The Fifth Amendment’s “takings clause” is one of the cornerstones of our Constitution. It states that no private property shall be taken for public use, without just compensation. Typically, just compensation is the property’s fair market value. But a recent Supreme Court decision limited the “just compensation” due to taxpayers whose property is taken for failing to pay their property tax.
In Pung v. Isabella County, Michigan, the Supreme Court held “just compensation” following a tax sale is measured by the auction sale price, not the property’s fair market value. “Fair market value” of property is a recurring issue in federal tax controversies and at the heart of many tax disputes. This Supreme Court decision confirms that not all sales of property are reflective of its fair market value.
The Facts
The Pung family owed $2,241.93 in real-property taxes after a local tax assessor repeatedly and wrongly denied their principal-residence exemption. Isabella County initiated foreclosure proceedings and sold the family’s home at public auction for $76,008, despite the property carrying a tax-assessed value of $194,400. Nearly 18 months later, the auction purchaser re-sold the same property on the open market for $195,000—almost exactly its earlier assessed value.
Michael Pung sued in federal court, arguing that the Takings Clause of the Fifth Amendment and the Excessive Fines Clause of the Eighth Amendment required compensation based on the property’s fair market value rather than the depressed auction price. The District Court granted partial summary judgment on the Fifth Amendment claim but limited relief to the surplus proceeds, which were the difference between the sale price and the tax debt and totaled $73,766.07. The Sixth Circuit affirmed.
The Court’s Holding
The Supreme Court held that the proper baseline for “just compensation” in a tax-sale context is the auction sale price, at least when the sale is fairly conducted in light of the country’s history of tax sales. The Court traced this principle through centuries of English and American law, noting that governments have long been obligated to return only the “overplus”—the surplus above the tax debt—to the former owner. Federal statutes from the early Republic, as well as this Court’s own precedents in United States v. Taylor, 104 U.S. 216 (1881), United States v. Lawton, 110 U.S. 146 (1884), and Nelson v. City of New York, 352 U.S. 103 (1956), all applied this surplus-proceeds rule.
The Court also rejected Pung’s Eighth Amendment excessive-fines claim, finding no historical evidence that a fairly conducted tax sale would violate that provision.
The Court Concedes: Tax Sales Can Yield Prices Far Below Fair Market Value
Critically, the Supreme Court did not dispute that tax sales routinely produce prices dramatically below fair market value. The Court expressly acknowledged that “tax sales frequently yield less than could have been obtained if the property had been ‘sold at leisure and pursuant to normal marketing techniques.'” The Court explained that tax sales, “by their very nature, are incompatible with these techniques,” because they are designed to collect unpaid taxes “without undue delay and administrative expense,” unlike private sellers who may wait for market upswings or the right buyer.
The Court’s own hypothetical illustrates the point: for a property with a fair market value of $100,000, a tax sale might yield only $60,000, leaving the former owner with just $40,000 in surplus after a $20,000 tax debt is satisfied, a figure $40,000 less than what the owner would have received at fair market value. Yet the Court held that this shortfall is constitutionally permissible.
Justice Thomas’s separate opinion drove this point home with stark real-world examples drawn from amicus briefs: a West Virginia owner’s $65,000 property was sold for $2,700 to satisfy an $80 tax lien; a Baltimore owner’s $140,000 property was sold for $5,000 to satisfy a $2,500 lien; a Nebraska owner’s $59,000 property was sold for $588 to satisfy a $588 lien; and in Washington, D.C., the average property sold based on a tax lien went for $17,400 while the average tax-assessed value of those properties was $578,100.
Practical Concerns and the Fair Sale Process
The majority also justified its holding in part on practical grounds: requiring governments to compensate property owners at fair market value following a tax sale “would impose unprecedented burdens on jurisdictions that wish to collect unpaid taxes and might well make tax sales impractical.” Under a fair-market-value rule, the Court observed, the government would frequently end up paying out more than it received at auction, rendering tax sales “infeasible as a debt-collection mechanism.”
However, the Court left open the question of what constitutes a “fair” sale process. The parties agreed that blatantly unfair procedures, such as a sham sale or needlessly delaying a sale while property values crashed, could violate the Constitution, but they disagreed on the standard. The Court declined to resolve these procedural questions, leaving them for the Sixth Circuit on remand.
Significance
Pung v. Isabella County establishes that property owners subjected to tax sales are constitutionally entitled only to the surplus proceeds above their tax debt—not the full fair market value of their homes—so long as the sale was “fairly conducted.” At the same time, the Court’s frank acknowledgment that tax-sale prices can be a fraction of fair market value, and its refusal to close the door on procedural-fairness challenges ensure that future litigation over the meaning of a “fairly conducted” tax sale is virtually certain.
