Summer 2022 In This Issue
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President’s Message By Vern Jarboe
Sloan, Eisenbarth, Glassman, McEntire & Jarboe LLC The Plaza Lights program came back live in December. Thank you to all who attended and even more thanks to those who presented. Those of us around for a while remember Plaza Lights had been a staple CLE program for many years and we hope attendance can maintain it going forward.
President’s Message By Vern Jarboe Real Estate Update By Matthew S. Gough Probate and Trust Update By Calvin J. Karlin IRS Tax Cases, Rulings and Changes in the Federal Law By Lauren G. Hughes
This past year we had 72 in attendance. We think that is sustainable going forward; more would be better. Presenters included: • Public Incentives 101: What Company Counsel Needs to Know Presenters: Kevin Wempe & Gina Riekhof • Real Estate Environmental Considerations Presenter: Jessica Merrigan • Medicaid Planning Panel – Panelists: Jennifer Walters, Tim O’Sullivan, Jessica Stoppel, Randy Clinkscales • 2021 Estate Tax Updates (Panel) Presenters: Matthew T. Schippers, Tim O’Sullivan, and Shannon Braun • Mediation & Arbitration Clauses in Trusts Presenter: Wyatt Hoch • Recent Trends in Kansas LLC Law and Practice Presenters: Bill Quick, Steve Munch, and Tara Cyr • Ethical Landmines in Estate Planning Presenter: Vern Jarboe Help plan the program for December 2022 by sending in some ideas on subjects you would like to see, or better yet the ones you would make a presentation on. The legislative season has mostly wrapped up. Thanks to Joe Molina for a short summary of activity we are interested in. He provided the hyperlinks below. • • • •
SB 141 Uniform Directed Trust Act Sub for SB 400 Uniform Trust Code SB 382 License Requirement for Real Estate Transactions HB 2531 Right of Way along county roads
In the real estate world, I would report that the post COVID process will likely be the same process we learned to handle in the COVID era. This means very few faceto-face closings, many remote zoom meetings and changes to how we think about notarization. We have made sure our staff received training from the Secretary of State’s office on the new process. All of us now have a formal notary book in which we can record the required elements for any notarization. It certainly creates more work, and we may need to revisit what is considered to be administrative functions for purposes of billing. The real estate market remains very hot in the residential field and commercial brokers tell me that market has seen significant movement. The commercial market Continued on next page
Continued from previous page for office and retail does not have the shortage of inventory described by brokers in the residential market. However, trying to find that perfect industrial spot is very difficult and makes 1031 exchanges somewhat iffy unless the seller has identified the new spot before selling the old one. The probate process slowed in our post-covid world as many courthouse staff members and judges were working remotely and a handful of staff members in the courthouse were taking care of the certification of letters needed for administrators and executors to act. The ability for remote notarization of documents by zoom required many additional steps that were time-consuming. The need for zoom hearings presented problems for many clients, attorneys, paralegals and courthouse staff during this learning curve. (we will never forget “I am not a cat!) When in-person hearings or meetings were necessary, the uneasiness of wearing masks and social distancing protecting participants hung heavy with all. I do believe we have come
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through the other side of the pandemic with a renewed ability to shift, turn and continue the ability to service clients in the probate and trust world. It also appears the Covid experience may have made many things more efficient although less personal. Please let me know if you have a topic or concern that you would like to write on – or that someone else needs to work on. We survive based on volunteers for both committee work and providing good substance to members. I look forward to hearing from you.
Section Officers President – Vern Jarboe President-Elect – Kevin Mitchelson Secretary/Treasurer – Mark Andersen Editor – Cal Karlin Legislative Liaison – Scott Jensen CLE Liaison – Kent Meyerhoff
Real Estate Update By Matthew S. Gough
Barber Emerson LC, Lawrence
Kansas Supreme Court FIRST SECURITY BANK V. BUEHNE COURT OF APPEALS – AFFIRMED MEADE DISTRICT COURT – AFFIRMED NO. 121,765 – DECEMBER 30, 2021 501 P.3D 362; 2021 KAN. LEXIS 132 Statute of Limitations; Waiver Attorneys: Zachary D. Schultz, of Schultz Law Office PA, Garden City, for appellants; James C. Dodge, of Sharp McQueen PA, Liberal, for appellee; and Kersten L. Holzhueter, of Spencer Fane LLP, Kansas City, Missouri, amicus curiae for the Kansas Bankers Association. Facts: First Security Bank (Bank) made a loan to the Buehnes in 2005, secured by a mortgage. The Buehnes never made a payment. Bank demanded payment of the full principal balance and unpaid interest in 2009, but did not file a foreclosure action until 2014. The Buehnes asserted the statute of limitations as an affirmative defense. The note, however, contained a waiver of “any applicable statute of limitations to the full extent permitted by law.” The District Court granted the Bank’s motion for summary judgment. On appeal, the Court of Appeals affirmed. Issue: Whether a note containing a waiver of “any applicable statute of limitations, to the full extent permitted by law,” is enforceable as a matter of public policy. Holding: The Kansas Supreme Court affirmed the decision of the lower courts, noting that the caveat “to the full extent permitted by law” would have permitted the Buehnes to raise any number of common-law-based challenges to Bank’s attempts to enforce the Note (critically, laches and unconscionability), but the Buehnes failed to do so and could show no prejudice by Bank’s delay in enforcing its rights under the note.
Kansas Court of Appeals WHEATLAND ELEC. COOPERATIVE INC. V. CITY OF GARDEN CITY FINNEY DISTRICT COURT – REVERSED AND REMANDED NO. 123,061 – DECEMBER 3, 2021 2021 KAN. APP. LEXIS 58 Public Utilities Attorneys: James M. McVay, of Wheatland Electric Cooperative Inc. and Allen G. Glendenning, Watkins Calcara Chartered, Great Bend, for appellant; Timothy J. Sear, Frank Caro Jr. and Andrew O. Schulte, of Polsinelli PC,Kansas City, Missouri, and Randall D. Grisell, of Doering, Grisell & Cunningham PA, Garden City, for appellee.
