Fall 2021 KBA REPT Section Newsletter

FALL 2021 In This Issue

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President’s Message

Real Estate Update

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President’s Message

By Kent Meyerhoff Fleeson, Gooing, Coulson & Kitch, L.L.C. This is my last President’s Column, as I hand the baton to Vern Jarboe. It’s been a privilege to serve in this role for the past two years. Our section is among the more active sections when it comes to proposing and monitoring legislation that affects our members, putting together CLE programs, putting out a regular newsletter, and trying to keep its members involved and informed.

By Kent Meyerhoff

By Matthew S. Gough

Probate and Trust Law Update

By Calvin J. Karlin

Tax Cases and Rulings Affecting the Estate & Business Succession Planner

By Mike Cannady

About the Author Kent A. Meyerhoff, Wichita, is an attorney at Fleeson, Gooing, Coulson & Kitch, L.L.C. Meyerhoff received a BA from Wichita State University in 1991, and a JD from the University of Nebraska in 1994.

He is a member of the Wichita, and Kansas bar associations; he is on the executive committees of the KBA Real Estate, Probate, and Trust Law Section; he is a Fellow of the American College of Trust and Estate Counsel; and he is recognized in the publications Best Lawyers in America and Super Lawyers Magazine.

Email: kmeyerhoff@fleeson.com

Most of our section’s activities are organized and carried out by our section’s Executive Committee, with the assistance and prodding of our outstanding KBA staff. I’d like to use my last column to give special thanks to Cal Karlin who has served as Editor of our section’s Newsletter for as long as anyone (including Cal) can remember. I’m probably a bit biased, but I don’t think there’s another section that does a better job of putting out a quality, regular newsletter, and that wouldn’t happen without Cal. So, thank you, Cal. We also appreciate those who regularly write the articles that appear in the newsletter.

In addition to serving as Editor, Cal also writes the probate section of the newsletter, and Matt Gough writes the real estate section. Starting with this issue, Lauren Hughes is assuming the task of writing the tax section of the newsletter, taking over the role my partner Mike Cannady and I have tag-teamed to fill the last few years.

The section can’t do its work without its members being willing to step up and become involved. If any of you are interested in getting more involved, whether by serving on the Executive Committee, presenting at a CLE program, or in some other way, please let one of our section’s officers (listed below) know, or contact Deana Mead at the KBA and she can help connect you with the appropriate person.

Finally, we are excited to be bringing back the Plaza Lights program in December.

Plaza Lights had been a staple CLE program for many years and has been on a brief hiatus due to waning attendance. It’s my understanding this year’s program will be the KBA’s first in-person CLE since the pandemic, and we look forward to seeing many of you there. Details for the program are still being worked out, but based on the preliminary information I’ve heard, it’s going to be a great program.

Our newly elected section officers are: President – Vern Jarboe President-Elect – Kevin Mitchelson Secretary/Treasurer – Mark Anderson Editor – Cal Karlin Legislative Liaison – Scott Jensen CLE Liaison – Kent Meyerhoff

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Real Estate Update

By Matthew S. Gough, Barber Emerson, L.C., Lawrence

Kansas Supreme Court JAYHAWK RACING PROPERTIES, LLC V. CITY OF TOPEKA COURT OF APPEALS – REVERSED SHAWNEE DISTRICT COURT – AFFIRMED NO. 118,035 – April 9, 2021 484 P.3d 250; 2021 Kan. LEXIS 37; 2021 WL 1323817 Enforcement of City Bond Commitment Attorneys: Cynthia J. Sheppeard, of Goodell, Stratton, Edmonds & Palmer, LLP, of Topeka, argued the cause, and Wesley A. Weathers and Patricia E. Riley, of the same firm, were with her on the briefs for appellants. Catherine P. Logan, of Lathrop Gage LLP, of Overland Park, argued the cause, and Thomas V. Murray and Mark A. Samsel, of the same firm, were on the briefs for appellee. Amanda L. Stanley, general counsel, of League of Kansas Municipalities, amicus curiae.

Facts: The City of Topeka entered into an agreement with private owners to assume full ownership of a motor speedway, the rights to which would be paid through Sales Tax and Revenue (STAR) bonds. The City subsequently decided not to fulfill the terms of the agreement. The private owners filed suit seeking damages for breach of contract. Holding that the agreement was an exercise of a governmental function and not binding on successive City Councils, the district court granted the City’s motion to dismiss. The Court of Appeals reversed, holding that the agreement was an exercise of an administrative function, and remanded for proceedings on the breach of contract action. This court granted the City’s petition for review.

Issue: Whether an agreement entered into by a prior city council, requiring the City of Topeka to implement a STAR bond plan and use good faith reasonable efforts to issue STAR bonds, constituted the exercise of a governmental function (which the next city council could decline to implement), or the exercise of a binding proprietary function?

Holding: The Supreme Court considered the jurisprudence distinguishing governmental or legislative functions, on the one hand, and proprietary or administrative functions, on the other hand, and held that one governing body of a city can not obligate future governing bodies to issue STAR bonds.

The issuance of STAR bonds is, the Court held, the exercise of governmental policy-making powers that cannot be contracted away. The Court’s opinion included a reminder to “parties that dive into the murky waters of municipal contracts, not knowing whether bonds will be approved,” that in Kansas “legislative bodies may not bind future legislative bodies to their governmental decisions” and “[p]arties contracting with municipal corporations are deemed to understand the law of this State, and they knowingly assume the risk.”

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Note on Concurring Opinion: Justice Stegall concurred, but questioned the ongoing validity and viability of the legal distinction between “governmental” and “proprietary” municipal functions. Justice Stegall cited multiple examples where legal scholars and commentators have argued that the distinction is “practically unworkable and conceptually incoherent” and is “notorious for its inconsistent and unprincipled applicability.” To Justice Stegall’s point, the Court’s opinion noted that “[n]o single act of a governing body is likely to be solely governmental or solely proprietary in nature.” 484 P.3d at 254 (citing McAlister v. City of Fairway, 289 Kan. 391, 402, 212 P.3d 184 (2009)). There appears to be a clear public purpose in knowing exactly if, and when, a city approval of a development incentive is “final.”

FAIRFAX PORTFOLIO LLC V. CAROJOTO LLC, ET AL. WYANDOTTE DISTRICT COURT – REVERSED AND REMANDED NO. 118,712 – September 11, 2020 312 Kan. 92; 472 P.3d 53; 2020 Kan. LEXIS 90; 2020 WL 5490994 Mortgagee in Possession Attorneys: Douglas J. Patterson, of Property Law Firm, LLC, of Leawood, for appellant; Christopher J. Sherman and Jon W. Gilchrist, of Payne & Jones, Chartered, of Overland Park, for appellees.

Facts: Fairfax Portfolio, LLC (Fairfax) was in default under the terms of a promissory note held by defendants (Carojoto). The note was secured by a mortgage. Without warning to Fairfax, Carojoto took possession of the property, consisting of 300,000 square feet of commercial real estate in Wyandotte County. Fairfax demanded the immediate return of possession, and Carojoto refused. Carojoto then filed a mortgage foreclosure action, and ultimately obtained a journal entry of judgment and acquired title to the real estate by sheriff ’s deed. Approximately one year later, Fairfax sued Carojoto and claimed Carojoto improperly took possession of the property prior to the foreclosure action and caused Fairfax damages. Carojoto filed a motion to dismiss, arguing that the remedies portion of the mortgage granted Carojoto a right to possession following any event of default. The District Court granted Carojoto’s motion. A Court of Appeals panel reversed the District Court, holding that Carojoto’s reliance on the provisions of executory agreements is unsupported by Kansas law and the facts do not support an exception. Fairfax Portfolio, L.L.C. v. Carojoto, L.L.C., 435 P.3d 180, 2019 WL 986149, at 6 (Kan. App. 2019). Carojoto appealed to the Supreme Court of Kansas.

Issues: Whether a mortgagee may take possession of mort-

Real Estate Update gaged real property without the mortgagor’s consent, when the mortgage instrument grants that remedy to the mortgagee upon an event of default?

Held: The Court held: “A mortgagee is not entitled to possession of the property without the mortgagor’s consent. Kansas precedent is clear that the mortgage instrument alone is unable to provide the express consent necessary for a lender to take possession of real estate prior to a valid court action.

Although it may intuitively run contrary to the freedom to contract, Kansas established in its infant years that the right of a borrower to retain possession—even in default—is paramount. Therefore, any language in the mortgage agreement between Carojoto and Fairfax which would give Carojoto the ability to take possession of the property is simply unenforceable in light of this court’s historical interpretation of K.S.A. 58-2301.” 312 Kan. at 98. Affirmed and remanded with instructions.

Statutes: K.S.A. 58-2301.

Kansas Court of Appeals – Summary of Unpublished Opinions G S CAPITAL MANAGEMENT, LLC V. WHITE SEGDWICK DISTRICT COURT – AFFIRMED NO. 121,622 – July 24, 2020 2020 Kan. App. Unpub. LEXIS 498; 467 P.3d 539; 2020 WL 4251062 Setting Aside Sheriff ’s Sale Attorneys: Kenneth M. Clark, of Kenneth M. Clark, P.A., of Wichita, for appellants; Frank M. Ojile, of Wichita, for appellee.

Short Summary: Bank of the Panhandle (Panhandle) made a loan to the Whites to purchase a home in Sedgwick County, Kansas. The loan was evidenced by a promissory note and secured by a mortgage. The Whites defaulted, and Panhandle foreclosed. After Panhandle moved for summary judgment in the foreclosure case, the Whites filed Chapter 13 bankruptcy.

In their bankruptcy filing, the Whites indicated the value of their house was $250,000. Panhandle obtained stay relief in the bankruptcy case and obtained an in rem judgment against the Whites. At a sheriff ’s sale held after Panhandle obtained the in rem judgment, Panhandle entered a credit bid of $150,000 – a significant deficiency below what the Whites owed on their mortgage. After that sale, G S Capital Management, LLC (G S Capital) approached Panhandle about purchasing the judgment from Panhandle for $185,000. Panhandle moved to set the original sale aside, and the Whites opposed the sale. The Whites claimed that setting aside the sale would cut short their

right to redeem the property at the price Panhandle had bid.

The District Court granted Panhandle’s motion, ruling that a refusal to do so would be inequitable since the amount bid was $90,000 less than the Whites’ debt, even without interest.

G S Capital bought Panhandle’s judgment against the Whites for $185,000 and was substituted as the plaintiff in the foreclosure action. A second sheriff ’s sale was scheduled, and the Whites filed and argued a motion for reconsideration of the District Court’s decision to set aside the original sheriff ’s sale.

The District Court denied the Whites’ motion, and the second sale proceeded as scheduled. At the second sale, G S Capital bid $306,187.89 – the full amount of the in rem judgment.

The District Court affirmed the second sale without objection from the Whites. The Whites appealed the District Court’s decision to set aside the first sheriff ’s sale and the denial of their motion to reconsider. Reviewing the matter for an abuse of discretion, the Court of Appeals affirmed.

