Spouse is not entitled to sales proceeds in a judicial sale of taxpayer’s home

The Eighth Circuit held that a taxpayer’s spouse lacked a present property interest in the taxpayer’s home, so she was not entitled to receive a portion of the sales proceeds in a forced sale action under Sec. 7403.

Facts: Ronald E. Byers owned property located in Wayzata, Minn., in which he was the sole titleholder. He acquired the property by deed in 1990, which was recorded with Hennepin County, Minn., that year. Hennepin County classified the property as a homestead.

Approximately two years after acquiring the property, Byers married his wife, Deanna. In February 1994, the Byerses executed a new mortgage on the Wayzata property, paying off an existing mortgage. Both contributed equally to the mortgage until it was fully satisfied in 2009. At all times, though, Ronald remained the property’s sole titleholder.

Ronald owed the government $327,419 in unpaid income taxes, interest, and penalties. The government made multiple tax assessments against him, resulting in several federal tax liens being attached to the Wayzata property. The government also sued in district court to reduce his tax assessments to judgment and enforce its liens by a judicial sale of the property under Sec. 7403. Deanna and Hennepin County were named as co-defendants, as potential claimants to the property. Hennepin County and the government stipulated that any lien the government had for unpaid income taxes was superior to Hennepin County’s lien for unpaid property taxes. The Byerses had no issue with the government selling the property. Their major point of contention was that Deanna was entitled to half of the sale proceeds.

Both the government and the Byerses filed cross-motions for summary judgment. The government claimed it was entitled to all proceeds of the sale. The Byerses did not contend that Deanna could block the sale or that she held an interest in the property as a joint tenant or as a tenant in common (Minn. Stat. §500.19, subd. 1). Their major argument was that Deanna had a property interest in the Wayzata property as the marital homestead, entitling her to half of the proceeds under Minn. Stat. §507.02.

The district court granted the government’s motion while denying the Byerses’ motion, concluding that Deanna should not receive a portion of the sales proceeds because she lacked an interest in the Wayzata property. The court reasoned that Minn. Stat. Section 507.02 “alter[ed] Ronald’s property interest in the homestead by forbidding him from conveying that interest without the approval of his spouse” (Byers, 699 F. Supp. 3d 774 (D. Minn. 2023)). Deanna, though, did “not have a property interest that [could] be altered by [Section] 507.02.” Therefore, by limiting this right to a spouse who owns the homestead, Section 507.02 did “not somehow create a property right in a spouse who does not own the homestead.” It did not matter, the court said, whether the property interest in which the government’s lien attached included the right to unilaterally convey the property. Sec. 7403 gave the court the authority to sell the entire property and distribute the proceeds. The court concluded that Deanna did not hold the sort of property interest in the property for “whose loss an innocent third-party must be compensated” (quoting Rodgers, 461 U.S. 677, 698 (1983)). The Byerses appealed the decision to the Eighth Circuit.

Issues: The parties did not dispute Ronald’s ownership of the property, which he held in fee simple, at no time transferring an interest in it to Deanna. The Byerses’ main argument on appeal was that, under Minn. Stat. §507.02, Deanna held “a present, vested, choate, and inalienable interest and property right in the Property by virtue of the Byers[es]’ marriage,” entitling her to half of the proceeds from the sale.

A taxpayer’s failure to pay an “assessed tax liability after notice of the assessment and demand for payment” results in an automatic lien by the government on “all property and rights belonging to the taxpayer” (Secs. 6303 and 6321—22). Sec. 7403 is one of several distinct enforcement tools available to the government to collect delinquent taxes, authorizing the judicial sale of “certain properties to satisfy the tax indebtedness of delinquent taxpayers” (Rodgers, 461 U.S. at 680 (1983)).

In a suit for judicial sale, under Sec. 7403(c), the court must “determine the merits of all claims to and liens upon the property,” distributing the proceeds according to the interests of the parties and the United States. Foreclosure and forced sale, with proceeds from the sale divided equitably between the United States and other parties claiming an interest, is normally the proper resolution of a Sec. 7403 action (Barczyk, 434 F. App’x 488 (6th Cir. 2011)).

As the Eighth Circuit observed, the Code does not create any property rights but “merely attaches consequences, federally defined, to rights created under state law.” The court, therefore, looked to state law to define Deanna’s interest in the “homestead property.”

Minnesota law defines the homestead as the house and land upon which the house sits that are owned by the “debtor as the debtor’s dwelling place” (Marine Credit Union v. Detlefson-Delano, 830 N.W.2d 859 (Minn. 2013)). The homestead is also exempt from sale or seizure “on account of any debt not lawfully charged thereon in writing” (Minn. Stat. §510.01). One of the main features of the homestead exemption is that it extends to the debtor’s spouse. Therefore, if a couple are married, title may be vested in either spouse, and the exemption (to which there are exceptions) extends “to the debts of either or of both” spouses (Minn. Stat. §510.04). A married couple may not convey property without the signatures of both spouses (Minn. Stat. §507.02); otherwise, the transaction is void (State v. Cummings, 2 N.W.3d 528 n.5 (Minn. 2024)).

The Byerses contended that, based on Rodgers, Minn. Stat. §507.02 gave Deanna “a legitimate property interest that must be protected in the [g]overnment’s tax lien sale.” In Rodgers, which involved Sec. 7403 and the Texas homestead law, the Supreme Court concluded that, based on “the nature of the homestead estate in Texas,” the nondebtor spouse had “the sort of property interest for whose loss an innocent third-party must be compensated under [Sec.] 7403” (Rodgers, 461 U.S. at 698).

The Eighth Circuit found that Rodgers “necessarily rested upon the determination that the Texas homestead right was a vested property right.” It further found, however, that although Minnesota homestead laws, including Minn. Stat. §507.02, gave Deanna extensive protection to safeguard her rights and interests in the homestead property owned by her husband, they did not provide her a vested property interest that rose to the level of that recognized under Texas law in Rodgers. As a result, as the district court had held, Deanna’s homestead interest in Ronald’s home was not in the nature of a property right that the IRS was required to compensate in a forced sale action under Sec. 7403.

Holding: The Eight Circuit therefore affirmed the district court’s decision, holding that because Deanna lacked a property interest in the Wayzata property, she was not entitled to receive any proceeds from the forced sale of the property under Sec. 7403.

• Byers, No. 23-3751 (8th Cir. 4/7/25)

— John McKinley, CPA, CGMA, J.D., LL.M., is a professor of the practice in accounting and taxation in the SC Johnson College of Business, and Matthew Geiszler, Ph.D., is a lecturer in accounting in the Brooks School of Public Policy, both at Cornell University in Ithaca, N.Y. To comment on this column, contact Paul Bonner, the JofA’s tax editor.