have no doubt the Sixth Circuit will reach the same conclusion.”
How the Michigan tax dispute began
The Michigan dispute began with a principal residence exemption (PRE) that Timothy “Scott” Pung had on his home outside Mount Pleasant to exempt his primary residence from a portion of certain local taxes.
After Pung died in 2004, the home continued to be occupied by his wife and son, but his estate didn’t update the ownership records for the property in Union Township or file a new PRE affidavit, according to court records.
That led the township assessor in 2010 to retroactively deny the tax exemption for 2007-2009 and to deny extending it to 2010 and 2011.
Scott’s uncle, Michael Pung, as the estate representative, appealed to the Michigan Tax Tribunal, where an administrative law judge sided with the Pungs, saying they didn’t need to file a new PRE affidavit because Scott’s son and wife had continued to reside at the property. The Michigan Court of Appeals in 2015 confirmed that the Pung family was entitled to the PRE through 2011.
The local assessor, however, again denied the PRE in 2012 ― an action the Pungs said they were never notified about in writing before it was beyond the 35-day window to object, Ellison said.
Foreclosure proceedings were initiated by the Isabella County treasurer to recover a $1,600 local tax that, with penalties and interest, eventually hit $2,242.
The county treasurer claimed that officials provided the Pung family with repeated notices of the tax delinquency, and Michael Pung failed to pay the debt or appear at the show-cause and foreclosure hearings to contend the property was exempt from the delinquent tax.
The county foreclosed on the home and later sold the property at a public auction for about $76,000, according to court records. The purchaser of the home turned around and resold it for $195,000.
The Pungs filed a lawsuit in federal court, claiming the county was required to pay them just compensation for taking and selling the home, which should be the fair-market value of the property from the time of the sale at auction (minus the tax debt) and not the $74,000 in surplus money it made on the auction of the home.
The district court ruled the government had to pay the Pungs the surplus amount from the sale of the property and not the Pungs’ claimed fair market value of the home. The Sixth Circuit on appeal said it was “sympathetic” to the Pungs’ situation but also slapped down their fair market value argument.
The Sixth Circuit also rejected the Pungs’ claim that the forfeiture of their home equity constitutes an excessive fine, saying the foreclosure sale process doesn’t implicate the Eighth Amendment.
Alito points to hundreds of years of tax law history
Alito in his opinion Tuesday pointed to hundreds of years of history under American and English law dating to the Magna Carta allowing for the seizure and sale of property to satisfy tax debts, “provided that the government return any surplus proceeds to the debtor.”
“Our Nation’s history and this Court’s precedent thus establish the principle that when the government seizes and sells property to collect a tax debt, the owner is entitled to the surplus sale proceeds — nothing less, and nothing more,” Alito wrote.
“The baseline for measuring just compensation in the tax-sale context is therefore the sale price, not the property’s hypothetical fair market value, at least when the sale is fairly conducted in light of our country’s history of tax sales.”
Pung’s theory would effectively force municipalities to do what homeowners do when they typically sell their home — such as hiring a real estate agent or selling it themselves — to try to obtain something like fair market value for homes on which they’ve foreclosed.
Or if they continued to use traditional tax sales, Pung’s proposed rule would often produce a net loss for the jurisdiction, leaving the government “on the hook” for any difference between the foreclosed property’s tax-sale price and fair market value, Alito wrote.
He offered a hypothetical example of a homeowner who fell behind on paying $20,000 worth of taxes on his property with a fair market value of $100,000. The government forecloses on the home and sells it at auction for $60,000.
Under the usual arrangement, the government would keep $20,000 to recover the tax debt and return $40,000 to the former owner of the home. But Pung’s proposed theory would see the government pay the former owner $80,000 ― the fair market value of the home minus the taxes owed, netting a $20,000 loss paid out to the delinquent taxpayer, Alito said.
That kind of a system could end up hurting other taxpayers who are dutifully paying their taxes, the justice suggested.
“The possibility of such a perverse result would render tax sales infeasible as a debt-collection mechanism,” Alito wrote of the net-loss paid to the delinquent taxpayer.
“And jurisdictions with a large inventory of unpaid taxes might well compensate for this lost revenue by increasing the burden on residents who do pay their taxes. So for taxpayers viewed as a group, the demise of tax sales might be a most unwelcome development.”
Court declines to define what is fair taking procedure
Part of the problem in these types of cases, the Pungs’ attorney argued to the court, is the government was taking more property than necessary to satisfy the debt that’s owed. Perhaps instead of pursuing a taxpayer’s home, the government could go after personal property, such as the Peloton bike in the house.
“Traditionally, there are a lot of different options or bank accounts. There’s personal property. The vehicle,” Ellison noted at oral arguments.
He also argued that instead of selling the house, the county could have put a lien on the property.
Alito said in Tuesday’s opinion that those arguments didn’t fit within the scope of the question that Pung presented to the high court, which asked only whether the Takings Clause of the Constitution required the government to compensate an owner based on the fair market value of the property.
The parties appeared to agree, the justice noted, that a government might violate the Constitution if they use “blatantly” unfair procedures such as a sham sale or waiting on a tax sale while real estate prices were crashing, for example.
But the parties disagreed on what constitutes a “fair” procedure, and Alito on behalf of the court declined to resolve those procedural questions, saying the Sixth Circuit could do so on remand if Pung preserved any of those arguments properly.
mburke@detroitnews.com
This article originally appeared on The Detroit News: Supreme Court rules against Michigan family that lost home in tax sale
Reporting by Melissa Nann Burke, The Detroit News / The Detroit News
USA TODAY Network via Reuters Connect
By Melissa Nann Burke, The Detroit News | USA TODAY Network