RINGNECK FARMS LLC V. STEUWE, ET AL. OTTAWA DISTRICT COURT – AFFIRMED IN PART, REVERSED IN PART AND REMANDED WITH DIRECTIONS NO. 121,879 – September 4, 2020 2020 Kan. App. Unpub. LEXIS 631; 471 P.3d 33; 2020 WL 5268234 Measure of Damages Attorneys: Troy D. Renkemeyer, of Renkemeyer Law Firm LP, of Overland Park, for appellant, Richard P. Billlings and Craig C. Blumreich, of Larson & Blumreich Chtd, of Topeka, for appellant. Dr. Bradley Steuwe and Fried Enterprises L.P., Cynthia J. Sheppeard, of Goodell, Stratton, Edmonds & Palmer LLP, of Topeka, for appellees C & W Ranch; and Joel Wimer, Michael L. Hughes, of McCormick Gordon Bloskey & Poirier PA of Overland Park, for appellee Hurtig Farms LLC. Short Summary: Ringneck Farms LLC owned land (Ringneck Property) which contained a row of hedge trees. The owners of the neighboring property (Fried Property), Fried Enterprises L.P., or those in its employ, allegedly cut down Ringneck’s trees without permission. Ringneck sued for negligence, gross negligence, conversion, and trespass. Ringneck’s expert witnesses were prepared to testify that the replacement cost of the trees was over $1 million dollars. The owners and employees of the Fried Property filed a motion in limine to bar Ringneck from presenting evidence regarding the replacement value of the trees, arguing that under Kansas law the replacement value was not a proper measure of damages. The district court agreed and granted the motion in limine. Subsequently, the owners, lessees, and contractors of the Fried Property filed a motion for summary judgment arguing that given Ringneck’s reliance on the replacement value of the trees for damages Ringneck was unable to prove damages. The district court agreed and granted the motion

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Real Estate Update for summary judgment. Ringneck appeals and argues that it had alternative ways to prove damages including a more reasonable replacement value based on the cost of replacing the trees with saplings that would be admissible. The Court of Appeals affirmed the District Court’s ruling on the motion in limine as it relates to introduction of evidence of damages in excess of $1 million for replacement of trees removed from the Ringneck Property with mature trees. The Court reversed, however, the District Court’s grant of summary judgment to the Defendants and found that Ringneck presented sufficient evidence of alternative damages to move forward with trial.

LAMBERT V. CITY OF LEAWOOD JOHNSON DISTRICT COURT – AFFIRMED NO. 121,649 – September 11, 2020 2020 Kan. App. Unpub. LEXIS 637; 471 P.3d 36; 2020 WL 5491377 Nonconforming Use Attorneys: John M. Duggan and Andrew I. Spitsnogle, of Duggan Shadwick Doerr & Kurlbaum LLC, of Overland Park, for appellants, Michael K. Seck, of Fisher, Patterson, Sayler & Smith, LLP, of Overland Park, for appellee.

Short Summary: Lamberts lost their house to a fire in December 2017, and sought permission from the City of Leawood to build a significantly larger replacement home on their lot. The City refused because the dwelling would not comply with the residential zoning restrictions. The Lamberts filed a declaratory judgment action in District Court on the grounds that their original house was a protected nonconforming use under zoning changes adopted in 2010 and 2017, so they should be able to apply that protection to their proposed replacement. They also submitted the City improperly enacted the restrictions, rendering them unenforceable. On cross-motions for summary judgment, the District Court sided with the City, and the Lamberts appealed. The Court of Appeals affirmed.

The Lamberts had a vested right to maintain their original house as a particular nonconforming use predating the zoning changes in 2010 and 2017. But they did not have a right to a new and demonstrably more expansive nonconforming use. Their proposed replacement house represented a materially greater deviation from the zoning restrictions, especially in square footage, and, like the original structure, would have been too tall. The proposed replacement, therefore, did not constitute a valid nonconforming use, since it did not predate the zoning changes.

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RINEY V. MCGUIRE JOHNSON DISTRICT COURT – AFFIRMED NO. 121,270 – September 11, 2020 2020 Kan. App. Unpub. LEXIS 632; 471 P.3d 36; 2020 WL 5490993 Real Estate Dispute Attorneys: Appellant appeared pro se; Deron A. Anliker and Alexander J. Aggen, of Duggan Shadwick Doerr & Kurlbaum LLC, of Overland Park, for appellees.

Short Summary: As noted in the memorandum opinion, this case involved a property dispute between the Rineys, as landlords, and McGuire, as tenant. After renting a house to McGuire for several years, the Rineys sued McGuire to retake possession of the house and recover unpaid rent. McGuire asserted several counterclaims, including one seeking reimbursement for improvements he claimed he made to the house.

The District Court granted summary judgment for the Rineys on their possession claim and on all McGuire’s counterclaims other than his reimbursement claim. After a bench trial on the remaining issues, the District Court awarded the Rineys $11,000 in damages for unpaid rent and found McGuire had not proven his reimbursement claim. On appeal, McGuire contended the District Court improperly granted summary judgment for the Rineys, denied him a right to a jury trial, prevented him from presenting evidence on his reimbursement counterclaim, and wrongly excluded two appraisal documents.

The Court of Appeals affirmed the District Court’s judgment.

FIRST SECURITY BANK V. BUEHNE MEADE DISTRICT COURT – AFFIRMED NO. 121,765 – September 18, 2020 2020 Kan. App. Unpub. LEXIS 643; 471 P.3d 730; 2020 WL 5580498 Statute of Limitations; Waiver Attorneys: Zachary D. Schultz, of Schultz Law Office, P.A., of Garden City, for appellants; James C. Dodge, of Sharp McQueen, P.A., of Liberal, for appellee.

Short Summary: 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, holding that the fiveyear statute of limitations in K.S.A. 60-511 can be waived and is not jurisdictional (citing State v. Sitlington, 291 Kan. 458, 463, 241 P.3d 1003 (2010)).

Real Estate Update KAUFMAN V. OLDENETTEL RENO DISTRICT COURT – AFFIRMED NO. 120,847 – September 18, 2020 2020 Kan. App. Unpub. LEXIS 644 *; 471 P.3d 731; 2020 WL 5581726 Breach of Contract Attorneys: Shannon S. Crane, of Hutchinson, for appellant; John B. Swearer and Adam M. Teel, of Martindell Swearer Shaffer Ridenour LLP, of Hutchinson, for appellees.

Short Summary: Kaufmans sold land on contract in 2011 to McNew through his agent Oldenettel. The transaction unraveled about six years later when the Kaufmans sued both McNew and Oldenettel for breach of the contract. McNew counterclaimed against the Kaufmans, contending they had first breached the contract and cross-claimed against Oldenettel. The District Court granted summary judgment to the Kaufmans and after a series of proceedings on remedy entered an order giving them possession of the land. McNew appealed. The Court of Appeals affirmed.

DEUTSCHE BANK NATIONAL TRUST COMPANY V. HINDS LINN DISTRICT COURT – AFFIRMED NO. 121,839 – November 13, 2020 2020 Kan. App. Unpub. LEXIS 768; 475 P.3d 1294; 2020 WL 6685336 Reformation and Mortgage Foreclosure Attorneys: Ronald P. Wood, of Clyde & Wood, LLC., of Overland Park, for appellants; Charles R. Curran, of Settle & Pou, P.C., of Dallas, Texas, for appellee.

Short Summary: In 2005, the defendants (the Hinds) granted a mortgage to a predecessor in interest to Deutsche Bank National Trust Company (Bank). Bank subsequently became the holder of the note and the assignee of the mortgage. In 2009, the Hinds noticed that the legal description in the mortgage included more acreage than the Hinds actually owned, and requested that Bank correct the error. Bank granted a partial release of mortgage in 2009. The partial release, however, erroneously released the entire mortgaged parcel. The Hinds discovered the error in 2013 but did not inform Bank.

The Hinds then ceased making payments on the loan. Bank filed to foreclose the mortgage in 2016. The Hinds counterclaimed for fraud and slander of title. Mr. Hinds testified in his deposition that he ceased making payments because he had discovered the error in the Partial Release while researching his mortgage. The District Court held that the Hinds were estopped from asserting a statute of limitations defense to prevent reformation of the partial release or, in the alternative, that Bank was entitled to an equitable lien on the mortgaged property based on the parties’ clear intentions. The

Court of Appeals affirmed. The Court of Appeals also affirmed the District Court’s decision to strike the Hinds’ expert witness testimony, citing decisions by multiple other courts finding the expert’s prior testimony to be unreliable, dubious, speculative and unintelligible.

JENSEN V. MAGUIRE DICKINSON DISTRICT COURT – AFFIRMED NO’s. 120,551, 121,056 – December 11, 2020 2020 Kan. App. Unpub. LEXIS 814; 477 P.3d 274; 2020 WL 7290642 Real Estate Contract Dispute Attorneys: Tai J. Vokins and Krystal L. Vokins, of Sloan, Eisenbarth, Glassman, McEntire & Jarboe, L.L.C., of Lawrence for appellant; no appearance by appellee.

Short Summary: Jensen (Buyer) and Maquire-McMillan (Seller) entered into a real estate contract with a closing date more than a year after the execution date, and signed a financing addendum that called for seller financing. The deal fell apart prior to closing and “turned into a strange civil action with each party alleging the other breached the contract for sale.” The District Court entered judgment for Buyer rescinding the contract and ordering Seller to return Buyer’s earnest money. The District Court also entered judgment for Buyer’s attorneys’ fees, consistent with the contract. Seller appealed.

The Court of Appeals found no reversible error and affirmed.

RICHARDS V. SMITH RENO DISTRICT COURT – AFFIRMED NO. 122,728 – May 14, 2021 2021 Kan. App. Unpub. LEXIS 269; 486 P.3d 685; 2021 WL 1945154 Latent Defect Attorneys: Cody R. Smith, of Hutchinson, for appellants, Gregory D. Bell, of Bell and Robinson LLC, of Hutchinson, for appellee.

Short Summary: Richards and Harman (Buyers) purchased a home in Hutchinson from Smith (Seller). The home utilized a septic system with a lateral field located on a neighbor’s property. After closing, the septic system failed and Buyers were required to install a new system on their own property. Seller testified that they have no prior problems with the septic system and the neighbor testified that Seller had never complained to him about the septic system. Seller testified that they told Buyers that the lateral field was located on the neighbor’s property, but the Buyers testified that Seller did not tell them. Buyers alleged Seller committed fraud by silence or, alternatively, sought reformation of the real estate contract based upon unilateral mistake. After a bench trial, the District Court concluded that Buyers did not meet their evidentiary

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Real Estate Update burden. The Court of Appeals affirmed.

WILMINGTON SAVINGS FUND SOCIETY, FSB V. HOLVERSON, ET AL. JOHNSON DISTRICT COURT – REVERSED AND REMANDED NO. 122,179 – May 14, 2021 2021 Kan. App. LEXIS 20; 2021 WL 1945164 Statute of Limitations Attorneys: William H. Meyer, of Southlaw, P.C., of Overland Park, for appellant; Tai J. Vokins, of Sloan, Eisenbarth, Glassman, McEntire & Jarboe, L.L.C., of Lawrence, for appellee Ashley A. Holverson.

Short Summary: The District Court granted the defendant’s motion for summary judgment, barring the plaintiff ’s foreclosure of a note and mortgage under K.S.A. 60-511(1). The loan had a 30-year maturity date, but the defendants stopped making payments. The holder of the note gave a “notice of intent to accelerate” and on appeal the parties argued over whether the present action was within the five-year statute of limitations. Citing FGB Realty Advisors, Inc. v. Keller, 22 Kan. App. 2d 853, 923 P.2d 520 (1996), a noteholder must take two steps to trigger K.S.A. 60-511(1)’s five-year statute of limitations: first, the noteholder must “clearly and unequivocally express an intention” to accelerate the loan. This means that a noteholder’s letter containing a threat of some future acceleration of the loan will not constitute a clear and unequivocal expression of an intention to accelerate the loan. Nor will a statement that the borrower’s entire obligation under the loan is now due suffice. Instead, to comply with this step, a noteholder’s letter must explain that it is “electing to exercise the option to accelerate the balance of the loan.” Second, the noteholder must “affirmatively act toward enforcing that intention” to accelerate the loan. The Court of Appeals held that the five-year statute of limitations did not commence until a later date, and therefore did not bar plaintiff ’s action, and reversed and remanded the case with instructions.

