When Tax Collection Is an Unconstitutional Taking

The BR State + Local Tax Spotlight

By Eugene J. Gibilaro

When has a tax collection procedure gone so far as to violate the Takings Clause of the U.S. Constitution? On May 25, 2023, the U.S. Supreme Court issued its decision in Tyler v. Hennepin County, 598 U.S. ____ (2023), holding that it constituted an unconstitutional taking when a Minnesota County sold a taxpayer’s home valued at $40,000 to satisfy her $15,000 property tax debt and kept the remaining $25,000 rather than returning it to her. On June 5, 2023, the U.S. Supreme Court issued an order vacating and remanding two cases to the Nebraska Supreme Court with facts similar to Tyler for further consideration in light of the Tyler decision. It is encouraging to see the U.S. Supreme Court moving quickly to ensure that state courts throughout the country apply the constitutional protections for taxpayers articulated in Tyler.

The Tyler Decision: In Tyler, the lower court held that the Minnesota County pocketing the excess $25,000 did not constitute an unconstitutional taking because Minnesota law did not recognize a property interest in surplus proceeds from a tax foreclosure sale conducted after adequate notice to the taxpayer owner. The U.S. Supreme Court did not dispute that the County had the power to force a sale of the taxpayer’s home to recover unpaid property taxes. However, the County could not “use the toehold of the tax debt to confiscate more property than was due” and, by doing so, the County had “effected a ‘classic taking in which the government directly appropriates private property for its own use.’” In support of its conclusion, the U.S. Supreme Court found that the principle that a government cannot take more from a taxpayer than they owe traces its origins at least as far back as the Magna Carta in 1215. Moreover, the Court observed that Minnesota’s rule was a minority rule and currently 36 states and the federal government require that excess value be returned to the taxpayer. The Court concluded that “[t]he taxpayer must render unto Caesar what is Caesar’s, but no more.”

The Nebraska Cases: Like Minnesota, Nebraska employed a minority rule that excess value was not required to be returned to the taxpayer. In Fair v. Continental Resources, No. S‑21-074 (Neb. Mar. 18, 2022), the taxpayer owed $5,268 in property taxes, interest, and fees and, in order to collect the amount due, the County effected a transfer of the title to his home to a third party. The home had an assessed value of $59,759, but no excess value from the title transfer was returned to the taxpayer. In Nieveen v. Tax 106, No. S-21-364 (Neb May 13, 2022), the taxpayer owed approximately $3,797 in delinquent property taxes and the home to which the County transferred title to a third party had an assessed value of $61,900. As in Continental Resources, none of the excess value from the title transfer was returned to the taxpayer. Like the lower courts in Tyler, the Nebraska Supreme Court found that the failure to return excess value to the taxpayers did not violate the Takings Clause because, according to the Nebraska Supreme Court, the taxpayers had no property interest in the surplus equity value of their homes. These decisions appear incompatible with Tyler and, given its order to vacate and remand the cases, it seems that the U.S. Supreme Court agrees. Stay tuned for further developments in these cases.

This update is one in a series of updates written for the June 2023 edition of The BR State + Local Tax Spotlight.

© 2023 Blank Rome LLP. All rights reserved. Please contact Blank Rome for permission to reprint. Notice: The purpose of this update is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. This update should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.