Just compensation for property measured by actual tax-sale price, not FMV

The Supreme Court held that in a tax sale of property to pay a property tax debt, the measurement of “just compensation” to be paid to the property owner for the property under the Fifth Amendment’s Takings Clause is based on the property’s actual tax–sale price and not its hypothetical fair market value (FMV).

Background

In 2010, the Pung family was denied a state–law tax exemption for principal residences by a local Michigan tax assessor. They appealed the denial of the exemption to the Michigan Tax Tribunal, which held they were entitled to it. This, however, did not end the matter. The assessor again denied the exemption, and the Pungs were forced to litigate a similar dispute in state courts, where they prevailed a second time.

Having won both appeals, though, the Pungs still owed $2,242 in real–property taxes, which they refused to pay. This led Isabella County, Mich., to initiate foreclosure proceedings. Although a state trial court initially blocked the proceedings, the Michigan Court of Appeals allowed the foreclosure and sale to proceed.

The county followed the procedures required by the Michigan General Property Tax Act. The act required the county to give the Pungs a period of redemption to pay off their tax debt, provide public notice of the tax sale, sell the property to the highest bidder, and obtain a judgment of foreclosure from a Michigan court.

The results of the public auction of the Pungs’ home were not favorable to them. The home sold for $76,008, even though its assessed value for tax purposes was $194,400. The county kept all of the sale proceeds.

Michael Pung sued in district court, arguing that the county violated the Fifth Amendment’s Takings Clause and the Eighth Amendment’s Excessive Fines Clause by retaining the full amount of the proceeds of the tax sale. The district court granted Pung partial summary judgment on his Fifth Amendment claim, holding that he was entitled to the surplus proceeds from the tax sale. Because it ruled for Pung on his Fifth Amendment claim, the district court concluded that it did not need to reach the question of whether the Eighth Amendment required a similar result. However, while agreeing with Pung that the county had to refund the surplus proceeds of the tax sale, the court rejected his argument that compensation for the property should be measured by its FMV.

Pung appealed the district court’s decision to the Sixth Circuit, which affirmed it. The court held that a plaintiff whose property is foreclosed and sold at a public auction for failure to pay taxes is not entitled to recoup the FMV of the property. Instead, it held that when a municipality sells foreclosed property at a properly conducted auction, the owner is entitled to “the amount of the sale above his debt and no more.” Thus, the court concluded that Pung should receive $73,766 — the difference between the sale price of the home and the tax debt. The Sixth Circuit also rejected Pung’s Eighth Amendment claim. Based on Sixth Circuit precedent, the court held that the Michigan tax–foreclosure regime was not punitive and thus not within the scope of the Eighth Amendment.

Pung subsequently appealed the Sixth Circuit’s decision to the Supreme Court, which agreed to hear the case. In the Supreme Court, besides making his Fifth Amendment and Eighth Amendment arguments, Pung, in both his merits briefings and at oral argument, raised what appeared to the Court to be a new argument — that the procedure the county followed in seizing and selling his property was unfair in several respects.

The Supreme Court’s decision

The Supreme Court held that the proper baseline for measuring “just compensation” following a tax sale is the actual tax–sale price, not the property’s hypothetical FMV, at least when the sale is fairly conducted. It also held that the Eighth Amendment’s Excessive Fines Clause did not require the county to return more than the surplus proceeds from the tax sale. However, the Court declined to resolve any of Pung’s new arguments that the procedure the county followed in seizing and selling his property was unfair. Instead, it vacated the Sixth Circuit’s judgment and remanded the case to it, stating that on remand, the Sixth Circuit “may decide whether [Pung’s new procedural arguments] were properly preserved in that court, and, if they were, may entertain Pung’s arguments.”

Baseline for measuring just compensation: The Supreme Court found that for hundreds of years, English and later American law has allowed governments to seize and sell property as a tax–collection method, provided that they return any surplus proceeds (i.e., the difference between the proceeds of the tax sale and the tax debt) to the debtor. The Court pointed out that federal statutes “from the early days of the Republic” applied this rule, and it also had done so in Taylor, 104 U.S. 216 (1881); Lawton, 110 U.S. 146 (1884); Nelson v. City of New York, 352 U.S. 103 (1956); and BFP v. Resolution Trust Corporation, 511 U.S. 531 (1994). Thus, the Court concluded: “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.”

Pung made several arguments to the contrary, but the Supreme Court determined that history and precedent did not support them. Pung cited a concurrence by a justice of the Supreme Court of Michigan interpreting that state’s constitution (Rafaeli, LLC v. Oakland County, 952 N.W.2d 434, 466—487 (2020) (Viviano, J., concurring)), but the Court stated, “It goes without saying that a one–Justice concurrence interpreting a state constitutional provision almost 230 years after the Takings Clause’s ratification does not shed much light on that Clause’s meaning.”