SMITH V. ANGUIANO SEWARD DISTRICT COURT – AFFIRMED NO. 122,135 – May 28, 2021 2021 Kan. App. Unpub. LEXIS 291; 2021 WL 2171155 Breach of Lease - Damages Attorneys: David W. West, of Law Office of David W. West, LLC, of Liberal, for appellants, Derek W. Miller, of Miller & French, LLC, of Liberal, for appellee.

Short Summary: Smiths, as commercial landlords, argued that Anguiano, as tenant, breached the terms of the lease for removing personal property items. Although a magistrate awarded Smiths the replacement value of the missing prop-

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erty, the District Court construed the lease and reduced damages. Smiths appealed, and the Court of Appeals affirmed.

The section of the lease requiring the tenant to maintain the premises, reasonable wear and tear excepted, imposed a duty but was not a measure of damages and did not impose liquidated damages. The remedies section of the lease did not require tenant to purchase new replacement property, and the Smiths failed to produce evidence of the fair market value of the missing or damaged property as of the date it was damaged or removed. Affirmed.

Summary of Other Notable Cases CZAPLINSKI V. BANK OF AMERICA UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE TENTH CIRCUIT BAP NO. KS-20-011 – September 21, 2020 2020 Bankr. LEXIS 2484 (unpublished) Future Advances Attorneys: George V. Czaplinski, pro se; Christopher J Redmond, for Trustee.

Short Summary: A Chapter 7 debtor initiated an adversary proceeding against Bank of America (Bank), and alleged that Bank failed to release a second mortgage on his residence securing a line of credit. In 2002, the debtor refinanced the line of credit balance and existing indebtedness on his residence, and reduced the line of credit balance to zero. However, Bank did not close the line of credit and debtor never requested that the line of credit be terminated. After the refinancing, Debtor incurred additional debt under the belief that such debt was unsecured. The United States Bankruptcy Court for the District of Kansas granted the Bank’s motion for summary judgment, and Debtor appealed. The BAP Panel affirmed. Under Kansas law, future advance clauses in mortgages are clearly valid and enforceable, and a mortgage need not be released when an agreement exists for the making of future advances to be secured by the mortgage.

IN RE KREUTZER UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF KANSAS NO. 17-20987 – April 14, 2021 2021 Bankr. LEXIS 985; 2021 WL 2523904 Statute of Limitations Tolling (Debts Owed to the United States) Attorneys: Christopher R. Coons, for Debtor; Steven R. McAllister, United States Attorney, and Christopher Allman, Assistant United States Attorney.

Real Estate Update Short Summary: Debtors’ objection to the proof of claim filed by the USDA was sustained because the six year statute of limitations in 28 U.S.C.S. § 2415(a) had run before debtors’ bankruptcy case was filed, and neither of the two provisos for the starting of a new limitations period was present. The limitations period was not restarted under the written acknowledgement proviso because there was no single document relating to a short sale that satisfied the criteria for a written acknowledgement by debtor. Payment of the proceeds of a short sale to release the USDA lien was not sufficient to restart the limitations period under the partial payment proviso.

Kansas Legislative Highlights High Performance Incentive Program; Decoupling Kansas Industrial Training and Kansas Industrial Retraining; SB 65. This bill eliminates the so-called “training requirement” for certification under the Kansas High Performance Incentive Program (HPIP) by decoupling participation in the Kansas Industrial Training program or the Kansas Industrial Retraining program as a method to qualify for the HPIP tax credit, and by eliminating the HPIP certification and recertification requirement for a business to dedicate two percent of payroll for training purposes. Under the bill, companies seeking HPIP certification must still satisfy the requirement to pay above-average wages.

The bill also creates a new opportunity to transfer up to 50 percent of HPIP tax credits to another company or individual per year, for projects placed into service on or after January 1, 2021. The transferee of the tax credit may carry forward the credits for up to 16 years. By way of caveat to the transferor, however, if the Secretary of Revenue determines a tax credit is not allowable, the transferor taxpayer who originally earned the credit is liable for the amount that is disallowed.

Amending K.S.A. 74-50,133 and 79-32,160a and repealing the existing sections.

Rural Housing Incentive Districts; SB 90. This bill expands the eligibility of the Rural Housing Incentive District (RHID) Act to include eligible projects in any City having a population of less than 60,000, regardless of whether such City is located in a metropolitan County. By way of example, smaller cities in Johnson, Sedgwick, Douglas, Wyandotte, and Leavenworth could form RHID districts. This bill also increases the county population limit from 60,000 to 80,000.

Under the previous version of the RHID Act, RHID proceeds could not be used for construction of buildings or other structures to be owned by or leased to any developer. In a significant expansion of permitted uses of RHID proceeds, this bill allows vertical renovations of certain buildings for

residential purposes (i.e., renovations made to the second or higher floors of a building at least 25 years of age located in a central business district) to be a permitted use of bond proceeds. This bill should result in a greater number of RHID project applications.

Amending K.S.A. 12-5249 and K.S.A. 2020 Supp. 12- 5242 and repealing the existing sections.

STAR Bonds Renewal and Modification; House Sub. for SB 124. This bill supplements, amends and renews the Sales Tax and Revenue (STAR) Bond program until July 1, 2026. The bill expands project eligibility in some cases, and limits project eligibility in others. The bill increases reporting and disclosure requirements for all projects. The bill expands the requirements for STAR Bond applications by requiring, among other things, a feasibility study performed by an approved consultant, a plan for tracking the zip codes of visitors to the project, an economic impact analysis that includes the anticipated effects of the project on the regional and statewide economies, a net return on investment analysis, a summary of community involvement, and a disclosure of all federal, state and local tax incentives. The bill requires the disclosure of the names of the developer’s owners, partners, officers and principals. The bill requires a developer to commence construction within two years of approval of the STAR Bond project plan, otherwise funding will cease.

The bill increases the minimum required capital investment and projected gross annual sales from $50 million to $75 million, but reduces such minimums to $40 million for “high value” projects in metropolitan areas with a population between 50,000 and 75,000. The bill adds a “rural development project” as an eligible project, for projects of regional importance in a city with a population of not more than 50,000. In rural development projects, the bill requires a minimum of $3 million in capital investment. The bill also defines a “major business facility” as an eligible area, which are significant business headquarters or office buildings that is designed to draw a substantial number of new visitors to Kansas. STAR Bond districts in statistical metropolitan areas with a population of more than 50,000 must be a connected parcel of real estate.

The bill requires additional reporting and disclosure requirements by the Department of Commerce and cities, counties and developers. City and county websites must include on the first page of their websites notices of the public hearing to consider the establishment of a STAR Bond district and links to certain documents to be considered at the meeting and information about the project. Any land sales within the district must be authorized by the Secretary of the Department of Commerce and the bill requires disclosure of the sales price, name of the purchaser (including all individual owner, partner, officer and principal of the purchaser).

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Real Estate Update This bill prohibits any state or local government official (including members of the legislature, appointed or elected officials, officers, commissioners, board members or any appointed or elected official of a city, county, township, school district, or special district) from being employed (directly or as an independent contractor) for the project developer or manager.

Amending K.S.A. 2020 Supp. 12-17,162, 12-17,165, 12-17,166, 12-17,169, 12-17,171 and 12-17,179 and repealing the existing sections.

Aboveground and Underground Storage Tanks; Sunset; Fund Limitations; SB 27. This law extends the sunset dates for Underground Petroleum Storage Tank Release Trust Fund (Underground Fund) from July 1, 2024, to July 1, 2034; Aboveground Petroleum Storage Tank Release Trust Fund (Aboveground Fund) from July 1, 2024, to July 1, 2034; UST Redevelopment Fund Compensation Advisory Board from July 1, 2024, to July 1, 2032; UST Redevelopment Fund from July 1, 2024, to July 1, 2032; the ability for certain petroleum storage tank owners and operators to apply for reimbursement for corrective action if contamination is discovered and reported during the replacement of single-wall underground storage tanks, from June 30, 2020, to June 30, 2030; and the ability for owners and operators to apply for reimbursement for the replacement of underground single-wall storage tank systems with a secondary containment system, from June 30, 2020, to June 30, 2030.

The bill also increases deductible amounts and liability and replacement limits for certain funds within the Kansas Storage Tank Act that are managed by the Kansas Department of Health and Environment.

Amending K.S.A. 65-34,105, 65-34,118, 65-34,119, 65-34,120, 65-34,123, 65-34,128, 65-34,134 and 65-34,139 and repealing the existing sections.

Plugging of Abandoned Wells; HB 2022. This bill makes significant changes to the laws related to complaints about, responsibility for, and the scope of investigating abandoned wells. The bill replaces the Well Plugging Assurance Fund with the Abandoned Oil and Gas Well Fund, and expands the applicability of the new Fund to include more abandoned wells. The statute expands the definition of “well” to include “penetration of the surface of the earth,” and expands the definition of “abandoned well.” The statute expands the reasons to file a complaint with the KCC secretary, and expands the KCC’s duties and powers to require persons legally responsible for the proper control and care of an abandoned well, including enabling the KCC to issue orders obligating such persons to plug the well or cause the well to be brought into compliance. The statute includes a list of persons that

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could be held legally responsible for proper care and control of an abandoned well. Persons who have no obligation to plug, replug or repair a well now have an opportunity to seek reimbursement from the Abandoned Oil and Gas Well Fund, if approved by the KCC, if the well has been abandoned for at least five years.

Amending K.S.A. 55-150, 55-161, 55-168, 55-178, 55-179, 55180, 55-192 and 75-3036 and K.S.A. 2020 Supp. 55-155 and repealing the existing sections; also repealing K.S.A. 55-163, 55-166 and 55-167 and K.S.A. 2020 Supp. 55-193.

City or County Assumption of Special District Duties; SB 118. This bill creates a process for a city or county to assume the powers, responsibilities and duties of “special districts” (i.e., airport authorities, cemetery districts, drainage districts, fire districts, industrial districts, library districts, port authorities, rural water districts, sewer districts, and rural watershed districts). Once all the conditions of the bill are satisfied (including the execution of an agreement between the city or county and the special district, adoption of a joint resolution, a public hearing, etc.), the special district is considered dissolved and the city or county succeeds to all powers, duties and responsibilities of the special district.

Self-service Storage Agreements; HB 2112. This bill may require self-storage operators to amend their rental agreements. The bill amends K.S.A. 58-816 to require the rental agreement to include notice that for purposes of any claim or action against an operator involving a claim of damage to, or the loss of, personal property stored in a leased space pursuant to a rental agreement with the operator, the value of such personal property shall be limited by the maximum value of personal property permitted to be stored in the leased space under the terms of the rental agreement. Rental agreements must also include a query of the occupant as to whether the occupant wishes to designate an alternative contact to receive notices required by the self-storage act (and the agreement must include space in the rental agreement to designate such alternative contact).

The bill authorizes an operator to sell property stored in a leased space in person or online, and does not mandate that notice of the sale be advertised in a newspaper of general circulation. However, if less than three independent bidders attend the sale in person or view the sale online at the time and place advertised, the manner of advertising the sale shall not be considered to have been commercially reasonable and the sale shall be canceled, rescheduled and readvertised.

Amending K.S.A. 58-816 and K.S.A. 2020 Supp. 58-817 and repealing the existing sections.

