Opinion ID: 453522
Heading Depth: 1
Heading Rank: 3

Heading: Valuation of the Homestead

Text: 15 Sarah Harris argues, alternatively, that even if the United States had a valid lien, the district court erred in valuing her one-half interest in the homestead at an amount equal to one-half the proceeds from the sale of the house. She relies on dictum from United States v. Rodgers, 461 U.S. 677, 698, 103 S.Ct. 2132, 2145, 76 L.Ed.2d 236 (1983), in arguing that the district court undervalued her homestead interest. 16 In Rodgers, the Supreme Court held that the United States can enforce a federal tax lien against the Texas homestead interest of a nondebtor spouse. Id. at 690-698, 103 S.Ct. at 2141-45. The Court also held that the innocent spouse must be compensated for the loss under 26 U.S.C. Sec. 7403 (1982). Id. at 698, 103 S.Ct. at 2145. The Court was not required to decide the method for compensating the innocent spouse, however, and it did not do so. In dictum and for purposes of illustration, it suggested the following method for valuing the homestead interest of an innocent spouse. First, the Court assumed that a homestead estate is the economic equivalent of a life estate. Next, it assumed that an 8% discount rate in a standard statutory or commercial table would be appropriate for valuing a life estate. Under those assumptions, it found that three nondelinquent or surviving spouses, each holding a homestead estate and aged 30, 50, and 70 years, would be entitled to compensation of approximately 97%, 89%, and 64%, respectively, from the proceeds of the sale of their homesteads. Assuming, but not deciding, that the three spouses had protected one-half interests in the underlying property ownership, the Court suggested that the respective homestead interests would be worth approximately 99%, 95%, and 82% of the proceeds from the sale of their homesteads. Id. at 677, 103 S.Ct. at 2132. It is important to recognize here that the Supreme Court, in its example, assumed that only one person or entity had a homestead interest. As explained below, the existence of another homestead interest in the property would have significantly decreased the percentage interests of the nondebtor spouse. 17 Relying on the above-described writing in Rodgers, Sarah argues that the district court undervalued her homestead interest. She urges that application of the formula in Rodgers might result in her homestead interest's being valued significantly in excess of 50% of the proceeds from the sale of her residence. To resolve the questions presented, we will examine below the assumptions made in Rodgers and also consider the arguments presented by the United States. 18 In Rodgers, the Supreme Court analyzed the Texas homestead estate and concluded that the homestead laws have the effect of reducing the underlying ownership rights in a homestead property to something akin to remainder interests and vesting in each spouse an interest akin to an undivided life estate in the property. Rodgers, 461 U.S. at 686, 103 S.Ct. at 2138-39. The Court recognized that the analogy does not take into account all the nuances of the Texas homestead estate. Specifically, the homestead estate is different from a life estate because it can be lost by abandonment. Id. at 2139 & n. 11, 103 S.Ct. at 2139 & n. 11. In its analysis, the Rodgers Court pointed out the fact that a Texas homestead estate is not merely a statutory entitlement; it is a vested property right. Id. at 686, 103 S.Ct. at 2139. 19 At oral argument, the United States conceded that it is impossible to place a value on the possibility of abandonment. Likewise, in its brief, the United States computes the value of the homestead estate of Sarah Harris as though it were the economic equivalent of a life estate. Therefore, for purposes of valuing the Texas homestead estate, we will ignore any decrease in value attributable to the possibility of abandonment. 20 The Supreme Court, in its Rodgers example, assumed that the use of a standard statutory or commercial table and an 8% discount rate would be appropriate in calculating the value of the homestead estate. The United States asserts that the requisite factors for valuing the homestead interests here can be found in Treasury Publication 723A, Actuarial Values II: Factors at 6 Percent Involving One and Two Lives (1971). Sarah Harris argues that a question of fact exists as to which actuarial table appropriately measures her life expectancy; she does not challenge the use of a six percent rate to value her estate. 