Facts: The Kansas Corporation Commission (KCC) assigned to Wheatland Electric Cooperative Inc. (Wheatland) the service area surrounding Garden City, Kansas, in 1977. Pursuant to the Retail Electric Suppliers Act, K.S.A. 66-1,170 et seq. (the Act), the KCC decides what entity is responsible for providing electricity to Kansas consumers located outside any incorporated city. Garden City’s former city manager arranged a handshake deal with Wheatland for Garden City to supply electricity to a proposed ethanol plant located outside city limits, without KCC approval. After a new general manager took over at Wheatland, Wheatland rejected the prior informal agreement. Garden City annexed the properties at issue, which ended Wheatland’s right to service the territory under the Act, but Wheatland filed suit for fair and reasonable compensation – in this case $7 million – pursuant to K.S.A. 66-1,176. Each party submitted motions for summary judgment. The District Court granted Garden City’s motions, and Wheatland appealed. Issues: First, can an oral agreement between a city manager and the general manager of an electric cooperative allowing the city to provide electricity to a territory outside that city be enforceable, even though that agreement has not been approved by the KCC as required by the Act? Second, can the equitable doctrines of laches, estoppel, and waiver render such a contract valid, even though that contract is void according to the statutes? Third, may a supplier of electricity receive compensation under the Act after a city annexes part of that supplier’s territory, even if the supplier had not been serving customers in the area because of an informal agreement between the parties? Holdings: The oral agreement is not enforceable. Equitable doctrines cannot render such an agreement valid. Heartland was entitled to compensation. The Court reversed the District Court’s grant of summary judgment to Garden City, reversed the denial of summary judgment to Wheatland, and remanded the case to the District Court with directions to enter summary judgment to Wheatland over Garden City. IN RE WALMART STORES INC. KANSAS BOARD OF TAX APPEALS – AFFIRMED NO. 122,162 – OCTOBER 8, 2021 500 P.3D 553; 2021 KAN. APP. LEXIS 49; 2021 WL 4699199 Tax Appeal Attorneys: Ryan L. Carpenter, assistant county counselor, for appellant Board of Johnson County Commissioners; Linda A. Terrill, of Property Tax Law Group LLC, Overland Park, for appellees Walmart Stores Inc. et al. Facts: This case represents a continuation of an ongoing dispute in the appraisal industry over the appropriate methodology to use in valuing real property associated with
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Real Estate Update
the operation of what are known as big-box retail stores. The 11 tracts of real property at issue were used for the operation of either a Walmart or a Sam’s Club store. Walmart appealed the 2016 appraised valuations of these properties in Johnson County to the Kansas Board of Tax Appeals (BOTA). BOTA heard numerous expert witnesses from both sides, and ultimately adopted the valuation approach that Walmart’s experts advocated for, with some variation. Both parties requested that BOTA make a full and complete opinion, which the County appealed to the Court. Issues: First, whether BOTA erroneously interpreted and applied Kansas law in reaching its final decision. Second, whether there is substantial competent evidence — when viewed in light of the record as a whole — to support BOTA’s final decision. Third, whether BOTA’s final decision is unreasonable, arbitrary, or capricious. Finding: The Court (and BOTA) cited existing Kansas precedent, namely In re Prieb Properties LLC, 47 Kan. App. 2d 122, 275 P.3d 56 (2012) and In re Equalization Appeal of Target Corporation, 55 Kan. App. 2d 234, 410 P.3d 939 (2017) in finding that Walmart’s approach to valuation was more persuasive than the County’s. The County essentially requested that the Court overturn its prior decision in Prieb, and the Court declined to do so. The Court affirmed BOTA’s decision and held that decision not to be unreasonable, arbitrary or capricious. Dissent: Judge Leben wrote a dissenting opinion and argued that the Court should overturn the Prieb decision, in order to “… let the tax valuation of real estate be decided on a level playing field before the Board of Tax Appeals, which has the expertise to fairly judge the real-estate appraisal testimony presented to it.”