Real Estate Update Office of the Secretary of State Business Filings and Publication Requirements; HB 2391. Among other things, this statute changes the requirement for business entities to file an annual report from annually to biannually. Entities formed in even-numbered years will file biannual reports in even numbered years, and entities formed in odd-numbered years will file in odd-numbered years. The fee increases from $40 to $80 for each report. The statute permits electronic signatures on the reports.

Amending K.S.A. 17-1513, 17-1618, 17-2037, 17-2711, 17-4677, 17-5902, 17-7509, 17-7511, 45-106, 45-315, 53-601, 56-1a151, 56-1a605, 56a-101, 64-103, 75-430, 75-433, 75-436, 75-446, 751005, 75-3520, 77-138, 77-417, 77-430, 77-430a, 77-431 and 77-438 and K.S.A. 2020 Supp. 17-2036, 17-2718, 17-4634, 176014, 17-6014, as amended by section 10 of this act, 17-7002, 177503, 17-7504, 17-7505, 17-7506, 17-7510, 17-7512, 17-76,136, 17-76,139, 17-76,146, 17-76,147, 17-78-601, 17-7903, 17-7904, 17-7905, 17-7906, 17-7910, 17-7910, as amended by section 31 of this act, 17-7936, 45-107, 45-229, 56-1a606, 56-1a607, 56a1001, 56a-1201 and 56a-1202 and repealing the existing sections; also repealing K.S.A. 17-7507, 57-205, 57-206, 57-207 and 75-447.

About the Author Matthew S. Gough, Lawrence, is a member of Barber Emerson L.C. His practice includes real estate, land use, corporate, and banking law.

Gough received his Juris Doctorate from the University of Kansas School of Law and his B.A. 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, L.C., Lawrence Ast v. Mesker Kansas Court of Appeals December 23, 2020

Attorneys: Paul D. Snyder and Karen E. Snyder of Snyder Law Firm LLC, Overland Park, for plaintiffs-appellants; Coy Martin of Coy Martin Law, LC, of Wichita, for defendantappellee.

K.S.A. 58a-604(a) provides a one year statute of limitations to contest the validity of a trust that was revocable at the time of the settlor’s death.

Two granddaughters of the decedent sued the widow alleging that she exerted undue influence when Bill Edwin Mesker amended his revocable trust in 2016, while a prior case against him was on appeal. (The same two granddaughters, plus their father, previously sued Bill Edwin Mesker over his management of his late wife’s living trust as breaching the duty of loyalty, appealed and lost, and an attorney fee ruling was upheld. Bill removed the two granddaughters from his trust and made other changes.)

When Bill died in 2017, more than a year after amending his trust for the last time, the coroner’s report showed that he suffered from Alzheimer’s and dementia. Nearly two years after his death the granddaughters sued Bill’s widow for “common law undue influence.” Neither the trustee nor the trust beneficiaries were named as defendants.

The granddaughters argued that the statute of limitations should not apply (as they sought relief other than a trust modification) was rejected. The Court of Appeals also held that the trust is a contract so the two year statute of limitations in K.S.A. 60-513(a)(4) for injury “not arising on contract” is inapplicable. Furthermore K.S.A. 58-604 more specifically applies and the granddaughters lost again.

Estate of Roger D. Seematter, et al. v. Delmar Seematter and Seematter Farms, Inc. Kansas Court of Appeals (Unpublished) September 11, 2020 Attorneys: P. Bernard Irvine, of Morrison, Frost, Olsen, Irvine & Schartz, LLP, Manhattan, for plaintiffs-appellants; Jay F. Fowler and Amy S. Lemley, of Foulston Sieklin LLP, Wichita, and John McNish, of Bolton & McNish, LLC, Marysville, for defendants-appellees.

Roger and Colleen Seematter sued Delmar (Roger’s father) and Seematter Farms, Inc. claiming Delmar had broken an oral promise to bequeath the family farming corporation and his personal farm properties to Roger in exchange for

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Roger having worked on the farm for his entire life. Shortly after filing this suit, Roger died, so his estate was substituted with Colleen as executor. The plaintiffs claimed damages of $4,397,220.90 from the broken oral promise to bequeath and additionally claimed they had not been compensated for labor and services to Delmar and the corporation.

Delmar counterclaimed to enforce his right to repurchase, at its current fair market value, the house with four acres quitclaimed to Colleen and Roger to build a new home.

District Court Judge John Weingart granted summary judgment to Delmar on Colleen and Roger’s claims and ordered specific performance on Delmar’s counterclaim, finding that the fair market value was $258,800.

The promissory estoppel claim to recover the amount of Delmar’s entire net worth could not be pursued by Roger’s estate as there was no such claim as of the date of Roger’s death (as Delmar is still living). Although Delmar’s current trust would violate the alleged oral agreement (which was largely advanced by arguable hearsay testimony from Colleen), Delmar could still amend the trust until his death so there is no course of action yet.

As to the claim for unjust enrichment, there was ample evidence of compensation, benefits, forgiven loans, gifts and conveyances from Delmar and the corporation to Roger and Colleen, but when asked to value their labor and services, Colleen responded that she “couldn’t fathom to even guessing” and said she couldn’t even estimate the value. Without such evidence Colleen did not have evidence of an essential element of an unjust enrichment claim.

As to Delmar’s counterclaim, his deed reserved the right to repurchase the 4 acre place if Roger died or divorced, Colleen argued that she and Roger had not signed the deed so that the statute of frauds barred enforcement of a real estate contract against her. The Court of Appeals states that the Kansas Supreme Court has not addressed such a circumstance, so it looked to a consensus from other jurisdictions (which would seem to suggest that this decision should be published).

Based upon that, the panel held that acceptance of the deed binds the grantees to the terms.

Colleen also claimed that her homestead rights under the Kansas Constitution and by K.S.A. 60-2301 prevent a forced sale by her to Delmar. The Court of Appeals remanded as to this issue to determine if Colleen had consented to the repurchase provision.

Probate and Trust Update Mounkes v. Mounkes Kansas Court of Appeals (Unpublished) August 21, 2020 Attorneys: Thomas A Krueger, Emporia, and Shane A. Rosson, of Triplett Woolf Garretson, LLC, Wichita, for appellants; Stephen J. Atherton, of Atherton & Huth, Emporia, for appellee.

What happens when a trust goes missing? Lyon County real estate was deeded from Duane and Dorothy Mounkes to the Duane D. Mounkes Living Trust. When Duane died neither an original nor a copy of a trust could be found. An accountant may have prepared the trust, but he was dead and his office records could not be located.

In a quiet title action, the district court held that the trust never went into effect. The Court of Appeals stated that quiet title actions are in rem only, so the district court could only decide legal interests in the property subject to the suit (noting that other property previously conveyed out of the trust was not at issue). The Court of Appeals thus determined that the trust failed after Duane’s death and a resulting trust should be imposed in favor of Duane and Dorothy, as joint tenants (as before the trust), with legal title to be Dorothy’s due to Duane’s death. The case was remanded with this directive.

In the Matter of the Estate of Dale Raymond Ramsey Kansas Court of Appeals (Unpublished) July 2, 2020 Attorneys: Jason P. Brewer, of Wilson, Brewer & Munson, P.A., Arkansas City, for appellant Constance Kirchner and H. Douglas Pfalzgraf, Wellington, and Carl N. Kelly, Wellington, for appellee Robert D. Brant, administrator.

Kirchner was a neighbor who provided personal care services to Ramsey and was paid $20 per day. She sought more based on general statements made to her, and alternatively implied contract and/or unjust enrichment theories. The District Court rejected her claims and the Court of Appeals affirmed.

In the Matter of the Estate of Thelma J. Taylor Kansas Supreme Court January 22, 2021 Attorneys: John W. Fresh, of Farris & Fresh Law Office, Atchison, for appellant Laura Kelly; Patrick E. Henderson, Atchison, for appellee Boys and Girls Club.

The Boys and Girls Club of Atchison, as sole beneficiary of the estate, objected to the executor’s proposed distribution, alleging that the executor converted estate property. The property converted was cash owned by the decedent taken by Ms.

Kelly, who was joint owner of the safe deposit box where it was. The district court found conversion and ordered the executor to repay double the converted value as provided by K.S.A. 59-1704. The Court of Appeals unanimously upheld the conversion finding, but a majority held the double penalty did not apply as the conversion was before the executor was appointed. The Kansas Supreme Court reversed the Court of Appeals majority and upheld Judge Robert Bednar’s assessment of the statutory double penalty, indicating that it should not be limited to an executor’s conversion occurring only after the executor’s appointment.

Kearney v. Unsecured Creditors Committee Tenth Circuit Court of Appeals February 24, 2021 This case arose from the New Mexico bankruptcy court.

Tenth Circuit affirmation of spendthrift trust assets to fund a creditors committee plan was puzzling until realizing that its hands were tied by a New Mexico state court ruling. Protection of spendthrift trust assets in bankruptcy pursuant to 11 U.S.C. 541(c)(2) is only available “if the state courts would hold that creditors could not reach the interest.” In re Harline, 950 F.2d 669, 670 (10th Cir. 1991).

Although Mr. Kearney received about $16 million over a 16 year period he sued to get more. When he filed bankruptcy he had over $7 million in debt, which the Tenth Circuit noted was due to “his own bad choices.” The Tenth Circuit noted that Mr. Kearney had “time and again undermined the Trusts’ spendthrift provision.” One example was his promise to pay his largest creditor from trust funds. He also pledged to authorize charging orders against the trust as security to this same creditor. He also asked others to loan him funds to be secured by future trust distributions.

The Tenth Circuit opinion referenced Mr. Kearney’s “obnoxious conduct” and that he “has significant credibility issues and seems comfortable lying under oath and otherwise.” Additionally, the Court of Appeals noted that “Mr. Kearney’s many lies suggest that he has an ever-decreasing believability reserve that continues to dwindle at every encounter with the judicial system, making him an unsympathetic plaintiff ”, which was relevant as he claimed he had much value to recover in potential lawsuits against 50 persons and entities. The Court of Appeals summarized that “Mr. Kearney has shown a tendency to exploit the judicial system as a club to beleaguer anyone who stands in his way.”

So while this case might appear to be a chink in the protection provided by a spendthrift trust, the special and pervasive factors involved here make it highly unlikely that such a result will regularly occur in a state court and then lead to a bankruptcy or other federal court recognition of such an exceptional result.

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Probate and Trust Update In re Estate of Lanny Lentz Kansas Supreme Court December 11, 2020 Attorneys: Jonathan Sternberg, Kansas City, Missouri, for appellant; Aaron R. Bailey and Alan V. Johnson of Sloan, Eisenbarth, Glassman, McEntire & Jarboe, L.L.C., Topeka, for appellees.

After a journal entry of final settlement was entered, one of decedent’s daughters filed a “Petition to Set Aside and/or Reconsider”. Motions to reconsider are generally treated as motions to alter or amend a judgment under K.S.A. 60-259(f).

Because a Court of Appeals panel treated the motion as one for relief from a final judgment under K.S.A. 60-260(b) it dismissed the appeal as out of time since a 260(b) motion does not toll the time to file an appeal. The Kansas Supreme Court reversed and remanded to the Court of Appeals to consider whether substantial competent evidence supported the district court’s findings.

Interestingly, appellant’s “Petition to Set Aside and/or Reconsider” only referenced K.S.A. 60-260(b), and not 60-259(f).

