United States District Court, D. South Dakota, Southern Division
LAWRENCE L. PIERSOL ATTEST UNITED STATES DISTRICT JUDGE
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.
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. See United States v. Rodgers, 461
U.S. 677, 710-11 (1983). The Nelsons were also directed to
brief those issues, but they did not do so.
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. The Nelsons did not respond to these
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.
the United States filed a motion for reconsideration, arguing
that Beverly Nelson is not entitled to any compensation for
her homestead interest because it is not a vested property
right. (Doc. 41.) The Court denied the motion and ordered the
United States to submit a brief regarding the valuation of
Beverly Nelson's homestead interest, and allowing the
Nelsons to respond. (Doc. 47.) The United States filed a
brief, doc. 50, but the Nelsons did not file a response.
brief, the United States argued that South Dakota's
homestead exemption in the amount of $60, 000 is the best way
to value a homestead interest. In support of its argument,
the United States cited Kim v. Dome Entertainment Center,
Inc., 748 F.3d 647 (5th Cir. 2014). A close reading of
Kim does not support the proposition that the state
homestead exemption is the best way to value a homestead
interest. In Kim, a bankruptcy case, Mr. Kim claimed
an unlimited homestead exemption under Texas law and 11
U.S.C. § 522(b)(3)(A) for the home the Kims purchased.
Following Dome's objection, the bankruptcy court limited
the exemption to $136, 875 under § 522(p)-the provision
adopted by Congress to override state law allowing for full
exemptions of property in a bankruptcy proceeding due to
homestead interests if the property was acquired within the
1215-day period preceding the date the petition was filed.
Mr. Kim then sought a declaratory judgment in the bankruptcy
court to determine Mrs. Kim's rights and claims by virtue
of her separate homestead interest under Texas law and 11
U.S.C. § 541. The bankruptcy court granted partial
summary judgment for Dome, holding that Mrs. Kim did not have
"a separate and distinct exempt homestead interest in
the property that would entitle her to compensation or to
prevent the sale of the Property." In re Kim,
405 B.R. 179, 188 (N.D. Tex. Bankr. 2009). The Kims appealed.
district court upheld the bankruptcy court's summary
judgment, concluding that Mrs. Kim's homestead interest
did not prevent the property from being subject to §
522(p) and that her homestead interest was not a property
right that would entitle her to compensation after the forced
sale of the residence. See Kim v. Kim, 2010 WL
11583180, *5 (N.D.Tex. Aug. 11, 2010).
appeal, the Fifth Circuit clarified that a homestead interest
may constitute a vested property right, and that a non-debtor
spouse could be entitled to compensation from the sale of a
property to which a homestead right attaches. Kim,
748 F.3d at 657 ("Dome argues, and the district court
held, that based on the decision of our court in In re
Rogers, Mrs. Kim's homestead rights are not a vested
economic interest in the residence, and therefore, she is not
entitled to compensation in the event of a forced sale. Dome
and the district court misunderstand the holding in
Rogers") The Fifth Circuit recognized that Mrs.
Kim had "a possessory interest in the real property by
virtue of its homestead character." Id. at 661.
The court noted, however, that the Kims "offered no
insight" about the valuation of the homestead interest
other than to argue Mrs. Kim should be compensated in
accordance with the hypothetical in Rodgers. Id. at
662-63. Accordingly, the Fifth Circuit affirmed the district
court's judgment, concluding that the Kims failed to
adequately brief whether "the determination by Congress
to permit an exemption of $136, 875 for a debtor such as Mr.
Kim would not be just compensation for Mrs. Kim's
homestead interest since $136, 875 in proceeds would be
impressed with her homestead rights." Id. at
Kims offered some insight into the value of Mrs. Kim's
homestead interest, it is possible that the Fifth Circuit
would have compensated her with more than the $136, 875 Mr.
Kim received for his homestead interest in accordance with
the bankruptcy law. The Kim decision does not
support the United States' position that Beverly's
homestead interest should be valued at $60, 000 based on the
South Dakota homestead exemption, and this Court was unable
to find any authority supporting that proposition.
earlier decision from the Fifth Circuit is more applicable
here. See Harris v. United States, 764 F.2d 1126,
1130 (5th Cir. 1985). In Harris, the husband
incurred a payroll tax liability and on June 2, 1979, the IRS
filed a lien. On July 13, 1979, the wife was awarded the home
by a judgment in a divorce proceeding. She later sold her
home and the IRS wanted payment. The wife argued that she
should be entitled to a life estate equivalent based on the
single life tables and, alternatively, one-half of the
proceeds because the house had been community property.
Fifth Circuit explained in detail the components of ownership
of a Texas homestead interest by a delinquent taxpayer and
his non-liable spouse. Harris, 764 F.2d at 1129-32.
First, each spouse owns a joint homestead interest, which is
the economic equivalent of a joint life estate. Id.
at 1131. Second, each spouse owns a contingent homestead
interest or life estate, which would become a possessory
interest in favor of the surviving spouse. Id.
Finally, each spouse jointly owns the remainder interest in
the property. Id. Under Rodgers, only the
homestead interest of the non-liable spouse is protected and
thus compensable upon foreclosure and sale. Id. The
IRS is thus entitled to the value of the taxpayer
spouse's interest in the homestead to the extent of its
lien and to the remainder interest in the property at the
time of the termination of the non-liable spouse's life
estate. Id. The court in Harris further
explained that "[w]e see no reason... to depart from the
use of the Treasury tables in determining the value of [the]
homestead estate," given that "their use in
determining the present value of future interests in property
has been long recognized and approved by the Supreme
Court." Id. at 1130-31. The court held that,
because both spouses were still alive, their interests should
be decided based on the two life table, not the single life
table as in Rodgers where only one party to the
marriage was alive at the time of the
Court found instructive a case from the Western District of
Texas that applied Harris. See United States v.
Caraway, 2008 WL 2510668 (W.D. Texas April 24, 2008).
Both parties had used the joint-life treasury tables to value
the non-liable wife's homestead interest, but they came
up with different numbers. Id. at *7. Neither party
had presented the district court with information about their
calculations, so the court asked for further briefing.
Id. The United States filed a brief explaining that
a homestead interest under Texas law is akin to a life
estate. It submitted a declaration and calculations of a
senior actuary with the IRS regarding how he computed the
homestead interest of an innocent spouse of a delinquent
United States has the ability to have an IRS actuary prepare
a valuation of Beverly Nelson's homestead interest as
akin to a life estate,  just as was done in
Caraway. When the United States submits the
valuation, it should explain the ...