Kansas Court of Appeals – Summary of Unpublished Opinions LOYD V. RURAL WATER DISTRICT NO. 2 JEFFERSON DISTRICT COURT – AFFIRMED IN PART, REVERSED IN PART AND REMANDED WITH DIRECTIONS NO. 123,464 – FEBRUARY 25, 2022 2022 KAN. APP. UNPUB. LEXIS 108; 2022 WL 570851 Offer of Judgment, Attorneys’ Fees Attorneys: Jonathan Sternberg, of Jonathan Sternberg, Attorney PC, Kansas City, Missouri, and Joel E. Cape, pro hac vice, of Cape Law Firm PLC, Fayetteville, Arkansas, for appellants; Todd A. Luckman, of Stumbo Hanson LLP, Topeka, for appellee. Short Summary: In a dispute over rural water meters, the rural water district (RWD) served an offer to allow judgment to be granted in favor of the plaintiffs under K.S.A. 60-2002(b). Plaintiffs accepted the offer and then sought recovery of court
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costs and attorneys’ fees on the basis of being the prevailing party. The District Court denied recovery of both costs and attorneys’ fees. On appeal, the Court of Appeals analyzed the plaintiff ’s arguments, some of which stemmed from existing case law applying the Kansas Consumer Protection Act (see Richardson v. Murray, 54 Kan. App. 2d 571, 402 P.3d 588 (2017)), and held that under the facts of this case, the plaintiffs were not entitled to recover attorneys’ fees, but were entitled to recover their court costs. MATHEWS V. CITY OF MISSION HILLS JOHNSON DISTRICT COURT – AFFIRMED NO. 122,710 – FEBRUARY 11, 2022 2022 KAN. APP. UNPUB. LEXIS 85; 2022 WL 414255 Appeal of Land Use Decision Attorneys: Patrick B. Hughes, of Adams Jones Law Firm PA, Wichita, for appellant; George F. Verschelden and Anna M. Krstulic, of Stinson LLP of Kansas City, Missouri, for appellee. Short Summary: Mathews opposed efforts by Kansas City Country Club to obtain a permit for the installation of an electrical fan and supportive electrical equipment on the 12th hole of the golf course. When the City of Mission Hills granted the permit, Mathews sued the City in District Court. Mathews claimed that the City’s Architectural Review Board (ARB) failed to follow proper procedure, and argued that the ARB acted unreasonably by concluding that the installation of the fan would not adversely affect the surrounding property values. The District Court found in favor of the City. Mathews appealed, and the Court of Appeals affirmed. EVERETTE V. BARTON & ASSOCIATES WYANDOTTE DISTRICT COURT – AFFIRMED NO. 122,628 – JANUARY 7, 2022 2022 KAN. APP. UNPUB. LEXIS 2; 501 P.3D 378; 2022 WL 68329 Scope of Duty Attorneys: Mark E. Parrish and Raymond Salva, pro hac vice, of Boyd Kenter Thomas & Parrish LLC, Independence, Missouri, for appellants; Sean P. Edwards, of Sanders Warren Russell & Scheer LLP, Overland Park, for appellee Safeguard Properties Management LLC. Short Summary: Smith and Everette appealed the District Court’s grant of summary judgment in favor of Safeguard Properties Management, a property preservation company. They argued that two claims in their petition — negligence and negligent misrepresentation — should have proceeded to trial because they turned on disputed facts. The District Court found as a matter of law that Safeguard did not owe any legal duty to Smith and Everette, and Smith and Everette have not demonstrated that they reasonably relied on any of Safeguard’s representations. The Court affirmed.
Real Estate Update
SHELTON V. CHACKO BARBER DISTRICT COURT – AFFIRMED NO. 123,092 – JANUARY 7, 2022 2022 KAN. APP. UNPUB. LEXIS 12; 501 P.3D 909; 2022 WL 67881 Trespass; Adverse Possession; Fence Boundary Line Dispute
Attorneys: John D. Beverlin II, of Stull, Beverlin, Nicolay & Haas LLC, Pratt, for appellant; Hannah L. Brass, Medicine Lodge, for appellee. Short Summary: This is an adverse possession case. Two properties, formerly under common ownership, were separated by a fence. The fence was not located on the boundary line stated on the vesting deeds. Rather, the fence encroached upon Shelton’s property. Shelton sued Chacko for trespass and to quiet title, and Chacko counter-claimed seeking declaratory judgment that he owned the disputed property by adverse possession. The District Court held that Chacko met his burden of proof of adverse possession. The Court of Appeals affirmed. HACKNEY V. ALLEN BROWN DISTRICT COURT – AFFIRMED NO. 122,023 – DECEMBER 3, 2021 2021 KAN. APP. UNPUB. LEXIS 696; 499 P.3D 1158; 2021 WL 5758244 Specific Performance Attorneys: William C. O’Keefe, of O’Keefe Law Office, Seneca, for appellants; Matthew R. Bergmann, of Frieden & Forbes LLP, Topeka, for appellees Joseph R. Hackney and Joni M. Hackney. Short Summary: The Hackneys executed a written real estate contract to purchase real estate owned by the Allens. The Allens’ son signed the contract as attorney-in-fact, under a Nebraska power of attorney. Allens then received a higher price offer from the Retteles, which Allens accepted and closed upon without notifying the Hackneys. The Hackneys attempted to close on the original written contract as of the closing date, and learned at that time that the property had been sold to the Retteles. Hackeys sued the Allens and the Rettelles. The District Court granted specific performance to Hackneys and voided the quitclaim deed to the Rettelles. The Court of Appeals affirmed. LACOST V. BOOT HILL CASINO & RESORT FORD DISTRICT COURT – AFFIRMED NO. 123,873 – NOVEMBER 19, 2021 2021 KAN. APP. UNPUB. LEXIS 670; 499 P.3D 512; 2021 WL 5409684 Premises Liability Attorneys: Peter J. Antosh, of Garcia & Antosh LLP, Dodge City, for appellant; Penny A. Calhoun, of Wallace Saunders Chartered, for appellee Boot Hill Casino & Resort; and Michael J. Norton, of Foulston Siefkin LLP, Wichita, for appellee Steve’s