The Kansas Supreme Court thus had to dive beneath the caption and the statutory reference to look to the substance of the allegations and to comparable federal case law to reach its conclusion. Had appellant’s counsel included a reference to K.S.A. 60-259(f) (“a practice dictated by prudence and diligence” according to Justice Wall’s opinion) the two appellate courts would not have had “to embark on a complex statutory analysis to address the question of jurisdiction in this proceeding.” The Supreme Court summarized as follows: “This case provides a textbook example of how diligent lawyering can avoid unnecessary and potentially devastating procedural and jurisdictional challenges that threaten to eviscerate the substantive rights of parties on appeal.”

Myzer v. Baldwin Kansas Court of Appeals (Unpublished) November 6, 2020 Plaintiff was pro se; Steven C. Day and Chris S. Cole, of Woodward, Hernandez, Roth & Day, LLC, Wichita, for defendants-appellees.

John Myzer alleged that defendants, who are living and deceased members of his family, conspired over several decades to hide their identities to keep plaintiff from knowing his true name. According to a prior federal lawsuit, this was to prevent him from receiving an inheritance. As to any deceased defendants the non-claim statute (K.S.A. 59-2239) would be a bar, unless the claim is based on tort for which K.S.A. 592239(2) provides the applicable tort statute of limitations. Mr. Myzer suggested it was possible that the defendants thought to be deceased were still alive, but they had not been served.

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Faced with statute of limitations defenses Myzer asserted that he had two years from discovery of the fraud, but this argument was rejected as he had earlier attempted to sue the defendants in 2003 in federal court and the case was dismissed with prejudice.

Myzer’s suggestion that the statute of limitations was tolled by his mental incompetence was rejected due to the record reflecting that he overcame this disability in a motion in the prior federal court proceeding. Many other arguments were made, discussed and rejected, but the above are the only ones in the relevancy range for this newsletter.

In re Estate of Nancy Ann Boone Kansas Court of Appeals (Unpublished) November 13, 2020 Attorneys: Ann M.E. Perkins and Lauren G. Hughes, of Wise & Reber, L.C., McPherson, for appellant Estate of James Dean Boon; Joseph A. Allen and Charles C. Lindberg of Allen & Associates Law, LLC, Minneapolis, for appellees Amy Meredith and Terry Farrington.

After Nancy Ann Boone died April 24, 2017, her widower James Dean Boone (Dean) initiated intestate probate proceedings identifying her two adult children, Amy and Terry, as her other heirs. He was appointed administrator. Dean died December 10, 2018, and his estate was substituted for him in the litigation, but a new administrator for Nancy’s estate was not appointed.

George Yarnevich testified that he prepared a draft will for Nancy, that included a consent for Dean to sign, but he was not aware that it had ever been executed, though both had executed a transfer on death deed for their residence in favor of Nancy’s children (that had been recorded). Although Nancy referenced her will to her children, they never saw it.

No witnesses came forward to testify that they saw Nancy execute a will. Consequently, the district court erred in finding a will had been executed. The Court of Appeals also rejected the district court’s denial to Dean of his homestead allowance, spousal allowance and spousal elective share based on his procedural failures as administrator to timely give notice to Nancy’s children, to timely give notice to creditors, to timely file an inventory, his oath and letters of administration. The district court will be allowed to review Dean’s timeliness in seeking the allowances, however, as well as the amounts to be allowed; but could not reject such allowances out of hand for the procedural failings.

Probate and Trust Update Roenne v. Miller Kansas Court of Appeals October 2, 2020 Attorneys: Craig L. Uhrich, of Upshaw, Uhrich, Taylor & Dykema PLLC, Oakley, for appellants Roenne, et al.; Todd D. Powell of Glassman Bird Powell, LLP, Hays, for appellee trustee and his wife.

According to the Court of Appeals, Brad Miller (in his role as trustee) violated all three duties of a trustee to beneficiaries (loyalty, impartiality and prudence) when he took all of the trust assets for himself and his wife. The Court of Appeals held that the “district court erred when it ruled that because the testamentary trust instrument gave Miller discretion to act, he could ignore the interests of the other beneficiaries and clean out the trust for his own use.”

Sonya Marie Miller died in 1995, survived by five children.

Four of them are appellants. The other child, Brad, was the trustee of a trust created to receive the residue of her probate estate.

Although the trust stated that the trustee had “uncontrolled” or “exclusive” discretion over the trust, the Court of Appeals noted that “a trustee cannot act as if there is no trust at all.”

Sonya had also provided that the trustee’s decision was to be final as to which of her children would receive income or principal and the amount thereof for each, stating that, “At no time shall any of the beneficiaries named have the absolute right or entitlement to any of the income or principal or either of them, except for the right of the grandchildren of the said decedent for distribution upon liquidation of the said trust.”

The trustee “treated this trust as his own property with no regard or consideration to the other beneficiaries.” Over the years, “Brad used the trust income for his own purposes and then transferred all the assets to himself.” He did not even set up a bank account for the trust, but just transferred the oil income (exceeding $1,000,000 during the life of the trust) directly into his personal checking account that he owned jointly with his wife. He justified this as an attempt to carry out his promise to his mother to keep the farm he inherited intact by using it to pay farm debt and expenses.

The beneficiaries lost in Rooks County District Court on their claims as to breach of fiduciary duties. The Court of Appeals saw “no analysis of the law of trust” by District Court Judge Blake A. Bittel. The Court of Appeals provided a quite helpful summary of trust law principles. First, it distinguished support trusts and discretionary trusts. Though a discretionary trust, Brad could not “abuse” his discretion, nor act in “bad faith”, nor engage in “conduct so arbitrary and unreasonable as to amount to practically the same thing.”

The Court of Appeals analyzed the statutory and case law duties of loyalty, impartiality and prudence that apply to all trusts. This was done in an informative and helpful manner.

The clear result was a holding that violations occurred. Remand was ordered to address possible remedies for the trustee’s breach of the trust and to address the defendants’ statute of limitations defense.

In re Martha Louise Standish Kansas Bankruptcy Court August 25, 2020 Debtor received around $45,000 from her mother’s estate. Instead of using it to pay her student loans she used it to pay for her adult daughter’s education. The Bankruptcy Court held that debtor willfully incurred expenses that were not her own and therefore denied her a discharge of her educational loans.

In the Matter of the O.E. Bradley and E.L. Bradley Trust Kansas Court of Appeals May 7, 2021 Attorneys: Mark G. Ayesh and David M. Hahn, of Ayesh Law Offices, Wichita, for appellant Casey Galloway; Patrick A. Edwards and John A. Vetter of Stinson LLP, Wichita, for appellee O.E. Brandley and E.L. Bradley Trust.

A trust beneficiary sought removal of and double damages against the co-trustees for a trust loan to a third party that was not repaid.

On the date of his grandfather’s death, Casey Galloway asked for trust accounting records. This was denied until his mother died and he became a beneficiary. When he got full accountings he sought replacement of the trustees.

Although Casey provided testimony that Commerce Bank would serve as substitute trustee for $15,000, the District Court allowed the co-trustees a combined annual fee of $24,000 for 2012 through 2019, but ordered that prior court approval was needed before taking future fees as required by the trust agreement.

Casey generally alleged trustee removal was appropriate under K.S.A. 58-706 but the Court found no basis to overturn the District Court’s decision. Friction between a beneficiary and a trustee does not provide a basis for removal.

Trustee loans to themselves and their closely held companies concerned the District Court for their lack of security, but their repayment by trial negated this concern. The loan to a third party who filed bankruptcy was not a basis for trustee removal where they reasonably collected what they could. And it did not deserve punishment as malicious, vindictive, or willful and wanton conduct justifying double damages equivalent

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Probate and Trust Update to punitive damages.

The Court of Appeals saw nothing in the record to indicate that the trustees’ inadequate accounting was to mask impropriety nor that any breach of trust terms or other failing was done maliciously or in bad faith.

The District Court allowed Casey his attorney fees from the trust through the date the trustees had offered to settle, but because it found the trial to be of no benefit to the 14 beneficiaries, it reduced reimbursement for Casey’s earlier fees by the fees incurred by the trust after the offer to settle. This was upheld as well by the Court of Appeals, which recognized its creativeness.

In the Matter of the Estate of Beatrice Sauceda Kansas Court of Appeals (Unpublished) April 9, 2021 Attorneys: William F. Dunn, Kansas City, for appellant Richard Palmerin; William W. Hutton, Kansas City, for appellee Robert Sauceda.

Beatrice Sauceda died on April 24, 2019. Mr. Palmerin petitioned for administration on October 24, 2019. The notice to creditors was first published on October 31, 2019, and Mr. Palmerin filed his demand on February 29, 2020. Both were timely in meeting the need for administration to be sought within six months by a creditor and to actually file the claim within four months. The Court of Appeals noted that the Probate Code does not include a separate provision for calculating the time periods in K.S.A. 59-2239, but guidance could be found in K.S.A. 60-206.

The Court of Appeals reversed the Wyandotte County District Court’s ruling that a creditor set forth his demand in the petition for administration, but only need state his interest as a creditor in connection with meeting the requirements of K.S.A. 59-2202 along with those of K.S.A. 59-2219 when petitioning for administration. The District Court will still have to determine if Palmerin should be appointed administrator, if his claim is valid, and what to do with a second probate case in decedent’s name.

James Kurt Schaake, Trustee of the Donald Dean Schaake Revocable Trust v. City of Lawrence, Kansas Kansas Court of Appeals May 7, 2021 Attorneys: Randall F. Larkin, Toni Ramirez Wheeler, and Maria Kaminska Garcia, for City of Lawrence, appellee. Appellant was pro se.

Plaintiff is one of three co-trustees and beneficiaries of a trust. He lives on one of the trust properties. He hired a law

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firm to contest two improvement districts, but they withdrew (with court authorization) before trial. When Schaake failed to hire substitute counsel to represent the trust, Judge McCabria dismissed the case with prejudice for failure to prosecute.

The Court of Appeals noted that “Whether a trust must be represented in our courts by a licensed attorney is a question of first impression in Kansas.” Although Schaake could represent himself personally, he cannot represent others (such as the trust, a corporation or other person or entities). The Court of Appeals rejected Schaake’s argument that a trustee can sue or be sued as equivalent to permitting him to act as an attorney in a Kansas court.

The Court of Appeals also held that Schaake lacked standing in his role as a beneficiary to prosecute third parties or in his personal capacity to proceed individually (and thus properly pro se). Therefore, he is only authorized as trustee to sue the City, but as a nonlawyer trustee he would be engaging in the unauthorized practice of law.

Porubsky v. Long Kansas Court of Appeals (Unpublished) June 11, 2021 Attorneys: Bryan W. Smith, Topeka, for plaintiffs-appellants; Samuel B. Heaney, of Martin, Pringle, Oliver, Wallace & Bauer, L.L.P., Overland Park, for Randall Forbes, Kevin Fowler, and Frieden, Unrein & Forbes, LLP; Timothy J. Finnerty of Wallace Saunders, Chartered, Wichita, for Bernard J. Hickert and Newbery, Ungerer & Hickert, LLP; Stephen D. Lanterman, Topeka, for Peter J. Long and Patricia A. Long, individually and as trustee of the Adam J. Long and Bernard C. Long Irrevocable Trust.

The facts of this case are so involved that they cannot be summarized, though they are worth a read as seven different Topeka attorneys are involved, as well as a question of eyesight, alleged elder abuse and financial exploitation, what a clinical neuropsychologist thought and what the accountant heard. Steven and Shauna Porubsky sued Steven’s great-uncle Bernard, Bernard’s trust, Bernard’s brother’s trust, an attorney named Bernard J. Hickert, two other attorneys and two law firms for malicious prosecution and abuse of process. District Court Judge Franklin Theis issued a 69-page memorandum decision granting summary judgment to the defendants on all of the Porubskys’ claims. The Porubskys had earlier prevailed by a jury verdict in the underlying action to retain property questionably deeded to them and did incur costs (damages) defending the underlying suit, but the defendants in this suit (plaintiffs and those affiliated with them in the underlying action) had probable cause to maintain the action and did not act with malice.