21 We see no reason here to depart from the use of the Treasury tables in determining the value of Sarah Harris' homestead estate. Although these tables have never attained the force of law, see Bowden v. Commissioner, 234 F.2d 937, 942 (5th Cir.), cert. denied, 352 U.S. 916, 77 S.Ct. 215, 1 L.Ed.2d 123 (1956), their use in determining the present value of future interests in property has been long recognized and approved by the Supreme Court, see Simpson v. United States, 252 U.S. 547, 550, 40 S.Ct. 367, 368, 64 L.Ed. 709 (1920). 22 The illustration in Rodgers was drawn under the assumption that there existed three nondelinquent surviving or remaining spouses of three different ages. Id. at 698, 103 S.Ct. at 2145 (emphasis added). Sarah Harris urges us here to value her estate as though she were a remaining spouse who had acquired the homestead free of any other interest in the property. To understand the fallacy of Sarah's argument, it is important to recognize that the actuarial tables used by the IRS to value Sarah's life estate properly reflect the fact that the aggregate value of all the interests in a piece of property equals 100 percent of the value of the property. Stephens, Maxfield, and Lind, Federal Estate and Gift Taxation, p 4.02[i] n. 149 (5th Ed.1983). In this case, the following interests existed in the Harrises' residence. First, at the time of assessment notice and attachment of the lien, Sarah and John owned a joint homestead interest in the residence, which is the economic equivalent of a joint life estate. Second, Sarah and John each owned a contingent homestead interest or life estate, which would become a possessory interest in favor of the surviving spouse. Finally, Sarah and John jointly owned the remainder interest in the property. Under Rodgers, only the homestead interests of Sarah are protected and thus compensable upon foreclosure and sale. By virtue of its lien on the property of John Harris, the IRS was entitled to the value of John's interest in the homestead to the extent of its lien. See 26 U.S.C. Sec. 6342 (1982). The IRS was also entitled to the remainder interest in the property at the termination of Sarah's life estate. The joint-life tables account for the fact that more than one person has an interest in the life estate, see 20 C.F.R. Sec. 2031-10(e) (1984) (explaining that special factors must be used to value concurrent interests involving one or more lives), and they should have been used here to value Sarah's homestead interest properly. 2 23 The attorney representing Sarah Harris also contended at oral argument that Sarah's community property was not subject to the debts of John Harris. It is settled law in Texas, however, that debts contracted during marriage are presumed to be debts of the community, absent evidence that the creditor agreed to satisfy the debt solely from the separate property of the contracting spouse. See Cockerham v. Cockerham, 527 S.W.2d 162, 171 (Tex.1975). No such evidence was submitted below and we may therefore apply the presumption here. 24 In an order denying Sarah Harris' objection to the entry of summary judgment, the district court refused her request for judicial valuation of her homestead interest. The court's order stated that she had received outright one-half of the sales proceeds from the residence. Concluding that her interest could not exceed her one-half share in the community property and finding that the escrowed funds at issue were from the other one-half of the sale's proceeds, the court refused to grant relief. 25 It is not entirely clear from this record whether Sarah actually received $88,000 in excess of the original mortgage on the home, but she stated in her deposition that, in addition to the $70,000 deposited in escrow, she had $88,000 remaining from the sale after attorneys' fees and closing fees and everything was taken out. Even if we assume that Sarah had to pay the full amount of the original mortgage of $80,000 from the $88,000 she received, she will receive an amount in excess of her interest in the homestead, as computed by the United States. 3 She will be entitled to the $33,887.86 remaining after the United States satisfies its lien of $36,112.14 from the $70,000 in escrow. See 26 U.S.C. Sec. 6342(b) (1982). Together, the $8,000 she would have after satisfying the mortgage and the $33,887.86 remaining from the $70,000 total $41,887.86, or approximately 54% of the original proceeds. 4 If the mortgage was paid before she received the $88,000, she will receive funds totaling $121,887.86, or approximately 77% of the original proceeds. 5 Because Sarah's homestead interest in the proceeds will not be impaired in any event and because the United States did not cross-appeal, we affirm the judgment below. 26 AFFIRMED.