Welding. Short Summary: Lacost slipped and fell in the parking lot of the Boot Hill Casino & Resort (Boot Hill), injuring herself. Lacost filed a premises liability lawsuit against Boot Hill and Steve’s Welding (the Contractor), the private contractor hired to remove snow from the lot. The District Court granted summary judgment for Boot Hill and the Contractor based on the winter storm doctrine. Lacost appealed and the Court of Appeals affirmed. BANK OF NEW YORK MELLON V. LUNA JOHNSON DISTRICT COURT – AFFIRMED NO. 123,524– NOVEMBER 19, 2021 2021 KAN. APP. UNPUB. LEXIS 667; 2021 WL 5409672 Reformation and Mortgage Foreclosure Attorneys: Charles S. Scott Jr., Shawnee, for appellants; Aaron M. Schuckman, of Millsap & Singer LLC, St. Louis, Missouri, for appellee. Short Summary: The Lunas failed to make payments on a mortgage held by the Bank of New York Mellon (Bank). The Bank filed a petition for foreclosure on the property subject to the mortgage. Prior to the District Court’s decision in the foreclosure action, the Lunas clandestinely conveyed that property to Las Cumbres LLC (Las Cumbres) through a quitclaim deed. Guillermo Luna is a registered agent of Las Cumbres. The District Court granted the Bank’s motion for summary judgment on the foreclosure action and the Lunas filed a motion for relief from judgment, arguing they were not subject to judgment because they no longer owned the property. Their motion was denied. The Lunas present two arguments on appeal: First, they contend that the District Court’s judgment is invalid because at the time it entered its order, the Lunas no longer had standing, and the Court no longer had subject matter jurisdiction based on the conveyance of the property; Second, they argue that error occurred when the District Court failed to add Las Cumbres as a necessary party to the action in violation of K.S.A. 2020 Supp. 60-219. The Court of Appeals affirmed and held that although Las Cumbres may be considered a necessary party to obtain clear title, error did not result from its absence from the action. About the Author Matthew S. Gough, Lawrence, is a member of Barber Emerson LC. His practice includes real estate, land use, corporate and banking law. Gough received his Juris Doctor from the University of Kansas School of Law and his Bachelor of Arts from the University of Kansas School of Business. Gough is admitted to the bar in Kansas and Missouri. Email: mgough@barberemerson.com
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Probate and Trust Update By Calvin J. Karlin
Barber Emerson LC, Lawrence In the Matter of the Estate of Lanny Lentz Kansas Court of Appeals (Unpublished) August 13, 2021 Attorneys: Jonathan Sternberg, Kansas City, Missouri, for appellant Diann Wyatt; Alan V. Johnson and Aaron R. Bailey of Sloan, Eisenbarth, Glassman, McEntire & Jarboe LLC, Topeka, for appellees Lana Kennedy and Marilyn Lentz. Appellees were successive executors of their father’s estate. Appellant is a third sister who objected to valuations for the estate inventory and final settlement. There is much to distract from the probate principles to be found in this opinion and those factual disputes and procedural difficulties will be ignored here. This second (and different) Court of Appeals panel rejected appellant’s argument that an executor must use certified market appraisals to provide the value for the probate inventory. The panel even noted that the statute does not even require the use of “fair market value,” as K.S.A. 59-1201 just requires a “full and fair value.” As the Court notes, “This establishes a broad standard for acceptable valuations.” The values determined by the executor were “verified” in both the inventory and the petition for final settlement as required by K.S.A. 59-1201 and 59-2201. The Court cited K.S.A. 592213 that the verification of the petition constitutes sufficient proof of the statements made absent a written defense or adverse appearance. Consequently, the executor’s valuations (as verified) constituted sufficient proof. Wyatt provided no contradictory evidence, so she lost. Belmore v. Goldizen Kansas Court of Appeals (Unpublished) September 10, 2021 Attorneys: Peter Charles Rombold, of Hoover, Edward, Pinaire & Rambold, Junction City, for appellants Goldizen; Melissa D. Richards, of Weary Davis LC, Manhattan, for plaintiff-appellee Alma Belmore. Margaret Goldizen removed her mother, Alma Belmore, from her long-time residence in Washington state and put her in an RV on the property where Margaret resided (that was owned by Alma). Margaret persuaded Alma to give her power of attorney and to add her name to Alma’s bank accounts and real estate. Margaret stopped paying rent to Alma for the house she and her husband resided in on Alma’s land, where Alma was in an RV. Margaret also moved Alma’s funds to her own account to “protect” them. The Court found similarities between this case and the oftcited Cresto opinion, 302 Kan. 820, 358 P.3d 831 (2015), as to the suspicious circumstances creating a presumption of undue influence. It upheld the district court’s finding, and noted that
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Margaret did not rebut the presumption of undue influence. A side issue was a finding of competency as to Alma in Washington State but the circumstances supported neither collateral estoppel nor res judicata. The Court also rejected the Goldizens’ argument that the district court should have appointed a guardian ad litem for Alma. The district court had actually appointed an attorney, Catherine Craft, as substitute plaintiff, which the Court held to properly protect Alma’s interest under K.S.A. 60-217 as an incapacitated person. In re Estate of Raney Kansas Court of Appeals (Unpublished) August 6, 2021 Appellant Carl Raney, pro se; Donald F. Hoffman of Dreiling, Bieker & Hoffman LLP, Hays, for appellees. Carl Raney contested his mother’s will. His brother, as executor, moved to enforce a no contest clause. The district court and Court of Appeals did not find “probable cause” for Carl to avoid the imposition of the in terrorem clause The Court of Appeals cited Hamel, 296 Kan. at 1078, for the definition of “probable cause” required to avoid effectiveness of a no contest clause as: “[T]he existence, at the time of the initiation of the proceeding, of evidence which would lead a reasonable person, properly informed and advised, to conclude that there is a substantial likelihood that the contest or attack will be successful.” The district court’s determination was a “negative finding” for which the Court of Appeals did not find arbitrary disregard of undisputed evidence or reliance on some improper extrinsic consideration such as bias, passion or prejudice. In the Matter of the Estate of Mike Valadez Kansas Court of Appeals (Unpublished) January 14, 2022 Appellants Kristopher Valadez and Greg Valadez, pro se. Sarah Doll Heeke, of Doll Law Firm LLC, Dodge City, for appellee. The first notice of appeal was filed prematurely (after the judgment was announced, but before actual entry of the judgment). This is permitted under Supreme Court Rule 2.01(a), but appellant did not docket the appeal within 60 days as required by Rule 2.04(a)(1) so it was deemed abandoned. A second notice of appeal was untimely so appellants’ sister Connie Valadez prevailed on having her father’s will admitted that named her as sole beneficiary and executor.
