No proceeds from sale of husband’s home to pay tax debts go to wife

The Eighth Circuit, affirming a district court, held that because a wife had no property interest in a home owned by her husband that was sold in a judicial sale to satisfy his federal tax debts, she was not entitled to half of the proceeds from the sale.

Background

Ronald and Deanna Byers married in 1992. At the time, Ronald owned a home in Hennepin County, Minn., of which he was the sole owner. Hennepin County classified the home as a homestead.

In February 1994, Ronald and Deanna, as spouses, executed a new mortgage on the property in the amount of $59,932, which paid off an existing mortgage. They contributed equally to the mortgage payments until the mortgage was fully satisfied in 2009. However, Ronald always remained the sole owner of the home.

Ronald owed $327,419 for unpaid federal income taxes, interest, and penalties. The IRS made multiple tax assessments against him, which resulted in multiple tax liens attaching to his property interests, including the home. The IRS brought suit under Sec. 7403 in district court to reduce Ronald’s tax assessments to judgment and to enforce its liens by way of a judicial sale of the property. In addition to Ronald, per Sec. 7403(b), the IRS named two other defendants in the proceedings who may have claimed an interest in the home: Deanna and Hennepin County.

Hennepin County and the government stipulated that any lien interest that the county had on the home because of unpaid property taxes was superior to the IRS’s lien interest in the property because of unpaid income taxes. Although the Byerses agreed that the IRS could sell the home, they argued that Deanna was entitled to half of the sale proceeds.

The IRS and the Byerses filed cross–motions for summary judgment. The IRS argued that it was entitled to all proceeds of the sale. The Byerses argued that Deanna had a property interest in the home as the couple’s marital homestead, pursuant to Minn. Stat. §507.02, which limits a married owner’s rights regarding the conveyance of a homestead property. Therefore, they argued, she was entitled to half of the proceeds from the home’s sale.

The district court granted the government’s motion and denied the Byerses’ motion, concluding that Deanna lacked a property interest in the home and consequently was not entitled to any portion of the sale proceeds. The court reasoned that Minn. Stat. §507.02 “alter[ed] Ronald’s property interest in the homestead by forbidding him from conveying that interest without the approval of his spouse” (Byers, 699 F. Supp. 3d 774, 780 (D. Minn. 2023)). But Deanna “does not have a property interest that can be altered by §507.02. And by limiting the property right of a spouse who owns the homestead, §507.02 does not somehow create a property right in a spouse who does not own the homestead” (id).

According to the district court, it did not matter “whether the property interest to which the government’s lien has attached includes the right to unilaterally convey the property. Section 7403 gives the [c]ourt the authority to sell the entire property and distribute the proceeds” (id. at 782). The court concluded that Deanna did not “hold[] an interest in the [home] that is ‘the sort of property interest for whose loss an innocent third–party must be compensated'” (id., quoting Rodgers, 461 U.S. 677, 698 (1983)). As a result, the district court ordered that the net proceeds from the sale of the home were to be applied to satisfy Ronald’s unpaid federal tax liabilities, subject to Hennepin County’s proven lien priority interest.

The Byerses appealed the decision to the Eighth Circuit. On appeal, they reasserted their argument that Deanna had a property interest in the home under Minn. Stat. §507.02 and therefore was entitled to half of the proceeds from the sale of the property.

Eighth Circuit’s decision

The Eighth Circuit, affirming the district court, held that Deanna was not entitled to half the proceeds from the sale of Ronald’s home because, under Minnesota law, she did not have a property interest in the home.

The Eighth Circuit explained, based on the Supreme Court’s decision in Rodgers, that normally, the proper resolution of a Sec. 7403 action is the foreclosure and forced sale of a property, with proceeds of the sale divided equitably between the United States and other parties claiming an interest in the property. However, under case law, the Code creates no property rights but merely attaches consequences, defined under federal law, to rights created under state law. Thus, the court was required to look to Minnesota law to define Deanna’s interest in Ronald’s home.

The Eighth Circuit found that there was no dispute that Ronald was the sole owner of the home, which Hennepin County classified as a homestead. Thus, the question was whether the laws regarding Minnesota homesteads gave Deanna a property interest in it and an entitlement to some of the proceeds from its sale.

Minnesota law “defines the homestead as the ‘house owned and occupied by a debtor as the debtor’s dwelling place, together with the land upon which it is situated to the amount of area and value hereinafter limited and defined.'” A homestead is “exempt from seizure or sale … on account of any debt not lawfully charged thereon in writing” (Minn. Stat. §510.01). Also, under Minn. Stat. §507.02, “[i]f the owner [of a homestead] is married, no conveyance of the homestead … shall be valid without the signatures of both spouses.” Thus, a spouse is generally prohibited from unilaterally conveying the homestead.

The Byerses primarily argued that, based on Rodgers, Minn. Stat. §507.02 gave Deanna “a legitimate property interest that must be protected in the [g]overnment’s tax lien sale.” In Rodgers, which involved Sec. 7403 and the Texas homestead law, the Supreme Court concluded that, based on “the nature of the homestead estate in Texas,” the nondebtor spouse had “the sort of property interest for whose loss an innocent third–party must be compensated under §7403″ (Rodgers, 461 U.S. at 698).

The Eighth Circuit found that Rodgers “necessarily rested upon the determination that the Texas homestead right was a vested property right.” It further found, however, that although Minnesota homestead laws, including Minn. Stat. §507.02, gave Deanna extensive protection to safeguard her rights and interests in the homestead property owned by her husband, they did not provide her a vested property interest that rose to the level of that recognized under Texas law in Rodgers. As a result, the Eighth Circuit affirmed the district court’s holding that Deanna’s homestead interest in Ronald’s home was not in the nature of a property right that the IRS was required to compensate in a forced sale action under Sec. 7403.

Reflections

To determine what property rights a taxpayer has in a certain piece of property, the courts must determine the taxpayer’s property rights under the law of the state in which the property is located. Thus, when addressing the resolution of any federal tax issue that depends entirely or in part on the taxpayer’s rights in property, a practitioner must carefully analyze in which state the property is located and what rights are assigned to the property under the laws of that state.

Byers, No. 23-3751 (8th Cir. 4/7/25)