When the government takes your home to collect a tax debt and sells it, how much does it actually owe you? That’s a question now before the U.S. Supreme Court. And while a similar case was resolved last year—Tyler v. Hennepin—a big question about valuation remains unanswered.

Thirty-five years ago, Timothy Scott Pung purchased a 3,000-square-foot house in Isabella County, Michigan, for $125,000. While he was alive, the property benefited from the state’s Principal Residence Exemption, which reduces some school-tax obligations for qualifying homes. After his unexpected death in 2004 followed by the death of his wife in 2008, his son, Marc, remained in the house with his family. He believed that under Michigan law, the tax exemption continued automatically (without the need for any additional paperwork) as long as family members lived in the home.

A local tax assessor saw things differently and retroactively denied the exemption for three years (2007, 2008 and 2009), arguing that Marc should have resubmitted paperwork.

The Pungs challenged the move in court. An administrative law judge at the Michigan Tax Tribunal agreed with the family and ruled in their favor. During the challenge, the assessor continued to deny the family the exemption for the years 2010 and 2011. The tax tribunal reversed the denial for the 2007-2011 tax years, holding that so long as the family and beneficiaries of Scott’s estate remained in the home, no further paperwork was ever necessary.

The assessor disagreed. Despite the ruling, she labeled the property as delinquent, and the county moved to foreclose. The alleged delinquency was just $2,241.93 (the house was assessed at $194,400). The county evicted the family, and sold their home at a tax auction for just $76,008.

After the foreclosure, Pung’s estate sued, arguing that the county had taken property in violation of the Fifth Amendment’s Takings Clause and had also imposed an excessive fine in violation of the Eighth Amendment. The district court gave the estate a partial victory, concluding that the estate was entitled to the surplus proceeds, plus interest, from the auction—that is, the auction sale price minus the tax debt. The estate, however, argued that the recovery should be measured by the property’s fair market value minus the amount owed, and not simply the auction amount.

That distinction may sound technical, but it is worth a lot of money. If compensation is based on the auction price, the estate would receive roughly $76,008 minus the tax debt. If compensation is based on fair market value, the estate’s recovery could be closer to $194,400, minus the debt. Here, the dispute is not whether the government may collect taxes, but whether the government can return only what a tax auction produces, even if that sale price is far below the market value.

That question has now landed in the U.S. Supreme Court where the Pungs are represented pro bono (for free) by the Pacific Legal Foundation, a public interest law firm. The issue in front of the Court? When the government takes your home to collect a tax debt and sells it at an allegedly depressed auction price,........

© Forbes