Probate and Trust Update In the Matter of the Estate of Barbara B. James Kansas Court of Appeals (Unpublished) October 15, 2021
Attorneys: Rhonda K. Levinson and Hale Weirick, of Perry & Trout LLC, Bonner Springs, and Marion L. Stern and Adam C. Mauck, of Stockton & Stern LLC, Gardner, for appellant Thomas James; Calvin J. Karlin and Catherine C. Theisen, of Barber Emerson LC, Lawrence, for appellee Katherine James. This case involves competing wills offered for probate. Thomas challenged the later one as the product of undue influence and testator’s alleged lack of capacity. The district court admitted the later will and appointed testator’s daughter, Katherine, as the named executor. The Court of Appeals acknowledged the district court’s “thorough and well-articulated memorandum opinion.” The Court of Appeals discusses in detail the shifting burdens and standards in a will contest. The Court of Appeals also discussed the standard for appointing the executor named in a will absent unsuitability. A “hostile and distrustful relationship” is not a sufficient reason to reject the testator’s appointment of an executor.
About the Author Calvin J. Karlin, Lawrence, is a member of Barber Emerson LC. His practice includes estate and trust planning and litigation. Karlin received his bachelor’s degree and Juris Doctor from the University of Kansas, where he was Phi Beta Kappa, Order of the Coif, and Kansas Law Review note and comment editor. He is a member of the American College of Trust and Estate Counsel, an executive committee member of the Kansas Bar Association Real Estate, Probate, and Trust Law Section, and serves as editor of the section newsletter. Email: ckarlin@barberemerson.com
The appellate opinion also contains a lengthy discussion of multiple continuances requested by Thomas and why the district court did not err in denying his request for a continuance of the last day of the evidentiary hearing. The Kansas Supreme Court denied Thomas’ request for review.
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IRS Tax Cases, Rulings and Changes in the Federal Law By Lauren G. Hughes Wise & Reber LC
Tax Cases
1. In re Bowman, 632 B.R. 64 (Bankr. E.D. La. 2021) Bowman was a bankruptcy case in which the debtor, a widow, objected to a claim filed by the IRS in the amount of $96,759 by asserting that she qualified for innocent spouse relief under Code Sec. 6015. After the Court walked through (1) the validity of the claim (it was a valid claim) and (2) the burden of proof (because the claim was valid, the dispute for such claim shifted to the debtor), the Court denied the widow’s motion for summary judgment finding that there was a genuine fact dispute as to whether she did in fact qualify for equitable relief under Code Sec. 6015(f). The Court noted: “[A]s a general rule, when married persons file a joint income tax return they become jointly and severally liable for the tax due with respect to that return.” In re Wyly, 552 B.R. 338, 464 [117 AFTR 2d 2016-1508] (Bankr. N.D. Tex. 2016). But “under certain circumstances, such liability could be unfair.” Id. Pursuant to Section 6015(f) of the Internal Revenue Code, a spouse may obtain relief from tax liability if she can establish that under “all the facts and circumstances, it is inequitable to hold [her] liable for any unpaid tax.” Haggerty v. Comm’r, 505 F. App’x 335, 337 [111 AFTR 2d 2013-411] (5th Cir. 2013) (quoting 26 U.S.C. § 6015(f)). “The Commissioner has issued revenue procedures to guide courts in determining whether a requesting spouse is entitled to relief from joint and several liability.” Id. Revenue Procedure 2013-34 provides guidance in this case regarding whether the Debtor is entitled to equitable relief under Section 6015(f) and lists seven general conditions for relief. See Rev. Proc. 2013-34, 2013-43 I.R.B. 397, § 4. Those conditions include (1) The requesting spouse filed a joint return for the taxable year for which she seeks relief; (2) Relief is not available to the requesting spouse under §§ 6015(b) or (c); (3) The claim for relief is timely; (4) No assets were transferred between the spouses as part of a fraudulent scheme by the spouses; (5) The non-requesting spouse did not transfer “disqualified assets” to the requesting spouse as that term is defined in § 6015(c)(4)(B); (6) The requesting spouse did not knowingly participate in the filing of a fraudulent joint return; and (7) The income tax liability from which the requesting spouse seeks relief is attributable in full or in part to an item of the non-requesting spouse or an underpayment resulting from the non-requesting spouse’s income and only to the extent the liability is attributable to the nonrequesting spouse.
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In her request for innocent spouse relief, the Debtor attached a copy of her husband’s Certificate of Death, a letter from her family physician addressing the Debtor’s mental health condition, a copy of her Request for Innocent Spouse Relief submitted to the IRS, a copy of Revenue Procedure 2013-34, and a schedule purported to be generated by the IRS listing tax liability amounts which would have been due by the Debtor if the liability had been based solely on her income for the years 2009 to 2013. The Debtor believed that she submitted sufficient evidence that satisfied her burden to demonstrate that no genuine issue of material fact exists regarding her qualification as an innocent spouse under Section 6015(f). While the IRS relied in large part on sworn documents, the IRS asserted that the evidence alone did not absolve the fact that genuine issues of material fact existed as to whether the Debtor qualifies for equitable relief under Section 6015(f). The Court agreed with the IRS and found that insufficient evidence had been presented to determine whether the Debtor, as a matter of law, qualified for equitable relief under Section 6015(f). Although taxpayer submitted the documents outlined above, she failed to satisfy threshold requirements for relief, including regarding whether income tax liability from which she sought relief was attributable in full or in part to item of husband or underpayment resulting from his income. She also failed overall factors test. The key takeaway from Bowman is that when applying for innocent spouse relief, the applicant must take care that each factor listed in Section 6015(f) be carefully met in the application process. 2. Estate of Lee v. Commissioner (TC Memo 2021-92) In a memo opinion, the Tax Court determined that an estate’s executor was personally liable for the estate’s unpaid estate taxes because he made distributions of estate assets knowing that the estate owed the taxes. An executor is personally liable for the unpaid “claims” of the U.S. to the extent the executor distributes assets from the estate when either (1) the estate was insolvent at the time of the distribution, or (2) the distribution rendered the estate insolvent and the executor had knowledge or notice of the U.S.’s claim. 31 USC §3713(b). A “claim” includes an estate’s federal tax liability. In April 2006, the IRS sent Mr. Frese, a licensed attorney who was Executor of the estate of Kwang Lee, a notice of deficiency claiming the estate owed over $1,000,000 in estate tax. Executor promptly filed a petition in the Tax Court disputing the estate tax claim. In February 2007, while the Tax Court case was pending,
Executor distributed $640,000 of estate assets. As a result of this distribution, the estate retained assets of only $183,000, which was not enough to satisfy the possible estate tax claim.
shares of those broadcasting fees to its member schools. All member schools in the NCAA have agreed not to pay students to participate in intercollegiate varsity sports.
