The Constitutionality of Tax Foreclosure Sales, and the Fifth Amendment’s Requirement for “Just Compensation” (Pung v. Isabella County, Michigan, 609 U.S. ______ (2026))
Anyone who’s seen the movie “Happy Gilmore” knows the IRS can take your house. And if you don’t win an improbable golf tournament against Shooter McGavin, your house can be sold to the highest bidder, with the proceeds (after payment of prior encumbrances and costs of sale) going to the government. See generally 26 U.S.C. § 7403(a)-(c); United States v. Rodgers, 461 U.S. 677 (1983). As those with experience can attest, these tax sales can generate proceeds far below a property’s fair market value. However, the US Constitution can play a role here.
The Fifth Amendment to the United States Constitution requires that individuals get “just compensation” when the federal government takes private property for public use (the “Takings Clause”). U.S. Const. Amend. 5. This has generally been extended to state governments through the Fourteenth Amendment. See Chicago, B. & Q. R. Co. v. Chicago, 166 U. S. 226, 241 (1897).
The Supreme Court has recently weighed in on the standard for determining “just compensation” when the government “takes” private property for a tax sale in Pung v. Isabella County, 609 U.S. ____ (2026).
The facts of Pung are relatively straightforward: The Pung family owed $2,241.93 in real estate taxes. As the taxes did not get paid, the County (Isabella County) sold the Pung’s residence (which was assessed at $194,000 for county tax purposes) for $76,008 at a public auction. The County initially kept the surplus proceeds. Michael Pung filed suit in federal district court, claiming the County violated the Takings Clause (of the 5th Amendment) and the Excessive Fines Clause (of the 8th Amendment). Pung argued that not only should he get refunded the surplus proceeds of the sale, but the surplus should be measured by the fair market value of the property (rather than the proceeds the government actually received). The lower court ordered the surplus funds returned, but held that the proceeds actually received (rather than the fair market value of the property) was the proper baseline to determine the surplus.
As to the Takings Clause, Justice Alito (writing for the Court held that “the proper baseline under the Takings Clause is the price obtained in a tax sale, at least when the sale is fairly conducted in light of our country’s history of tax sales.”
The Court also rejected Pung’s Eighth Amendment argument (i.e. that the County’s failure to compensate him for the fair market value was an “excessive fine”). The Court found that (absent evidence of an intent to punish), a tax sale “fairly conducted in light of our Nation’s history” would not violate the Eight Amendment.
While the outcome is not surprising, it is interesting that the Court left explicit wiggle room for “blatantly unfair procedures,” and tax sales not “fairly conducted in light of our country’s history of tax sales.” To be sure, “blatantly unfair procedures” in tax sales do sometimes occur. To combat this problem (with respect to federal taxes), the Internal Revenue Code has a statutory scheme designed to compensate taxpayers for certain types of IRS collection action (see e.g., IRC § 7433 (damages suit for unauthorized collection actions); IRC § 7432 (damages suit for failure to release a lien); IRC § 7426(h) (damages permitted in wrongful levy action). However, these suits have technical requirements and are often dismissed if not brought correctly. Taxpayers are encouraged to seek professional advice and help if they were the victims of blatantly unfair tax collection action.
