Originally published on Forbes.com April 22nd, 2014
Despite the ferocious reputation of the IRS, if you can’t pay your income taxes, it is possible to get quite a bit of slack. It is not hard to apply for a payment plan and before any serious collection activity, you will get notice of your right to a collection due process hearing. You can appeal the result of that hearing to Tax Court. Typically Tax Court decisions on collections hearings concern taxes that are at least five years old.
Compared to that, the system for collecting property taxes in many parts of the country is much, much speedier. There is something of “You snooze, you lose” attitude in some jurisdictions with the penalty, loss of the property, often disproportionate to the tax involved. The New Mexico Court of Appeals decision in the case of Francisco and Rachel Valenzuela is a cautionary tale in this regard. They lost a property valued at $25,000 over $215 in unpaid property tax.
In New Mexico, like several other states including Indiana and Florida, localities collect delinquent property taxes by auctioning off the property. (Sometimes what is auctioned off is a certificate. Investors in the certificates can end up getting a healthy rate of interest when the owner finally gets around to paying the taxes. If the owner takes too long and the certificate holder jumps through the proper hoops, the certificate holder ends up owning the property, free and clear.) Apparently, New Mexico skips the certificate step. That is what happened to the Valenzuelas. Here is the story.
Plaintiffs Francisco and Rachel Valenzuela owed delinquent taxes on property in Portales, New Mexico, which the New Mexico Taxation and Revenue Department (the Department) sold at auction to Defendants Allan and Sherry Snyder. It is undisputed that the minimum bid at the sale was established by the Department as $215, and the Snyders, who were the only bidders at the auction, paid that amount. The Department’s Property Tax Division (the Division) issued deeds on the property to the Snyders, which the Snyders recorded.
So, in effect, the Valenzuelas sold their property to the Snyders for less than 1% of its value. It gets a little lawyerly from here. They appealed to district court and won the first round.
The Valenzuelas filed suit seeking an order setting aside the tax sale. They alleged that because the purchase price was so grossly disproportionate to the property’s fair market value-alleged to be at least $25,000-it would be inequitable and unconscionable to let the tax sale stand. The district court granted them summary judgment on the ground that the Snyders failed to respond to the motion for summary judgment and were deemed to have admitted the facts alleged by the Valenzuelas.
It almost looks like the Valenzuelas pulled a reverse snooze/lose on the Snyders. They told the judge that the property was worth more than 100 times what the Snyders paid for it and the Snyders didn’t object in the proper manner, so the Court gave the Valenzuelas summary judgment. But not so fast, says the appeal court. The Snyders, because of the failure to properly respond were deemed to have admitted:
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The property’s fair market value was at least $25,000.
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The Snyders purchased the property at a tax sale for $215.
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The price the Snyders paid was “grossly disproportionate to fair market value.”
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“It is unconscionable to allow the tax sale in which purchased the property to stand.”
The Appeals Court is unmoved by the raw deal that the Valenzuelas appear to be getting. The point of the whole system is to make it easy for the localities to collect the property tax. Here are some of the high points of the analysis.
We conclude that inadequacy of the purchase price or gross disproportionality between the purchase price and the property’s value are not grounds for setting aside a tax sale. New Mexico’s Property Tax Code (the Code) and our case law make this clear.
While it may seem harsh to disregard a large discrepancy between the purchase price in a tax sale and the property’s value, there are at least three sensible reasons for doing so.
First, it seems less important to protect a property owner’s interest in fair market value where the owner has not bothered to pay taxes on the property, despite having had at least three years in which to contemplate doing so before the tax sale.
Second, “the purchaser buys, knowing the uncertainty of title which is reflected in offer.” Id. at 714. In this case, the Snyders, like all purchasers at a tax sale, received quitclaim deeds, and this circumstance may compel the purchaser to undertake the cost and time expenditures of a quiet title suit. Allowing property to be sold for the amount of delinquent taxes, penalties, interest, and costs encourages purchasers and resolves a delinquency owed the Department.
Third, precluding an after-sale challenge on the basis of an inadequate price “clothe tax titles with a measure of certainty and security.”
In summary, the district court erroneously granted summary judgment to the Valenzuelas. As a matter of law, the purchase price paid by the Snyders, while disproportionate to the market value of the property, cannot be deemed unconscionable and cannot serve as a basis for setting aside the deeds issued to the Snyders by the Division.
So, if you own property in New Mexico, you should be careful to not let the tax slide. Looked at in one way, the Court approved what was in effect a penalty of over 10,000%.
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