In March 2010, the Tax Court issued a decision finding the estate owed $536,151 in estate tax.
The NCAA and member colleges exercise significant control over the student athletes. For example, the NCAA has bylaws which apply to all student athletes, and the bylaws address “recruitment, eligibility, hours of participation, duration of eligibility, and discipline.” The student athletes are supervised by coaching and training staff, and NCAA Division I member schools are required to have adult supervisors maintain time sheets for participants. They also have handbooks that contain standards for controlling student athletes’ performance and conduct.
In 2013, the IRS sent the Executor a notice of federal tax lien. In response to the lien notice, Executor submitted an offer-incompromise based on doubt as to collectibility, to settle the estate tax claim. The IRS declined the offer-in-compromise as too low because it determined that the estate’s reasonable collection potential included amounts it could collect from Executor under the federal priority statute. The estate argued that Executor didn’t have knowledge or notice of the estate tax claim as required under the federal priority statute. As a result, he wasn’t personally responsible for the estate tax claim so the IRS couldn’t collect from Executor. The Court ruled that the Executor was personally liable for estate tax claim. According to the Tax Court, the Executor had both knowledge and notice of the estate tax claim in February 2007 when he distributed the estate’s assets. First, the Tax Court found that the Executor had notice of the estate tax claim because in April 2006 he received a deficiency notice from the IRS. According to the Tax Court, a notice of deficiency with respect to estate tax liabilities received by an executor before the distribution of estate assets satisfies the notice requirement in the federal priority statute.
NCAA D-I member schools impose discipline, including suspension and dismissal from a team, in instances of specified misconduct. NCAA D-I member schools also publish supplemental handbooks with standards used to control the performance and conduct of student athletes both on and off the field. These handbooks contain rules regarding agents, prohibiting certain categories of legal gambling, and restricting social media use, including restrictions on making derogatory comments about other teams. NCAA D-I member schools also have team policies that restrict the legal consumption of alcohol and legal use of nicotine products by student athletes.
Second, the Tax Court determined the Executor had actual knowledge of the estate tax claim because he was a named party in the Tax Court petition the estate filed disputing the deficiency notice it received in April 2006.
Based upon these factual allegations, the complaint asserted that student athletes are the employees of Defendants, including the associated schools defendants (ASD). The athletes asserted claims for violations of the Fair Labor Standards Act (FLSA) 29 U.S.C. § 200 et seq., the Pennsylvania Minimum Wage Act (“PMWA”), the New York Labor Law,(“NYLL”), and the Connecticut Minimum Wage Act (“CMWA”) and that they are employees of the schools and thus are entitled to be compensated. The ASD moved to dismiss the complaint pursuant on the ground that they do not employ the student athletes.
The Tax Court also noted that the Executor, a licensed attorney, made the February 2007 distribution knowing that the IRS had determined an estate tax deficiency against the estate, and that an action disputing that deficiency claim was pending before the Tax Court. Under these circumstances, Executor “made the February 2007 distribution at his own peril and any advice he may have received” from a tax professional regarding the distribution did not absolve him from liability.
The court determined that out of several tests for determining an employment relationship, the one best suited in this situation was Glatt v. Fox Searchlight Pictures Inc., 811 F.3d 528, 536-37 (2d Cir. 2016), which examined the relationship between interns and their employer. The Glatt court outlined a list of factors that put more reliance on who the primary beneficiary is in the relationship. For example, some of the factors include
3. Johnson v. Nat’l Collegiate Athletic Ass’n, Civil Action 19-5230 (E.D. Pa. Aug. 25, 2021)
• The extent to which the intern and employer understand that there is no expectation of compensation (any express or implied promise of compensation supports a finding that the worker is an employee); • The extent to which the internship provides training that would be similar to that which would be given in an educational environment; • The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit; • The extent to which the internship accommodates the intern’s academic commitments by corresponding to the
In Johnson, the plaintiffs were all student athletes in a variety of sports and National Collegiate Athletic Association (NCAA) schools. While the NCAA is not an unfamiliar organization to most, in its most basic form, the NCAA is an association that regulates intercollegiate sports and has jurisdiction over approximately 1,100 schools and nearly 500,000 student athletes. It has multi-year, multi-billion dollar contracts with broadcasters ESPN, CBS, and Turner Sports to show sporting events between NCAA member schools, and it distributes