Probate and Trust Update Hoskinson v. Heiman Kansas Court of Appeals (Unpublished) June 4, 2021 Attorneys: Plaintiff/Appellant Hoskinson pro se; Michael E. Collins, of Hope, Mills, Bolin, Collins & Ramsey, Garden City, for Defendant/Appellee Madonna Hoskinson had been Laverne Hoskinson’s caregiver and then married him. Three months after the marriage, Heiman (Laverne’s cousin) had him removed from his marital residence and placed in assisted living, procured a power of attorney for Laverne and used it to file for his divorce from Madonna. After the divorce, Heiman changed Laverne’s will to exclude his daughter (who was still being cared for by Madonna). Madonna was subsequently charged with mistreatment of a dependent adult (the daughter) and she entered a diversion.

Madonna alleged that Thelma Clarene “Toke” Heiman interfered with her marriage and her “rightful inheritance” from her ex-husband upon his death. The Court of Appeals indicated that Hoskinson “disregarded virtually every appellate briefing rule, making it impossible. . .to discern her argument and authorities. . .” Consequently, the district court’s decision was affirmed.

Mead, De La Rosa & Pishny v. Bob Joe Small, Trustee of the Herlinda Small Revocable Living Trust Kansas Court of Appeals (Unpublished) May 21, 2021 Attorneys: Lane L. Frymire of Yoxall, Antrim & Frymire, LLP, Liberal, for appellant trustee; Zachary D. Schultz, of Schultz Law Office, P.A., Garden City for appellee plaintiffs.

When the trust settlor, Herlinda Small, was unable to act as her own trustee due to dementia, her daughter Shirley William became successor trustee. Shirley William became ill and shortly before her death she executed a deed of Herlinda’s home in Garden City to herself and her three daughters (the three named plaintiffs) as joint tenants. When Shirley William died a month later, Herlinda’s son, Bob Joe, became successor trustee. He filed an affidavit of equitable interest and the plaintiffs filed a quiet title action against him in his capacity as trustee. The parties agreed to sale of the house with the $205,121 of proceeds deposited with the Court Clerk.

The district court issued summary judgment in plaintiffs’ favor. Bob Joe appealed and while the appeal was pending Herlinda died. The Court of Appeals did not treat the case as moot, though the distribution to have been made at Herlinda’s death was the same as that made by Shirley William to herself and her three daughters. Bob Joe argued that Shirley

breached her fiduciary duties by using the gift provisions in the trust to gift the house to herself. Although this was stated as a central issue in the competing summary judgment motions, the Court of Appeals noted that, “Unfortunately, there is no evidence available in the record on whether William and Plaintiffs received the House in 2017 after providing some form of adequate consideration to the Trust.”

The Court of Appeals also considered the plaintiffs’ argument made to the district court that the anti-lapse provision would provide that if the property remained in the trust (which had become irrevocable due to Herlinda’s incapacity), though the district court did not mention this argument (perhaps because Herlinda was still living until the appeal became pending). The Court of Appeals thus determined that the House ended up where it would have given Shirley’s death and then Herlinda’s.

One thing that was not discussed was the presumption that property is inherited as tenants in common, not as joint tenants. Presumably the daughters can sort that out, but one wonders if that had been argued whether it would have affected the decision or just added another layer of analysis to a case where the Per Curium opinion was already complicated enough in reaching what seems to have been ultimately a fair result in the face of various technical issues and even possible mootness.

KANSAS LEGISLATION Senate Bill 103 amends the Kansas Power of Attorney Act to deem a power of attorney as sufficient if in substantial compliance with a form to be developed by the Judicial Council.

(The prospective application of this legislation shall not affect the validity of a power of attorney executed prior to July 1, 2021.)

Blessedly, the legislation attempts to prohibit a third party (bank, brokerage, etc.) from requiring an additional or different power of attorney form. The only exceptions are if (1) the third party is not otherwise required to transact with the principal, (2) federal law prohibits such transaction, (3) the third party has actual knowledge of termination of the authority, (4) a request for information, certification or indemnification is refused, (5) the third party has a good faith belief of the lack of validity or authority (regardless of whether a certification or opinion of counsel has been requested or provided), or (6) the third party has made or actually knows of a report under mandatory reporter statutes, stating a good faith belief that the principal may be subject to physical or financial abuse, neglect, exploitation, or abandonment by the attorneyin-fact or someone acting for or with the attorney-in-fact.

The statute allows the third party to request a certification by the attorney-in-fact, provided under penalty of perjury, of any factual matter concerning the document or parties there-

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Probate and Trust Update to; AND an opinion of the counsel as to any matter of law concerning the power of attorney, if the third party provides a record of the reason for the request. The Kansas Legislative Research Department inexplicably indicates that this is to be an opinion of the “third person’s counsel”, which the statute does not so indicate (and hopefully that is not an option for recalcitrant third parties). The Judicial Council is directed to develop a form for the attorney-in-fact’s certification that shall be deemed sufficient if in substantial compliance with that form.

A third party refusing to accept a power of attorney in violation of the statute shall be subject to a court order mandating acceptance, and if the court determines that the third party did not act in good faith it may award reasonable attorney fees and costs.

This legislation was undoubtedly enacted to address the recalcitrance of certain institutions refusing or delaying recognition of powers of attorney. It seems that this happens most often with larger national institutions when the request is for a withdrawal from or termination of an account. Hopefully, the solution is not consumed by the exceptions. Two in particular may prove problematic. If the opinion of counsel is not to be from the principal’s attorney, but from the third party, then delay and concocted excuses may nevertheless result.

Secondly, the option of the third party to seek an indemnification (though limited to forgery) is to be one that is reasonably satisfactory to the third party or it could require a bond that might not even be available for many attorneys-in-fact. Let’s hope the game playing by certain institutions stops as there can be real economic consequences from such delay, that class action counsel might more appropriately pursue.

Senate Bill 106 replaces the Uniform Law on Notarial Acts with the Revised Uniform Law on Notarial Acts effective January 1, 2022. Two significant changes involve remotely located signatories and certification of an electronic record.

A remotely located individual (defined as someone not in the physical presence of the notary) may use communication technology to appear. The notary must have satisfactory evidence of the identity, reasonably confirm that the record is the same both places, retain audio-visual recording of the performance for ten years, and have notification to and pre-qualification with the Kansas Secretary of State. BE SURE THAT YOUR MALPRACTICE POLICY COVERS THIS as some specifically exclude coverage for signings that are not in-person.

The statute also allows a Register of Deeds to record a tangible copy of an electronic record certified by the notary as an accurate copy, provided the notary has passed an exam with, and provided required information to, the Kansas Secretary of State.

New short-form certificates of notarial acts are to be pro-

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vided by the Kansas Secretary of State by January 1, 2022.

Senate Bill 107 enacts the Uniform Fiduciary Income and Principal Act (UFIPA) in place of the Uniform Principal and Income Act (UPIA). Its purpose is to provide for distribution of assets to trust and estate beneficiaries according to methods provided for allocating receipts and expenses to principal and income. The 29 page statute is effective July 1, 2021, and will surely be the subject of continuing education programs.

An 11 page summary is included with the Kansas Legislative Research Department’s 2021 Summary of Legislation.

Senate Bill 178 amends the Kansas Banking Code to permit a national bank, federal savings association, or federal savings bank to convert its charter to a state trust company. Conversely, a state trust company can convert to one of the three federal institutions.

Senate Substitute for HB 2074 establishes a fidfin fiduciary institution pilot program beginning July 1, 2022. The Kansas Legislative Research Department’s 2021 Supplement I to Preliminary Summary of Legislation has an 18 page summary of the comprehensive 18 page statute.

House Bill 2254 increases the $7,000 cap on irrevocable prearranged funeral agreements to $10,000, effective July 1, 2021.

Each July 1 thereafter the amount is tied to any increase in the defined Consumer Price Index.

Senate Bill 67 creates a law establishing right of way for funeral processions. Curiously, the bill requires each vehicle in the procession to have its lights on, but does not state what the effect may be if one vehicle does not in regard to the protections provided to the procession.

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 Doctorate degree 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.

IRS Tax Cases, Rulings and Changes in the Federal Law

By Lauren G. Hughes, Wise & Reber, L.C. TAX CASES 1. Donald Bailey v. Commissioner (2021) TC Memo 2021-55

In Bailey, an S corp. shareholder of a medical imaging corporation (who happened to be a former CPA/unenrolled return preparer) and his spouse were not entitled to deduct legal fees relating to unsuccessful malpractice suit they commenced against an attorney and expert witness who assisted the shareholder in earlier unsuccessful refund case involving his and wife’s taxes. The Tax Court reasoned that since origin of claim went to taxpayers’ personal taxes, not husband’s tax business, these expenses were considered non-deductible personal expenses. This case also denied excess home office deductions above amounts the IRS allowed, as the taxpayers did not substantiate the additional amounts or show for Section 280A purposes that any part of home was exclusively used on regular basis as principal place of business for their trade or business, or by clients or customers in meeting or dealing with taxpayers in normal course of same.

2. In re Stackley, Bktcy Ct KS, 127 AFTR 2d 2021-689 In Stackley, the bankruptcy court redetermined exemptible amount of portion of taxpayer’s Chap. 13 petition-filing year refund that was attributable to EIC, finding that Kansas’ “maximum credit allowed to debtor pursuant to Code Sec. 32” language limited her bankruptcy estate exemption to portion of refund attributable only to her federal EIC, precluding her from exempting any amount attributable to her state EIC. 3. Andrews v. U.S., Ct Fed Cl, 127 AFTR 2d 2021-693 In Andrews, the taxpayer/executor hired an estate planning law firm to administer the estate of the decedent. The decedent’s estate was required to file a Form 706 given the size of his estate. Estate tax would be assessed on the decedent’s estate. The taxpayer alleged that his attorney advised him to file a Form 4768 requesting the automatic six-month extension provided by the IRS regulations to file the Form 706.

According to the taxpayer, the attorney assured him that “the automatic extension ordinarily afforded by Form 4768” ensured that “no return and no liability would be due until the extended due date . . .” Consequently, the taxpayer authorized the attorney to apply for the extension, but the attorney failed to file the Form 4768 due to a computer calendaring error that failed to generate the correct due date for the form.

After realizing her error, the attorney completed and filed the estate’s Form 706 return, reporting tax due of approximately $3 million. Because of the illiquidity of the estate’s assets, the estate did not make a tax payment at that time.

The IRS assessed against the estate a late-filing penalty, a latepayment penalty, and interest. About a month later, the IRS assessed an additional late-payment penalty and interest. The estate fully paid all tax owed, as well as all penalties and interest assessed against it with respect to its Form 706.

The taxpayer then filed an IRS Form 843 “Claim for Refund and Request for Abatement.” After delays in reviewing the Form 843, the taxpayer filed suit seeking a refund for the latefiling penalties, late-payment penalties and interest on those penalties.

The court ultimately dismissed the taxpayer/executor’s complaint for refund of failure to timely file returns and timely pay tax penalties that the IRS imposed. This ruling came notwithstanding the taxpayer’s reliance on the attorney to assist with estate taxes. The court reasoned that it was still taxpayer’s nondelegable duty to timely seek extension request, and that the taxpayer did not plead facts that, as a matter of law, demonstrated reasonable cause for avoiding the penalties at issue.

