When the government takes your home to collect a tax debt and sells it at auction, how much does it actually owe you?

The Supreme Court has now answered part of that question. And like many tax issues, the answer is complicated.

The Court ruled that when a government fairly conducts a tax sale, the Constitution does not require it to compensate the former owner based on the home’s fair market value. Instead, the constitutional baseline is the auction sale price, minus the tax debt. But that wasn’t a complete win for Isabella County, Michigan. The justices vacated the Sixth Circuit’s ruling against the family and sent the case back for the lower court to consider whether the county’s sale process was fairly conducted in the first place.

Background

The case, Pung v. Isabella County, is the follow up to Tyler v. Hennepin County, the 2023 Supreme Court decision that rejected what critics call “home equity theft.” In Tyler, a 94-year-old Minnesota woman lost her condo over unpaid property taxes. Hennepin County sold the property for $40,000, kept the full amount, and applied only about $15,000 to taxes, penalties, interest, and costs. The Supreme Court unanimously ruled that the county could not keep the surplus.

Tyler established a basic principle: The government can collect taxes, but it cannot use a tax debt as an excuse to confiscate more property than it is owed.

Pung had a variation on that that question: What counts as the surplus?

Timothy Scott Pung bought his family home decades ago. After his death, and later the death of his wife, his son Marc remained in the home with his family. The house had received Michigan’s Principal Residence Exemption, which reduces certain school-tax obligations for qualifying homes. The family believed the exemption continued because family members and beneficiaries of the estate continued to live in the home. The local tax assessor disagreed and denied the exemption for several years.

The Pungs challenged that decision and won before the Michigan Tax Tribunal. The tribunal concluded that no additional paperwork was required so long as family members and beneficiaries continued to reside in the home.

But the dispute did not end there. Despite the ruling, the tax assessor continued to treat the property as delinquent, and the county proceeded to foreclosure. The alleged delinquency? Just $2,241.93. The home was assessed for tax purposes at $194,400.

Isabella County foreclosed and sold the property at public auction for $76,008. Marc Pung, his wife, and their young child were evicted.

Michael Pung, as personal representative of the estate, sued. He argued that the county’s actions violated the Fifth Amendment’s Takings Clause and the Eighth Amendment’s Excessive Fines Clause. The district court gave the estate a partial victory, holding that the family was entitled to the surplus proceeds from the tax sale—the auction sale price minus the tax debt. But the court rejected the family’s argument that compensation should be measured by the home’s fair market value.

The Sixth Circuit affirmed the lower court. Under that approach, the estate would receive about $73,766 (the $76,008 auction price minus the $2,241.93 tax debt).

Supreme Court Ruling

The Supreme Court agreed with that part of the lower court’s analysis. Writing for the Court, Justice Samuel Alito said that the proper baseline for “just compensation” following a tax sale is the price obtained at auction, 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.”

The Court’s opinion leaned heavily on history. For hundreds of years, governments have used the seizure and sale of property as a way to collect unpaid taxes. But the traditional rule, the Court explained, was that the government had to return the “overplus,” meaning the amount generated by the sale above the debt owed. In other words, under Tyler, taxpayers are guaranteed the surplus proceeds from a tax sale. It does not, however, the Court held, guarantee taxpayers the difference between the tax debt and what the home might have fetched in a conventional real estate transaction.

Pacific Legal Foundation, which represented Tyler and has been involved in similar challenges around the country, had urged the Court to recognize that fair market value may be required in some cases, especially where a forced tax sale produces a deeply depressed price. The Court declined to go that far.

The Court also rejected Pung’s Eighth Amendment that failing to compensate the estate based on fair market value amounted to an excessive fine. The Court held that the Eighth Amendment does not require more than surplus proceeds when a tax sale is fairly conducted.

Unanswered Questions

The majority (Chief Justice Roberts and Justices Sotomayor, Kagan, Gorsuch, Kavanaugh, Barrett and Jackson joined Alito, while Justice Thomas joined with an exception) did not decide whether the sale was fair. Instead, it said the Sixth Circuit may consider on remand whether Pung properly preserved arguments that Isabella County’s procedures were constitutionally unfair. Pung has argued, among other things, that the county seized more property than necessary to satisfy the alleged debt and that the county’s handling of the property and sale process should not be treated as constitutionally adequate merely because it complied with state law.

Sotomayor, joined by Gorsuch and Jackson, filed a concurring opinion to emphasize that the Court was not defining what makes a tax auction fair. The majority’s opinion, she wrote, should not be read as endorsing any party’s version of the fair-auction standard. Those issues remain for remand.

Thomas, joined in substantial part by Gorsuch, was more blunt in his lengthy concurring opinion. In his view, the Pungs paid their property taxes on time and in full, and the additional amount the county sought to collect was based on an improper denial of the principal-residence exemption. Thomas noted that the family had prevailed in litigation over the exemption, yet the county continued with foreclosure. He also highlighted the dramatic gap between the property’s assessed value and the auction price: The county valued the home at $194,400 for tax purposes, but sold it for $76,008, less than 40% of that amount. “What Isabella County did to the Pungs was wrong, and, on my initial view, likely unconstitutional,” he wrote.

What’s Next

The case has been remanded in part, which means that it has been sent back to a lower court for further proceedings. The question on remand is not whether the Pungs were entitled to fair market value as an automatic constitutional rule. The Supreme Court has said they were not. The question is whether Isabella County’s conduct was fair enough for the auction price to serve as the constitutional baseline.

For now, the Pung family has not won the compensation rule it sought. But, as Larry Salzman, Pacific Legal Foundation's vice president for litigation and strategy, noted, “The case isn't over. The Pungs won the right to continue their fight in the lower courts."

The case is Michael Pung, Personal Representative of the Estate of Timothy Scott Pung, Petitioner v. Isabella County, Michigan. You can find the opinion here.

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