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academic calendar; • The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning; • The extent to which the intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern. The court noted that it is important in these cases to look to the economic realities of the relationship in determining employee status under the FLSA. The court analyzed the facts pursuant to those set forth the Glatt case, and held that the complaint plausibly alleges that student athletes are employees of the ASD under the Glatt test and denied the motion for summary judgment. 4. Gaston v. Commissioner (T.C. Memo. 2021-107) In Gaston, the taxpayer began an acting career following her retirement from marketing. She took several business deductions related to her acting pursuits, but clearly showed on her return that she had a clear profit objective in pursuing an acting career — that her acting career was not just a hobby in which she was attempting to offset her expenses. Notably, she secured roles in feature-length films; she spent 35-45 hours per week researching, applying, or auditioning for other roles; trained to enhance her skills through acting and voice lessons; retained an assistant and agent to help her obtain new roles; and otherwise carried on activity in a businesslike manner. The IRS denied these deductions and stated that the taxpayer couldn’t have had genuine profit objective because her daughter was a famous actress and the taxpayer could have had her daughter help her secure more roles if she was rejected. Essentially, the work she did in furthering her acting career, and the expenses she incurred, were superfluous because of her relationship with an established, successful actor. Ultimately, the deductions she took in relation to her acting pursuits were shown to be proper, however, the taxpayer failed to show that another side activity (jewelry sales) was engaged in for profit; rather, the fact that she devoted only 10 hours per week, didn’t seek out expert in industry, and that she didn’t make sustained effort to sell to general public and had only intermittent sales to former associates, showed lack of profit objective for that activity. 5. Nelson v. Comm’r, T.C. Memo. 2020-81 (U.S.T.C. Jun. 10, 2020) The Nelson decision was a gift tax deficiency case involving taxpayers’ gift and sale to a family trust of limited partner interests in a family partnership whose primary asset comprised stock interest in a family holding company. The Tax Court affirmed the deficiency. The taxpayer reported that the transfers were fixed dollar amounts, but when reviewing the plain language of the transfer instruments, the Court determined that the transfers
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were actually specific percentages of the limited partner interests. The language specifically provided that the sale was for “TWENTY MILLION AND NO/100THS DOLLARS ($20,000,000.00) as of January 2, 2009, as determined by a qualified appraiser within one hundred eighty (180) days of the effective date of this Assignment …” The transferred interests are expressed in the transfer instruments as an interest having a fair market value of a specified amount as determined by an appraiser within a fixed period. The clauses hang on the determination by an appraiser within a fixed period; value is not qualified further, for example, as that determined for federal estate tax purposes. See, e.g., Estate of Christiansen v. Commissioner, 130 T.C. 1, 14-18 (2008) (upholding gift clause providing fair market value “as such value is finally determined for federal estate tax purposes”), aff ’d, 586 F.3d 1061 (8th Cir. 2009); Estate of Petter v. Commissioner, 2009 WL 4598137, at *11-*16 (upholding gift clause transferring the number of units of a limited liability company “that equals one-half the minimum * * * dollar amount that can pass free of federal gift tax by reason of Transferor’s applicable exclusion amount” along with a clause providing for an adjustment to the number of units if the value “is finally determined for federal gift tax purposes to exceed the amount described” in the first clause). The Court specifically stated “fair market value” here already is expressly qualified. By urging us to interpret the operative terms in the transfer instruments as transferring dollar values of the limited partner interests on the bases of fair market value as later determined for federal gift and estate tax purposes, petitioners ask us, in effect, to ignore “qualified appraiser * * * [here, Mr. Shrode] within * * * [a fixed period]” and replace it with “for federal gift and estate tax purposes.” While they may have intended this, they did not write this. Any attempts by the taxpayer to analogize the language as a formula clause were also rejected. The IRS deficiency calculation was upheld. 6. Smaldino v. Commissioner (T.C. Memo. 2021-127) Smaldino owned and operated numerous rental properties in southern California. He placed 10 of these properties in Smaldino Investments LLC, which he owned through a revocable trust. In 2013 he transferred about 8% of the LLC class B member interests to the Smaldino 2012 Dynasty Trust, an irrevocable trust that he had created a few months earlier for the benefit of his children and grandchildren. Around the same time, petitioner purportedly transferred about 41% of the LLC class B member interests to his wife, Agustina Smaldino, who purportedly retransferred them to the Dynasty Trust the next day. On Smaldino’s 2013 gift tax return, he reported as a taxable gift only the approximately 8% of the LLC class B membership interests he had transferred directly to the Dynasty Trust. The IRS determined that Smaldino had actually made a taxable gift to the Dynasty Trust of 49% of the class B membership interests, including the approximately 41% interest that passed
from Smaldino to the Dynasty Trust indirectly through Mrs. Smaldino. After revaluing the LLC interests, respondent determined that Smaldino had a $1,154,000 gift tax deficiency for 2013. This case involved the indirect gift doctrine. The Court reviewed the operating agreement for the LLC, looked at whether Mrs. Smaldino had any real incidents of ownership, and whether or not this transaction was in appearance only. Ultimately, the Court determined that the “substance over form” principle weighed in favor of the IRS and upheld the deficiency. Of importance to the Court (1) The Operating Agreement expressly prohibited Mrs. Smaldino from owning any interest in the LLC. (2) Mrs. Smaldino testified that she would not have disposed of the interest in any other way than gifting it to the LLC. (3) Mrs. Smaldino testified that her husband planned to make arrangements for her outside of the LLC if she used her estate and gift tax exemption to make the gift to the Dynasty Trust. (4) The tax return for the LLC in the year in question did not report Mrs. Smaldino as an owner. (5) Mrs. Smaldino never reported any of the income tax earnings or ownership on her own personal return. While there were several other factors that the Court reviewed, it is important for practitioners to be aware in this climate of the indirect gift doctrine and to be careful of “substance over form” in every gifting transaction you may do with clients.
