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United States v. Nelson

United States District Court, D. South Dakota, Southern Division

July 3, 2018

JEFFREY A. NELSON, Individually and as Trustee of the J.A. Nelson Irrevocable Trust; BEVERLY A. NELSON; and The MINNEHAHA COUNTY TREASURER'S OFFICE, Defendants.



         On May 8, 2018, a hearing was held to determine Beverly Nelson's interest, if any, in the real property listed in the Complaint. The United States appeared by counsel, Natalie Loebner. Defendants Jeffrey Nelson, Beverly Nelson and the Minnehaha County Treasurer's Office did not appear in person or by counsel. The United States submitted evidence showing that Jeffrey Nelson holds title to the property. The United States admitted that, for purposes of these proceedings, Beverly Nelson is a non-delinquent taxpayer.

         At the conclusion of the May 8 hearing, the Court ordered the United States to submit a brief regarding the issues whether South Dakota law provides Beverly Nelson with an interest in the subject property, including a homestead interest, and whether her interest, if any, would prohibit foreclosure on the property or would entitle Beverly Nelson to some proceeds from sale of the property. (Doc. 36.) The Court directed the United States to include an analysis of the Rodgers factors.[1] See United States v. Rodgers, 461 U.S. 677, 710-11 (1983).

         On May 14, 2018, the United States submitted its post-hearing brief. (Doc. 37.) The United States agreed that Beverly Nelson has a homestead interest in the property and admitted that her possessory interest in the property should be considered by the Court in deciding whether to allow a forced sale of the property under 26 U.S.C. § 7403. The United States argued, however, that Beverly Nelson should not be compensated for the loss of her homestead interest because, under South Dakota law, a homestead interest is not a vested property right.

         On May 25, 2018, after analyzing the factors set forth by the Supreme Court in Rodgers, this Court ruled that the United States should be allowed to force a sale of the property. (Doc. 40.) The ruling was based in large part on the determination that Beverly Nelson could be fully and fairly compensated for the loss of her homestead interest out of the proceeds of the sale. The Court directed the parties to submit briefs regarding the value of Beverly Nelson's homestead interest, and recommendations for distribution of the proceeds from the sale.

         Subsequently, the United States filed the pending motion for reconsideration. (Doc. 41.) The United States argues that Beverly Nelson is not entitled to any compensation for her homestead interest because it is not a vested property right. (Doc. 41.)

         The United States attempts to distinguish Rodgers by arguing that the non-delinquent spouse's interest in Rodgers was compensable out of sale proceeds because it was a vested property right under Texas law, but Beverly Nelson's homestead interest is deemed a privilege under South Dakota law and not a vested property right. Thus, unlike in Rodgers, Beverly Nelson is not entitled to compensation for her homestead interest. (Doc. 42 at 3-4.) Having closely scrutinized Rodgers, this Court disagrees.

         In Rodgers, the government filed suit under 26 U.S.C. § 7403(a) to foreclose its lien on the delinquent taxpayer's property, and his wife argued foreclosure could not occur because she continued to hold a homestead interest in the property. Rodgers, 461 U.S. at 687-88. The Fifth Circuit ruled that the United States could not foreclose tax liens against homestead property "for as long as the nontaxpayer spouse maintains his or her homestead interest under state law." United States v. Rodgers, 649 F.2d 1117, 1125 (5th Cir.1981) (footnote omitted). The Supreme Court reversed, and held that: (1) federal tax liens may attach to property that cannot be unilaterally alienated; (2) § 7403 allows the government to seek, and the district court to order, the judicial sale of such property; and (3) if the property is sold, the nondelinquent spouse must receive complete compensation of her interest from the proceeds of the sale. Rodgers, 461 U.S. at 680.

         State law governs whether a property interest exists but "federal law governs the consequences that attach to property interests." Rodgers, 461 U.S. at 702 n. 31. Rodgers discusses state homestead law, which happened to be Texas law in that case. The Court concluded that the effect of provisions in the Texas Constitution "is to give each spouse in a marriage 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 heirs." Id. at 685. Noting that analogies are "somewhat hazardous in this area," id. at 685-686, the Court stated that the Texas homestead laws have the effect of reducing the underlying ownership rights in a homestead property to something akin to an undivided life estate in the property." Id. at 686. "[T]he Texas homestead right is not a mere statutory entitlement, but a vested property right." Id. "As the Supreme Court of Texas has put it, a spouse 'has a vested estate in the land of which she cannot be divested during her life except by abandonment or a voluntary conveyance in the manner prescribed by law." Id.

         South Dakota homestead laws have the same effect as Texas homestead laws, giving both spouses an independent interest in the homestead property.[2] The South Dakota Supreme Court has described the nature of the homestead interest:

The land in which the owner has a homestead interest may be conveyed by deed or pass by will, or under the statutes of succession. But the homestead interest does not pass as an incident to the land; and, if the party acquiring such property becomes vested with a homestead interest founded on the title so obtained, it vests by reason of possession and use and occupancy as a homestead, under the general statute. The source of the title is immaterial.
[T]he Legislature, in effect, has said that neither the deceased spouse nor the adult heirs shall deprive the surviving spouse of a homestead right in what had formerly been the family homestead. Yet it leaves to the surviving spouse the power to determine whether or not such homestead right shall be retained or abandoned.

Gross v. Gross, 491 N.W.2d 751, 753 (S.D. 1992) (quoting Bailly v. Farmers' State Bank of Sisseton, 150 N.W. 942, 944 (S.D. 1915). "This Court has also noted that 'the homestead law was passed for the express purpose of making it impossible for the husband, or the wife, if the title to the homestead is vested in her, to alienate or otherwise dispose of the homestead without the concurrence of the other spouse.'" Gross, 491 N.W.2d at 753 (quoting O 'Neill v. Bennett, 181 N.W. 97, 99 (1921); SDCL 43-31-9).

         In support of its argument that Beverly Nelson is not entitled to compensation for her homestead interest, the United States relies on language describing a South Dakota ...

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