Pung also cited as support for his position state court cases in which the courts ordered compensation based on FMV. The Court found these cases did not help Pung because they involved governments that unnecessarily sold multiple discrete pieces of personal property. In Pung’s case, the county sold just one parcel of real property, and Pung did not argue that it could have been subdivided. Thus, the Court determined that even if it assumed that a different common–law rule applies when the government sells more property than necessary, that rule did not apply in Pung’s case.

Lacking tax–sale cases that supported his arguments, Pung turned to eminent–domain cases. The Supreme Court found that these cases did not help him either, because even in the eminent–domain context, it has “refused to designate market value as the sole measure of just compensation” (564.54 Acres of Monroe and Pike County Land, 441 U.S. 506, 512 (1979)), since there are cases where using an FMV standard would be inappropriate. The Court determined that FMV is not an appropriate measure of just compensation in the context of tax sales because if a taxpayer believes that the FMV of the property to be sold in a tax sale is greater than the taxes due, generally, property owners can avoid a tax sale in a number of ways.

The Court also concluded that “Pung’s fair–market–value theory would impose unprecedented burdens on jurisdictions that wish to collect unpaid taxes and might well make tax sales impractical.” The Court observed that if Pung’s proposed rule were applied, a tax sale would often net the government a loss, with it having to pay out to the property owner the difference between the actual tax–sale price and the FMV of the property. The Court stated, “The possibility of such a perverse result would render tax sales infeasible as a debt–collection mechanism.”

The Supreme Court noted that since the nation’s beginning, tax sales have been an accepted and common method of government debt collection and remain so today. Thus, it concluded “[t]hat Pung’s novel interpretation of the Takings Clause would whisk this longstanding practice into the dustbin is strong evidence that his interpretation is incorrect.”

Excessive Fines Clause: Pung also argued that the county’s failure to compensate him for the FMV of his property constituted an excessive fine and thus violated the Excessive Fines Clause of the Eighth Amendment. The Supreme Court explained that forfeiture of property can be a fine for Eighth Amendment purposes if it serves in part to punish. To determine whether a fine is in part to punish, the Court stated, it has “consulted historical practice.”

The Supreme Court rejected Pung’s claim, concluding it lacked historical or precedential support. The Court found Pung did not offer any additional historical evidence suggesting that a fairly conducted tax sale would violate the Eighth Amendment. Furthermore, he had not cited a single decision holding that the government violates the Eighth Amendment by returning only the surplus proceeds from a tax sale.

In addition, the Supreme Court noted that imposing Pung’s FMV rule under the Eighth Amendment would result in the same consequences as imposing it under the Fifth Amendment, “namely, the demise of the longstanding use of tax sales to collect debts.” The Court concluded, “The Eighth Amendment requires no such thing.”

Pung’s new procedural arguments: The Supreme Court found that Pung made several arguments that he had not raised in the Sixth Circuit, contending that the procedure the county followed in seizing and selling his property was unfair in several respects. The Court found that these arguments did not fit within the scope of the question presented regarding the Fifth Amendment, which asked only whether the Takings Clause requires the government to compensate owners based on their property’s FMV.

The parties, the Supreme Court explained, appeared to agree that a government jurisdiction might violate the Constitution if it employs blatantly unfair procedures, such as by conducting a sham sale or needlessly delaying a tax sale while real estate prices crashed. However, they disagreed on what constitutes a fair process in this context. The Court held it would not answer Pung’s new procedural arguments and instead remanded the case to the Sixth Circuit to address the arguments if it determined they had been properly preserved in that court.

Reflections

Whether or not the Sixth Circuit on remand determines that the county conducted an unfair tax sale of the Pungs’ property, it is certainly understandable that the Pungs believe that the sale was not fair. To pay a tax debt of less than $2,242, rather than try to collect other property of the Pungs (e.g., personal goods, a car, or a portion of their land), the county proceeded to seize the Pungs’ home with an assessed value of $194,400. It then sold the home at auction for less than half of the assessed value and for less than half of the $195,000 price for which the auction purchaser later sold it on the open market. After reviewing the facts and circumstances surrounding the seizure and sale of the home, Justice Clarence Thomas, in closing his concurring opinion, stated, “What Isabella County did to the Pungs was wrong, and, on my initial view, likely unconstitutional.”

Pung v. Isabella County, Michigan, No. 25–95 (U.S. 6/23/26)

Contributor

James A. Beavers, CPA, CGMA, J.D., LL.M., is The Tax Adviser’s tax technical content manager. For more information about this column, contact thetaxadviser@aicpa.org.