Rulings 1. PLR 202133005 In PLR 202133005 (Aug. 20, 2021), the IRS, in a private letter ruling, stated that the division of a common trust fund for the grantors’ children and more remote descendants into separate trusts for each child and his or her descendants would cause no adverse income or generation-skipping transfer tax consequences. In particular, the IRS stated that (1) The pro-rata transfer of assets from the original trust into the newly created trusts will not result in treating any property of the original trusts as being paid, credited, or distributed for purposes of Code Sec. 661 or the regulations thereunder, and will not result in realization of income, gain, or loss by the original trust, the newly created trusts, or any beneficiary. (2) The newly created trusts will be treated as separate trusts for federal income tax purposes pursuant to Code Sec. 643(f). (3) The tax basis that the newly created trusts will have in the assets of the original trust will be the same as the tax basis of the original trust immediately before the transfer of those assets. (4) Each historic asset of the original trust will have the same holding period immediately after the transfer to the newly created trusts that it had immediately before
the transfer. (5) Each of the newly created trusts will succeed to, and take into account, an equal portion of any net operating loss carryforward, net capital loss, and other tax attributes, including passive activity losses and credit carryforwards and statutory depletion deductions, of the original trust, and each asset transferred to the newly created trusts will have the same tax attributes immediately after the division that it had immediately before the division. (6) The GST inclusion ratio of the newly created trusts will be the same as that of the original trust. 2. Late Portability Elections – Reminder! The IRS, in seven private rulings, allowed executors to make a late election of portability for a decedent’s estate, because the estate was under the filing threshold. In each ruling, the decedent died, survived by a surviving spouse. The value of each decedent’s gross estate was less than the basic exclusion amount in the year of death, including lifetime taxable gifts. In each ruling, the IRS allowed a late election for portability. The IRS does not permit a late portability election when the estate is over the filing threshold, even if no estate tax was owed due to the marital, charitable, or other deductions. Please note: Rev Proc 2017-34, 2017-26 IRB 1282 permits executors to file a late estate tax return electing portability without a private ruling, if: (i) the executor files a complete and properly prepared estate tax return (Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return), by the second anniversary of the decedent’s death; (ii) the executor states at the top of the form that the return is “FILED PURSUANT TO REV. PROC. 2017-34 TO ELECT PORTABILITY UNDER § 2010(c)(5)(A)”; (iii) the decedent was survived by a spouse; (iv) the decedent died after December 31, 2010; (v) the decedent was a U.S. citizen or resident on the date of death; (vi) the executor is not otherwise required to file an estate tax return because the gross estate was less than the filing threshold; and (vii) the executor did not file a timely estate tax return. This procedure cannot be used for estates that are above the filing threshold, even if no tax was due because of the marital or charitable deduction.
Changes in Federal Law 1. Infrastructure Investment and Jobs Act On November 5, 2021, Congress passed a $1.2 trillion bipartisan infrastructure bill known as the Infrastructure Investment and Jobs Act (the Bill). The Bill includes $550 billion in new spending on infrastructure during the next five years. The Bill was initially passed by the Senate in August, but was stalled in the House of Representatives for several months. Notably, several Democrats insisted that the Bill be tied to the Build Back Better Act. This was eventually rejected. The Bill calls for the repair of 20,000 miles of roads and 10 of the country’s most economically important bridges;
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modernization of public transit, including addressing the repair backlog of more than 24,000 buses, 5,000 rail cars, 200 stations and thousands of miles of track and power systems; removal of lead pipes to improve the quality of drinking water; expansion of the nation’s freight and passenger rail network, including the construction of new rail corridors and transit lines; reduction of commute times by alleviating rail and roadway congestion; extending broadband internet access to rural areas, low-income families and tribal communities; and enhancement of grant and loan programs that support passenger and rail safety. The Bill includes investments in the following areas:
communities divided by transportation infrastructure, such as highways. Water Infrastructure The Bill allocates $50 billion to protect against droughts and floods and for investment in other weatherization to reduce the impact of climate change, including $3.5 billion in flood mitigation assistance grants. Drinking Water The Bill allocates $55 billion to drinking water, wastewater, and storm water infrastructure funding.
Passenger and Freight Rail The Bill allocates $66 billion to eliminate Amtrak’s maintenance backlog, modernize the Northeast Corridor and extend rail service outside of the northeast and midAtlantic. The Bill allows Congress to take additional action to invest another $36 billion for rail by 2026.
High-Speed Internet The Bill includes $65 billion to bring high-speed internet to every American through broadband infrastructure improvement and expansion, and by requiring service providers who receive federal funding to offer a low-cost plan, thereby improving price transparency and increasing competition.
Public Transit The Bill allocates $39 billion to modernize transit, including repairing and upgrading bus and rail fleets and extending transit services to more communities.
Environmental Remediation The Bill includes $21 billion to remediate environmental hazards, including the clean-up of superfund and brownfield sites.
Roads, Bridges, and Major Projects The Bill allocates $110 billion for roads, bridges and major projects, including $40 billion of funding for bridge repair, replacement and rehabilitation and $16 billion for major projects that would be too large or complex for traditional funding programs.
About the Author Lauren G. Hughes, McPherson, is a member of Wise & Reber LC and practices in the areas of estate planning, estate and trust administration, and business law. She received her Bachelor of Arts in both English and American studies from the University of Kansas in 2013 and her law degree from the University of Kansas School of Law in 2016.
Electric Vehicle Infrastructure The Bill includes $7.5 billion to invest in a national network of electric vehicle chargers. Electric Buses The Bill includes $2.5 billion for zero emission buses, $2.5 billion in low emission buses and $2.5 billion for ferries. Airports, Ports and Waterways The Bill provides $17 billion for port infrastructure and $25 billion in airport repairs, maintenance and emission and congestion reduction. Safety The Bill provides $11 billion for transportation safety programs to reduce crashes and fatalities, with a particular focus on bicyclists and pedestrians. Power Infrastructure The Bill designates $65 billion for upgrades to power infrastructure, research and development of transmission and electricity distribution technologies, and smart grid technologies. Reconnecting Communities The Bill provides $1 billion to reconstruct street grids and other infrastructure as part of an effort to reconnect
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She currently serves on the University of Kansas School of Law’s Board of Governors. In 2020, Lauren was named the Kansas Bar Association’s Outstanding Young Lawyer of the Year. Email: lhughes@bwisecounsel.com