There is a distinct difference with relying upon a professional concerning a question of tax law versus determining and meeting unambiguous statutory deadlines. The court in citing United States v. Boyle, 469 U.S. 241, 251, 105 S.Ct. 687, 693, stated that “one does not have to be a tax expert to know that tax returns have fixed filing dates and that taxes must be paid when they are due.” The delegation of ministerial tasks, such as filing a tax return or remitting a tax payment, does not absolve the taxpayer of his duty to comply with the statutory deadlines. Thus, the court rejected the taxpayer’s argument and enforced all late filing penalties and interest.

4. Rev. Proc. 2021-24 In Rev. Proc. 2021-24, the IRS permits individuals not otherwise required to file an income tax return to receive the advance child tax credit payments and economic impact payments. In order for individuals to obtain the advance child tax credit payments (and other applicable payments), this revenue procedure provides several methods in which to obtain those payments. Taxpayers may (1) file a simplified Federal tax return; or (2) file an electronic Federal income tax return. In the past, electronic filing of Federal tax returns was prohibited for taxpayers whose AGI was zero.

5. Estate of Michael J. Jackson v. Commissioner, 2021 TC Memo 2021-48 This case is less like a memo and more like a treatise. The Estate of Michael J. Jackson v. Commissioner is a massive tax case involving a valuation dispute of three intangible assets left in Michael J. Jackson’s estate following his death: (1) Jackson’s image and likeness; (2) his interest in New Horizon Trust II,

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Tax Cases and Rulings... through which he held an interest in Sony/ATV Music Publishing, LLC; and (3) his interest in New Horizon Trust III, which contained Mijac Music, a music-publishing catalog that owned the copyrights to compositions that Jackson wrote or co-wrote, as well as compositions by other songwriters.

The estate, on its 2009 Form 706, alleged the three assets in question held the following values: (1) (2) (3)

Jackson’s image and likeness - $2,105.00 New Horizon Trust II - $0.00 New Horizon Trust III - $2,207,351.00

In contrast, the IRS determined that the three assets were valued as follows: (1) (2) (3)

Jackson’s image and likeness - $434,264,000.00 New Horizon Trust II - $469,005,086.00 New Horizon Trust III - $60,685,944.00

Because of this disparity, the IRS assessed additional estate tax liability of $500,000,000 and imposed a penalty of $200,000,000 as a substantial understatement penalty.

The Estate countered in its brief to the Tax Court by asserting the following valuation adjustments: (1) (2) (3)

Jackson’s image and likeness - $3,078,000.00 New Horizon Trust II - $0.00 New Horizon Trust III - $2,267,316.00

In an opinion that spanned over 260 pages, the court went into significant detail regarding the late Mr. Jackson’s background, family, success and fame. But ultimately, at the time Mr. Jackson passed away, he was deeply in debt and his likeness and image had become tarnished by severe allegations regarding civil and criminal offenses.

As to the valuation of his image and likeness, the Tax Court redetermined value of the late Mr. Jackson’s image/likeness in an amount which was more than estate’s original return position, but closer to its expert’s revised amount and approximately $156 million less than amount IRS determined.

In so holding, the court categorically rejected the IRS expert’s estimate as “fantasy,” finding that he valued wrong assets such as copyrights; improperly included unforeseeable events/revenue streams from such things as merchandising agreement and themed attractions which, given Mr. Jackson’s pre-death reputation, were unforeseeable at time he died; and made other miscalculations. In contrast, even though not completely agreeing with the estate’s experts, particularly on some issues such as tax affecting, the court found their revised estimate to be “much closer to reality,” noting that they gave proper weight to the impact certain allegations had on Mr. Jackson’s ability to market his image/likeness up until death and that

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their revenue projections were largely reasonable. The tax court valued Mr. Jackson’s image/likeness at $4,153,912.00.

In valuing the late Mr. Jackson’s interests in New Horizon Trust II and New Horizon Trust III, the Tax Court redetermined the values initially proposed by the estate and revalued by the IRS. In the New Horizon Trust II, the IRS’s expert valued this interest at over $200 million. In its initial Form 706, the estate reported an asset value of $0 for this interest, citing the fact that Mr. Jackson borrowed heavily against this asset and other substantial factors. The court stated that Sony/ATV Music Publishing, LLC (the trust’s main asset) was operating in the music-publishing industry, not just a music catalog, therefore, the court applied an income approach and discounted cash-flow analysis. The court’s valuation also took into account a number of factors, including effect of stated debt, and ultimately, like the estate initially asserted, arrived at zero dollar death date value, albeit not using same underlying calculations or assumptions as estate’s experts. Finally, as to Mr. Jackson’s interest in the New Horizon Trust III, whose major asset was another music catalog that owned copyrights to Mr. Jackson’s and other artists’ compositions, the court noted the difficulty in valuing this asset and, in detailed analysis, determined the value in the an amount relatively closely aligned with IRS’s expert’s estimate, and more than $100 million more than taxpayer’s experts estimated. The Tax Court valued Mr. Jackson’s interest in the New Horizon Trust III at $107,313,561.00.

Although there was an increase in the valuation of assets from what was originally reported on the Form 706, the Tax Court did overturn the $200 million in underreporting penalties, noting that the Estate reasonably relied on a reputable and credible appraiser who employed standard methods that are widely accepted in the valuation of these assets. As parting words, the court noted: “Popular culture always moves on. There will come a time when Captain EO joins Monte Brewster and Terry Forbes as names that without googling sort of sound familiar, but only to people of a certain age or to students of entertainment history. And just as the grave will swallow Jackson’s fame, time will erode the Estate’s income. It resurrected and then sold what became its most valuable asset to Sony before trial. The value of what it has left, no matter how well managed, will now dwindle as Jackson’s copyrights expire and his image and likeness shuffle first into irrelevance and then into the public domain.”

RULINGS 1. PLR 202119009 A 501 (c)(3) charitable organization operates an educational grant program that promotes charitable, educational, and scientific endeavors and has recently been promoting people,

Tax Cases and Rulings... culture, history, imagination, and literature through language, poetry, story, and dialogue. To facilitate this mission, the charitable organization plans on operating a grant program making fellowships and literary awards directly to writers. The recipients of these grants will be required to attend a retreat in various locations that are held annually. The charitable organization plans to publish the educational program grant through the website, national press releases, limited paid advertising and word of mouth. The number of grants may fluctuate based upon shifting budgetary concerns or based upon the number of invited recipients who accept or decline the grant in a given year.

IRC 4945 imposes certain excise taxes on taxable expenditures of private foundations. A taxable expenditure is any amount a private foundation pays as a grant to an individual for travel, study, or other similar purposes. If a grant meets certain requirements pursuant to IRC 4945, such a grant is not a taxable expenditure. Such requirements include: • The foundation awards the grant on an objective and nondiscriminatory basis.

• The IRS approves in advance the procedure for awarding the grant.

• The grant is: o A scholarship or fellowship subject to Section 117(a) and is to be used for study at an educational organization described in Section 170(b)(1)(A)(ii); or o A prize or award subject to the provisions of Section 74(b), if the recipient of the prize or award is selected from the general public; or o To achieve a specific objective; produce a report or similar product; or improve or enhance a literary, artistic, musical, scientific, teaching, or other similar skill or talent of the recipient PLR 202119009 determined that the charitable organization met each of the requirements pursuant to IRC 4945 so that the grant was not a taxable expenditure.

2. PLR 202125007 The IRS has held that an inherited IRA’s assets, which were transferred to a non-IRA account, could not be transferred back into an inherited IRA. Generally, amounts distributed from an IRA are included in the distributee’s gross income in the year the distribution is received by the distributee. IRC 408(d)(1). However, a trusteeto-trustee transfer of funds from an individual’s own IRA into another IRA maintained for the benefit of the same individual

is not a distribution includible in gross income. Rev Rul. 78406.

In addition, an individual who receives a distribution from their own IRA (i.e., the IRA maintained for the benefit of that individual) is not required to include the distribution in income if the individual “rolls over” the entire distribution into another IRA within 60 days after receiving it (“rollover exception”). IRC 408(d)(3)(A).

An “inherited IRA” is an IRA acquired by a person by reason of the death of an individual who is not their spouse. IRC 408(d)(3)(C)(ii). The rollover exception in IRC 408(d)(3)(A) does not apply to amounts distributed from an inherited IRA. IRC 408(d)(3)(C)(i).

After the death of his wife, the decedent assumed ownership of IRA X. The decedent then named Trust, a valid irrevocable trust, as the beneficiary of IRA X and named his children as trustees and beneficiaries of the Trust. Upon the decedent’s death, IRA X became an inherited IRA maintained for the benefit of Trust (“inherited IRA X”).

Shortly after the decedent’s death, the custodian of IRA X advised the Trust to transfer inherited IRA X’s assets to a nonIRA account if Trust wanted to trade stocks. Following the custodian’s advice, the Trust transferred substantially all of inherited IRA X’s assets to a non-IRA account held by the custodian for the benefit of the Trust.

Several months after that transfer, the Trust wanted to transfer the assets in the non-IRA account back to an inherited IRA account maintained for the benefit of Trust without including either distribution in gross income.

The IRS ruled that the Trust could not transfer assets from non-IRA account back into inherited IRA. The IRS denied the Trust’s request to transfer the assets back into an inherited IRA because the only permissible way to transfer assets from one inherited IRA to another is via a trustee-to-trustee transfer, which has to be a direct transfer from one IRA to another IRA. Furthermore, the amounts distributed by the Trust into the non-IRA account are to be included in the gross income for the Trust in the year of the transfer.

CHANGES (OR POSSIBLE CHANGES) IN FEDERAL LAW 1. S. 994 – “For the 99.5 Percent Act” This bill has been introduced in the Senate to reduce estate, gift, and generation-skipping transfer tax exemption amounts and increase rates. The bill also would eliminate or reduce the tax benefits received from certain estate planning techniques.

Senator Bernie Sanders (I-VT) introduced S. 994, also known

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Tax Cases and Rulings... as the “For the 99.5 Percent Act,” which would amend the Code to increase the rates set forth under Code Sec. 2001.

For estates over the basic exclusion amount (see below), the rate would be 39%; for estates over the basic exclusion amount and not over $10 million, the rate would be 45%; for estates over $10 million and not over $50 million, the rate would be 50%; for estates over $50 million and not over $1 billion, the rate would be 55%; and for estates over $1 billion, the rate would be 65%.

The bill would also reduce the basic exclusion amount, which for 2021 is $10,000,000, adjusted for inflation, to $3,500,000 for estates of decedents dying, and generation-skipping transfers and gifts made, after December 31, 2021. The text of the bill does not include an annual inflation adjustment for the basic exclusion amount. It is also important to note that the bill is not retroactive for decedents dying after January 1, 2021, rather would take effect in 2022.

For purposes of the special use valuation under Code Sec. 2032A, the bill would increase the limitation on the total decrease in the value of qualified property from $750,000 (as adjusted for inflation) to $3 million (as adjusted for inflation).

The bill would eliminate a step up in basis for certain grantor trusts, the assets of which are not includible in the grantor’s estate.

The bill would eliminate valuation discounts for some transfers of nonbusiness assets. The bill would also impose a minimum term limit of ten years for grantor retained annuity trusts (GRATs), and provide that the remainder interest for a GRAT must not be less than an amount equal to the greater of 25% of the trust assets or $500,000.

In addition, the bill would apply an inclusion ratio of one to any generation-skipping transfer trust that is longer than 50 years, and would impose a limit of two donees for annual exclusion gifts.

Whether or not this bill, or some other form of it will pass, is a wait-and-see game.

