Eighth Circuit: Tax Debtor's Spouse Not Entitled to Proceeds from Judicial Sale of Home

(Parker Tax Publishing April 2025)

The Eighth Circuit affirmed a district court and held that the spouse of a taxpayer who owed the government a debt for unpaid taxes, interest, and penalties was not entitled to half of the proceeds of the judicial sale of the home the taxpayer owned but shared with his spouse. The court found that a state statute that forbids the owner of a homestead from conveying his interest without the approval of his spouse did not give the taxpayer's spouse a property right whose loss had to be compensated as a result of the judicial sale. U.S. v. Byers, 2025 PTC 120 (8th Cir. 2025).

Background

Ronald Byers owned property located at 16808 Prospect Place in Wayzata, Minnesota (Wayzata Property). Ronald was the sole titleholder of the Wayzata Property. Approximately two years after acquiring the Wayzata Property, Ronald married Deanna Byers. In February 1994, Ronald and Deanna, as husband and wife, executed a new mortgage on the Wayzata Property in the amount of $59,932, which paid off the existing mortgage. Ronald and Deanna contributed equally to the mortgage payments until the mortgage was fully satisfied in 2009. But, at all times, Ronald has remained the sole titleholder to the Wayzata Property.

Ronald owed the United States $327,419 for unpaid income taxes, interest, and penalties. The government made multiple tax assessments against Ronald. As a result, multiple federal tax liens attached to his property interests, including in the Wayzata Property. The government brought suit to reduce Ronald's tax assessments to judgment and to enforce its liens by way of a judicial sale of the property under Code Sec. 7403. Although the Byerses agreed that the government may sell the Wayzata Property, they argued that Deanna is entitled to half of the sale proceeds.

In U.S. v. Byers, 2023 PTC 273 (D. Minn. 2023), a district court held that Deanna lacked a property interest in the Wayzata Property and thus was not entitled to any portion of the sale proceeds. The district court noted that Minnesota Statutes Section 507.02 altered Ronald's property interest in the homestead by forbidding him from conveying that interest without the approval of his spouse. But the court found that Deanna did not have a property interest that could be altered by Section 507.02. According to the district court, by limiting the property right of a spouse who owns the homestead, Section 507.02 does not somehow create a property right in a spouse who does not own the homestead. It did not matter, the district court said, whether the property to which the government's lien attached included the right to unilaterally convey the property. Code Sec. 7403 gave the court the authority to sell the entire property and distribute the proceeds. The district court quoted the Supreme Court's holding in U.S. v. Rodgers, 461 U.S. 677 (1983), in concluding that Deanna did not hold an interest in the Wayzata Property is "the sort of property interest for whose loss an innocent third-party must be compensated."

Code Sec. 7403 authorizes the judicial sale of certain properties to satisfy the tax indebtedness of delinquent taxpayers. Under Code Sec. 7403(c), a district court in a suit for judicial sale must "finally determine the merits of all claims to and liens upon the property." The court may order a sale of the property in which a delinquent has an interest in order to satisfy that taxpayer's debt even though an innocent third party also has an interest in the property, so long as the third party receives compensation. The Code creates no property rights; instead, courts must look to state law to determine an interest in the homestead property.

The Byerses relied primarily on Rodgers to argue that Section 507.02 gave Deanna a property interest that had to be protected in the government's tax lien sale. Rodgers involved Code Sec. 7403 and Texas homestead law. In Rodgers, the Supreme Court concluded that the Texas homestead law's prohibition on foreclosure for the debts of one spouse did not apply because the IRS has rights to superior to those of an ordinary creditor. However, the Court also recognized that "homestead interests of a non-debtor spouse, while not preventing a sale, must be recognized." The requirement in Code Sec. 7403 that a court "finally determine the merits of all claims on the property" includes the obligation to consider the homestead interest of a non-debtor spouse and, "when that interest rises to the level of a property right," to compensate the spouse for that interest. The Court went on to find that the Texas homestead law gave the non-debtor spouse a property interest the loss which had to compensated under Code Sec. 7403. Under the Texas law, each spouse in a marriage has a separate and undivided possessory interest in the homestead, which is only lost by death or abandonment, and which may not be compromised either by the other spouse or by his or her heirs. Texas courts have repeatedly found that the Texas homestead right is not a mere statutory entitlement, but a vested property right.

The Byerses appealed to the Eighth Circuit, reasserting their argument that Deanna had a property interest in the Wayzata Property under Section 507.02 and was therefore entitled to half of the proceeds from the sale of the property.

Analysis

The Eighth Circuit affirmed the district court and held that Deanna was not entitled to half of the proceeds of the judicial sale of the Wayzata Property. The Eighth Circuit found that Rodgers necessarily rested on the determination that the Texas homestead right was a vested property right.

The court found that, although the Minnesota homestead law afforded Deanna extensive protections to safeguard her rights and interests in the homestead property owned by Ronald, the law did not vest in Deanna a property interest which rises to the level of that recognize under Texas law in Rodgers. As a result, Deanna's homestead interest in the Wayzata Property was not in the nature of a property right for which the government was required to compensate in a forced sale action under Code Sec. 7403. The court thus concluded that the district court did not err in determining that Deanna lacked a present property interest in the home and granting summary judgment to the government.

For a discussion of actions to enforce liens, see Parker Tax ¶260,530.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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