The Supreme Court of the United States handed down a major decision in a widely publicized property rights case. In short, the Court held that the baseline for determining just compensation to property owners in tax sales is not fair market value but instead the sale proceeds. In other words, property owners are only entitled to the difference between the auction price and the tax deficiency.

We share the same frustration as other property rights advocates over this verdict. Although the decision doesn’t align with our view on the Takings Clause, the Court has left some hope that property owners at least receive a fair tax sale process.

Background

Pung v Isabella County stems from a longstanding dispute between the Pung family and a local tax assessor. In 2010, the assessor denied the Pungs a property tax exemption. The family successfully challenged the denial not once but twice, first at the Michigan Tax Tribunal and then in the State courts. Despite their legal victories, the Pungs allegedly owed a balance of $2,241.93. When the Pungs refused to pay it, Isabella County stepped in and initiated a tax sale where the home was put up for auction. Despite having an assessed value of $194,400, the home was sold at auction for only $76,000!

Holding

In a unanimous opinion, the Supreme Court held that the measure of just compensation in tax sales is based on the auction price, not fair market value. In other words, property owners are only entitled to receive the surplus funds from tax sales. Nothing more, nothing less.

Reasoning

The Court rejected the fair market value standard for three main reasons:

1. Longstanding Historical Practice and Precedent: The Court noted that for centuries, U.S. and English law allowed the seizure and sale of property for unpaid taxes, provided that surplus proceeds were returned to the owner. The Supreme Court has consistently followed this precedent throughout the years and has never held that property owners are entitled to anything more than surplus proceeds.
2. Lack of Support for the Fair Market Value Theory: Because they could point to no authority supporting a fair market value standard in the tax sale context, the Pungs failed to persuade the Court to adopt it as the proper measure of just compensation. Instead, they relied on eminent domain precedent, where fair market value is the well-established benchmark. The Court found this analogy unconvincing, emphasizing that tax sales differ materially from eminent domain proceedings. In particular, the Court noted that, unlike eminent domain, tax forfeitures are generally avoidable, as property owners can take steps such as refinancing or leveraging their property to satisfy delinquent taxes.
3. Practical Consequences for the Tax System: The Court reasoned that requiring governments to pay fair market value in tax sales would impose serious practical and financial burdens. In many instances, fair market value would exceed the auction price, forcing governments to pay more than what they had recovered through the sale. This would undermine the revenue-raising purpose of tax enforcement. The Court also reasoned that tying compensation to fair market value would make tax sales far less workable. Tax auctions are designed to be efficient mechanisms for collecting delinquent taxes, not lengthy processes aimed at securing the highest possible price. Although a more elaborate sale process might produce higher bids, it would also be more time-consuming, less efficient, and more costly for municipalities that rely on tax revenue to fund essential public services.

Even though the decision was technically unanimous, not all the Justices completely agreed on the reasoning behind it. Justice Thomas, for instance, concurred with the majority in that the case should be remanded for consideration of whether the tax sale procedures were properly followed. But he went further, suggesting that the County’s actions were unconstitutional. Thomas noted that instead of seizing enough assets to cover the unpaid taxes or taking a portion of the Pungs’ property, the County took the entire home at a depressed auction price. Moreover, Thomas flipped the majority’s reasoning on its head. In his view, the Takings Clause prioritizes the rights of private property owners over the interests of governments, not the other way around. Considering that the Pungs lost their home over a relatively minuscule tax debt, it’s hard to disagree.

Takeaways

Balancing the interests of local governments against private property rights can be difficult, as this case demonstrates. The Court’s decision, however, makes clear that—at least for now—the government’s interest in securing tax revenue takes precedence over homeowners’ interest in receiving fair market value in tax sale proceedings.

A copy of the Supreme Court opinion is available here.

For more reading on this case, here are some other resources:

Pacific Legal Foundation: Supreme Court says Michigan family may continue challenge after County took home over disputed tax debt.

Inverse Condemnation Blog:  Pung Roundup

Forbes.com:  Supreme Court Rejects Fair Market Value in Tax Sale Case, But Keeps Challenge Alive