2. IR 2021-117 The IRS reminds taxpayers that there is no late filing penalty for those who missed 5/17 tax filing deadline and are due refund. But, taxpayers who owe and missed filing deadline without requesting extension should file quickly to limit penalties and interest. Additional time to file and pay any taxes due without penalties and interest is available for members of military who served or are currently in combat zone, support personnel in combat zones or contingency operation in support of armed forces, and some disaster victims.

3. HR 2954 “Securing a Strong Retirement Act” (some-

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times referred to as the Secure Act 2.0) On May 5, the House Ways and Means Committee voted unanimously to send the bipartisan bill HR 2954, “Securing a Strong Retirement Act” (sometimes referred to as Secure Act 2.0), to the full House for consideration. The goal of the bill is “to increase retirement savings, and simplify and clarify retirement plan rules,” among other things.

The bill builds on the Setting Every Community Up for Retirement Enhancement (SECURE Act, PL 116-94), signed into law in December 2019 to improve retirement savings opportunities for workers. Highlights of the bill include: • Automatic enrollment in retirement plans. The bill would require 401(k) and 403(b) plans to automatically enroll participants in the plans upon their becoming eligible to participate (though employees may opt out of coverage). The initial automatic enrollment amount would be at least 3% of compensation but not more than 10%, i.e., each employee would automatically contribute a percentage of compensation as decided by the employer unless the employee chooses to contribute another amount or none at all. And then each year the amount that the employee automatically contributes would be increased by one percentage point, until it reaches at least 10%, but not more than 15%, of compensation, unless the participant specifically elects not to have such contributions made or to have such contributions made at a different percentage. All current 401(k) and 403(b) plans are not subject to these rules. There are also exceptions for new businesses and small businesses.

• Indexing IRA catch-up limit. Under current law, the limit on IRA contributions is increased by $1,000 (not indexed for inflation) for individuals who have attained age 50. The bill would index the $1,000 catch-up amount starting in 2023.

• Higher catch-up limit to apply at age 62 through 64. Under current law, employees who have attained age 50 are permitted to make catch-up contributions under a retirement plan in excess of the otherwise applicable limits. The limit on catch-up contributions for 2021 is $6,500, except in the case of SIMPLE plans for which the limit is $3,000.

The bill would increase these limits to $10,000 and $5,000 (both indexed), respectively, for individuals who have attained ages 62 but have not attained age 65 by the end of the tax year.

• Increase in age for required beginning date for mandatory distributions. Under current law, participants are generally required to begin taking distributions from their retirement plans at age 72. The bill would increase the required minimum distribution age to 73 starting on January 1, 2022, to 74 starting on January 1, 2029, and to 75 starting on January 1, 2032.

Tax Cases and Rulings...

• Penalty-free withdrawals from retirement plans for individuals in case of domestic abuse. The bill would allow retirement plans to permit participants that self-certify that they experienced domestic abuse to withdraw a small amount of money (the lesser of $10,000 or 50% of the participant’s account). A distribution made under this provision would not be subject to a 10% tax on early distributions. Additionally, a participant would have the opportunity to repay the withdrawn money to the retirement plan over three years, in which case they would be refunded the income taxes on the money that is repaid.

• SIMPLE and SEP Roth IRAs. The bill would allow SIMPLE IRAs to accept Roth contributions. In addition, the bill would allow employers to offer employees the ability to treat employee and employer SEP contributions as Roth (in whole or in part).

4. IR 2021-113 The 2021 advance child tax credit (CTC) payments, that were provided for in American Rescue Plan Act, will begin being made on July 15, 2021 and here is some additional information about the payments.

Taxpayers are allowed a CTC—temporarily expanded and made refundable for 2021 by the American Rescue Plan Act (ARPA, PL 117-2, 3/11/2021)— for each qualifying child.

The credit phases out for taxpayers with adjusted gross incomes (AGIs) over certain thresholds. Code Sec. 24. For 2021, a qualifying child with respect to a taxpayer is defined as an under-age-18 child, whom the taxpayer may claim as a dependent (i.e., a child related to the taxpayer who, generally, lived with the taxpayer for at least six months during the year), and who is a U.S. citizen or national, or a U.S. resident. Code Sec. 24(a); Code Sec. 24(c); Code Sec. 24(i)(2)(A).

or the Senate. The House of Representatives and the Senate passed the American Rescue Plan Act of 2021. On March 11, 2021, President Biden signed the $1.9 trillion American Rescue Plan Act of 2021 into law.

Here are some of the key tax and pension provisions in the bill: Individual tax provisions • Economic impact payment/recovery rebate credit. The payment/credit is a maximum of $1,400 for a single taxpayer ($2,800 for joint filers), in addition to $1,400 per dependent for qualifying taxpayers.

• Child tax credit. Makes the child tax credit fully refundable for 2021 and increases the maximum amount from $2,000 to $3,000 per child ($3,600 for a child under age 6).

• Child and dependent care tax credit. Makes a number of modifications for 2021. For example, makes the credit fully refundable and increases the maximum credit rate to 50%.

Amends the phase-out threshold to begin at $125,000 instead of $150,000.

• Premium tax credit. Increases credits for individuals eligible for assistance under current law and provides credits for taxpayers with income below 400% of the federal poverty line.

• COBRA. The bill would subsidize 85% of premiums for individuals eligible for COBRA continuation coverage if they lose their job. The employee would pay 15% of the premium, and the employer or health plan could claim a refundable tax credit for paying the remaining amount.

The IRS is required to establish a program to make periodic advance payments which in total equal 50% of IRS’s estimate of the eligible taxpayer’s 2021 CTCs, during the period July 2021 through December 2021. Code Sec. 7527A. Recipients will receive the monthly payments through direct deposit, paper check, or debit cards. IRS says that it is committed to maximizing the use of direct deposit.

Business tax provisions

While most taxpayers will not be required to take any action to receive their payments, the IRS says that it will continue outreach efforts with partner organizations over the coming months to make more families aware of their eligibility.

• Credits for paid sick and family leave. The bill would make a number of changes. Among them: extend through September 30 tax credits for employer-provided paid sick and family leave; and increase the wages covered by the paid family leave credit to $12,000 per worker, from $10,000.

5. American Rescue Plan Act of 2021 The House Budget Committee approved the American Rescue Plan Act of 2021, a bill to enact President Biden’s COVID-19 relief package. The bill includes another round of economic impact payments as well as several tax and pension changes.

Its provisions are subject to change by the full House and/

• Employer provided dependent care assistance. Increases the exclusion for employer-provided dependent care assistance from $5,000 to $10,500 (from $2,500 to $5,250 in the case of a separate return filed by a married individual) for 2021.

• Employee retention credit. The bill would extend this credit through December 31, 2021.

• Corporate interest expense. The bill would eliminate the ability of companies to allocate interest expenses on a worldwide basis beginning in 2021.

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Tax Cases and Rulings...

Pension provisions • Multiemployer pensions. The bill would: establish a fund for the Pension Benefit Guaranty Corporation (PBGC) to provide financial assistance to struggling multiemployer pension plans; permit plans to amortize investment and other losses incurred after February 29, 2020, over 30 years instead of 15.

• Pension smoothing. The bill would extend and modify “pension smoothing,” which increases the interest rates used to calculate pension fund liabilities, allowing companies to contribute less money to pension plans in the short term.

• Other pension provisions. The bill would: extended amortization for single employer plans; modify the special rules for minimum funding standards for community newspaper plans; and freeze cost of living adjustments.

6.

Kansas Taxpayer Protection Act

On May 17, 2021, Kansas Governor Laura Kelly signed legislation enacting the Kansas Taxpayer Protection Act, requiring paid tax return preparers to sign tax returns and provide tax identification numbers. The bill also enacts new tax credits against income tax; allows employers to choose the withholding state for employees who are temporarily teleworking; exempts compensation for taxpayers whose identity was used to fraudulently secure any compensation; expands the eligibility for the single city port authority credit; extends the time period for eligibility in the loan repayment program and the income tax credit related to rural opportunity zones; and defines rural opportunity zones on the basis of population. The bill also authorizes actions to enjoin paid tax return preparers from engaging in specified conduct or from further action as a paid tax return preparer once a preparer is found to be in violation of the act. “Paid tax return preparer” means any person who prepares or substantially prepares for compensation, or who employs one or more persons who prepare or substantially prepare for compensation, any income tax return or claim for refund, required to be filed pursuant to Kan. Stat. Ann. § 79-3201. The term does not include individuals licensed as certified public accountants in Kansas or by other jurisdictions or an individual employed by a firm licensed in Kansas and preparing a return under the supervision of a licensed individual.

• Donations to the Eisenhower Foundation. For tax years commencing after December 31, 2020, and before January 1, 2026, the bill provides for a credit against income tax equal to 50% of the total amount contributed during the taxable year to the Eisenhower Foundation, not to exceed $25,000 for individuals or $50,000 for corporations.

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• Donations to the Friends of Cedar Crest Association. For tax years commencing after December 31, 2020, and before January 1, 2026, a credit against income tax will be allowed for 50% of the total amount contributed to the Friends of Cedar Crest Association, not to exceed $25,000 for individuals or $50,000 for corporations.

• Wages paid to teleworkers. For tax years commencing after December 31, 2020, and before January 1, 2026, for wages paid to employees who are temporarily teleworking in a state other than their primary work location, employers will have the option to continue to withhold income taxes based on the state of the employee’s primary work location and not based on the state in which the employee is teleworking or otherwise working during the coronavirus (COVID-19) pandemic.

• Compensation received via identity fraud. For any individual whose identity was fraudulently used to secure any type of compensation, if the individual never received the compensation, the compensation will not be considered gross income and will not be taxable for Kansas income tax purposes after the Department of Revenue determines that the compensation was fraudulently obtained by another individual.

• Rural opportunity zones. The bill expands eligibility for the rural opportunity zone credit to counties with a population of 40,000 or less. The expiration date for the loan repayment program is extended from July 1, 2021, to July 1, 2023. For tax years commencing before January 1, 2024, taxpayers who establish residency in a rural opportunity zone are eligible for an income tax credit when domicile is established prior to January 1, 2023.

7. Kansas First-Time Homebuyer Savings Account Act On and after July 1, 2022, individuals may open an account with a financial institution and designate the account as a first-time home buyer savings account to be used to pay or reimburse a designated beneficiary’s eligible expenses for the purchase or construction of a primary residence in Kansas.

The maximum contribution in any tax year is $3,000 for individuals and $6,000 for married couples filing a joint tax return, and the maximum contributions into an account in all tax years will be $24,000 for individuals and $48,000 for married couples filing joint returns. The maximum total allowed in an account will be $50,000; if these limits are exceeded, all interest or other income earned on the investment of the money in the account will be subject to Kansas income tax. Money will be subject to recapture and added to adjusted gross income in the tax year withdrawn if it has been less than a year since the first deposit in the account or the money is used for a purpose other than specified.

Tax Cases and Rulings...

About the Author Lauren G. Hughes, McPherson, is a member of Wise & Reber, L.C. 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.

While at KU Law, Lauren served as a Staff Editor for the Kansas Journal of Law & Public Policy and served on the Editorial Board as a Staff Articles Editor. Lauren was elected as a Graduate Student Senator for KU’s Student Senate, volunteered with the Volunteer Income Tax Assistance (VITA) Program, and served as a Graduate Teaching Assistant for the undergraduate Business Law course.

She is currently President-Elect of the Kansas Bar Association’s Young Lawyers Section and also serves on the University of Kansas School of Law’s Board of Governors. In 2020, Lauren was named as the Kansas Bar Association’s Outstanding Young Lawyer of the Year.

Email: lhughes@bwisecounsel.com

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