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Supreme Court Unanimously Holds That The Government Must Return Excess Equity To The Taxpayer After Selling Her Home

The Tyler decision will ensure that states like Minnesota which have strict home equity forfeiture laws establish procedures to give taxpayers any excess funds after its tax debts are paid.

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961176Last week, the Supreme Court again issued a unanimous ruling involving a tax issue. In Tyler v. Hennepin County, it ruled that the county’s complete seizure of proceeds from a forced property sale to pay a much smaller tax debt is unconstitutional.

Geraldine Tyler, 94, owned a condominium in Hennepin County, Minnesota. In 2010, she moved out of the condominium. While she stopped paying the property taxes, she did not sell it. A few years later, her outstanding property tax bill totaled $15,000 ($2,300 in taxes and $13,000 in interest and penalties). After no response or payment from Tyler for several years, the county foreclosed and sold the condominium for $40,000. Minnesota state law allows the county to keep the entire amount, including the $25,000 equity surplus after paying off the outstanding taxes.

Tyler sued the county in federal court to retrieve the surplus, arguing that it is an unconstitutional taking without just compensation and was an unconstitutionally excessive fine. The district court and later the Court of Appeals for the Eighth Circuit dismissed the lawsuit. They argued that there was no taking because property laws were granted by the state and there was no state property right in the condominium’s excess equity.

In its unanimous and straightforward decision, the Supreme Court stated that state law is not the only source of property rights and cites documents going as far back as the Magna Carta. It was also concerned that states can circumvent the Takings Clause by removing property interests in assets it wishes to appropriate. The Court also cites to precedent where an unconstitutional taking occurs when the government takes the proceeds from the tax sales and fails to return the excess to the taxpayer.

Since the Court ruled that the seizure was an unconstitutional taking, it did not address the other issue in the case which was whether the seizure was an unconstitutionally excessive fine. Justices Gorsuch and Jackson wrote a separate concurring opinion addressing this issue and stated that it was.

This was one of the few cases where almost everyone would agree that the outcome was fair with the exception of the minority of states that have similar laws allowing the full seizure of tax sale proceeds. The county and their amici raised the following arguments to justify and uphold the law, some of which the Court addressed and rejected.

First, they argued that Tyler did not have standing. This was because in addition to the tax lien, her condominium may have been subject to a $49,000 mortgage and $12,000 for unpaid homeowner association fees. The court rejected this argument because Tyler would be personally liable for both debts if the county seizes the sale proceeds so there is sufficient harm to establish standing.

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Second, they claim that Tyler constructively forfeited or abandoned her property rights by not paying property taxes. There were procedures for Tyler to, however, the Court rejected this argument by citing a Minnesota Supreme Court case where it held that the owner did not abandon property despite failing to pay property taxes for 30 years. It stated that under Minnesota case law, the owner has to surrender the property or fail to use the property in any way to relinquish the property right.

Third, they argue that state property tax laws are carefully crafted in the best interest of its citizens. The legislature is in a better position to fix any problems. It can discern the will of the people through a deliberate process based on feedback from the social media mob various stakeholders. Accordingly, the courts should not interfere.

Fourth, they argue that striking down the law would hinder states’ ability to address abandoned and blighted properties. They cite examples of dilapidated properties that are uninhabitable due to neglect and vandalism. The owners have no incentive or the means to restore them and so it would be more efficient to not pay any bills associated with the property. The properties would eventually be seized and the state would have to pay for cleanup and demolition. Ultimately the land would be sold for a very low price. While not directly saying so, they seem to suggest that the full seizure of the property sale proceeds is justified because most tax forfeitures sales result in a loss due to the costs of rehabilitating the many neglected and dilapidated properties and the surplus will simply offset the loss. But the Supreme Court in its concluding paragraph states that the purpose of the Takings Clause was to bar the government from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public at large.

Lastly, they argue that ruling for Tyler would open the litigation floodgates where plaintiffs would substitute “Taxation is Theft” with “Taxation is an Unconstitutional Taking.” And there are the usual arguments that the loss in tax revenue could jeopardize funding for the police, first responders, road maintenance, and schools.

The Tyler decision will ensure that states like Minnesota which have strict home equity forfeiture laws establish procedures to give taxpayers any excess funds after its tax debts are paid. While this decision seems like a win for the little guy, it is possible that these states enacted harsh laws like this because of the expenses they incurred to rehabilitate neglected and abused properties which in most cases sell at a loss most likely because the owners had no incentive to use their money. How the government will apply this decision remains to be seen. Will they simply cut a check for the proceeds to the taxpayer after the delinquencies have been paid? Or will they implement a procedure for reimbursing the government for rehabilitation costs? Hopefully the affected states will implement a plan that is fair to all parties, including the delinquent taxpayer.

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Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at stevenchungatl@gmail.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.

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