Krantz v. University of Kansas

271 Kan. 234

21 P.3d 561

KERMIT E. KRANTZ, Appellee/Cross-appellant, v. UNIVERSITY OF KANSAS and KANSAS UNIVERSITY GYNECOLOGICAL AND OBSTETRICAL FOUNDATION, Appellants/Cross-appellees.

No. 85,021.

Supreme Court of Kansas.

Opinion filed April 20, 2001.

John C. McFadden, special assistant attorney general, and David J. DeSimone, of DeSimone Pearson, L.C., of Kansas City, Missouri, argued the cause and were on the briefs for appellants/cross-appellees.

Paul D. Sinclair, of Sinclair, Sawyer, Thompson, Haynes & Cowing, P.C., of Kansas City, Missouri, argued the cause, and James J. O'Connell, of the same firm, was with him on the briefs for appellee/cross-appellant.

The opinion of the court was delivered by

ABBOTT, J.:

The University of Kansas and the Kansas University Gynecological and Obstetrical Foundation have filed this interlocutory appeal of the district court's decision rescinding the settlement agreement entered into with the appellee, Dr. Kermit E. Krantz. In its memorandum order, the district court determined that the settlement was based upon a mutual mistake of the law surrounding the tax liability of Krantz. The district court also ordered Krantz to return the money he received as part of his settlement. The district court refused, however, to order Krantz' reinstatement. Krantz has also filed a cross-appeal. This court has jurisdiction pursuant to K.S.A. 20-3018(c).

In June 1993, Krantz, a tenured member of the faculty at the University of Kansas Medical Center (University) and an employee of the Kansas University Gynecological and Obstetrical Foundation (Foundation), turned 70 years old. At the time Krantz turned 70, K.S.A. 74-4925(d) and the policies of the Board of Regents required the retirement of any faculty member of a state university at the end of the academic year following the member's 70th birthday. At the University, the academic year ends on June 30.

In April 1994, Krantz was notified by the University that it was without authority to renew his tenured appointment with the University. Krantz retained an attorney and threatened to sue the University, arguing that K.S.A. 74-4925 did not apply as it had a sunset provision which forced its expiration on December 31, 1993.

In July 1994, the parties settled all of Krantz' tort, contract, and discrimination claims and executed a separation agreement, release, and waiver of claims. The settlement required the University and the Foundation to provide Krantz with a lump sum payment of $266,365 and to pay his attorney $10,000. The settlement also provided Krantz with continued health benefits and a recommendation of Emeritus status. The settlement agreement contained the following language, which is the focus of this case:

"The parties intend that the total lump sum payment of $266,365 and the additional consideration referred to in paragraph 1 above represent compensation for any and all of Dr. KRANTZ' alleged personal injuries within the meaning of Section 104(a)(2) of the Internal Revenue Code."

At the time the settlement agreement was executed, 26 U.S.C. § 104(a)(2) (1994) of the Internal Revenue Code permitted the exclusion from "gross income" of "the amount of any damages. . . received on account of personal injuries or sickness."

Neither the University nor the Foundation deducted any taxes from the settlement it paid to Krantz. Krantz did not immediately pay any taxes on the settlement amount received. At the time of the settlement, it was understood that payments in settlement of tort damages were exempt from taxation. Taxation on payment for damages brought pursuant to the Age Discrimination Employment Act (ADEA) had not been addressed by the United States Supreme Court or the 10th Circuit Court of Appeals. Two district courts had held that payments received as damages for ADEA claims were taxable. See Maleszewski v. United States, 827 F. Supp. 1553, 1557 (N.D. Fla. 1993) (holding that settlement reached under ADEA was not excludable from gross income under § 104[a][2]); Shaw v. United States, 853 F. Supp. 1378, 1382 (M.D. Ala. 1994) (holding that liquidated damages under ADEA are not excludable under § 104[a][2]). The Supreme Court had, however, held in U.S. v. Burke, 504 U.S. 229, 119 L. Ed.2d 34, 112 S. Ct. 1867 (1992), that payment in settlement of discrimination claims brought pursuant to Title VII is taxable.

One year following the execution of the settlement agreement, the Supreme Court rendered an opinion in the case of Commissioner v. Schleier, 515 U.S. 323, 132 L. Ed.2d 294, 115 S. Ct. 2159 (1995). In Schleier, the Court held that money received as a result of an age discrimination claim brought pursuant to the ADEA was not excludable from gross income under § 104(a)(2).

Subsequent to the Schleier decision, the Internal Revenue Service (IRS) assessed income taxes against individuals who had received judgments or cash payments in settlement of age discrimination claims, including Krantz. The IRS determined that Krantz' settlement amount was comprised of (1) Foundation salary of $151,681; (2) tenured faculty salary of $46,870; (3) 3 months' termination benefits in the Foundation contract; and (4) $25,145 in back pay for the difference between the amount the Foundation owed Krantz for the first half of 1994 and the actual amount he received. The IRS set forth:

"SALARY FOUND $151,681 KUMC SALARY 46,870 TERM BENEFITS 42,512 BACK PAY 25,145 ___________ TOTAL $266,208

"ENDOWMENT PAID $225,000 & FOUNDATION PAID $41,365 OR TTAL $266,365.

"ARGUE: Substance over form—Settlement represented a compensation claim under ADEA and therefore was structured to try and evade essence of its purpose by trying to show that it was not subject to tax."

The IRS determined, therefore, that the settlement paid to Krantz amounted to compensation and was not for tort-like injuries. Because the settlement represented compensation and not damages for personal injuries, the IRS concluded that the monies were subject to income taxation. The IRS concluded that the parties were "steering [the] transaction purposely to try and define tax laws and prevent payment of taxes."

Krantz paid the IRS and the Kansas Department of Revenue the taxes that the agency claimed he owed on the lump sum settlement with the University and the Foundation. Krantz then contacted the University and the Foundation and demanded reimbursement of the $167,776 he paid in state and federal income taxes. Both the University and the Foundation refused to reimburse Krantz the taxes he payed on his settlement. Krantz thereafter filed suit against the University and the Foundation in Johnson County District Court.

Krantz asserted in his petition that the University and the Foundation breached the settlement agreement by refusing to reimburse him for the taxes paid. Krantz also asserted that a "mutual mistake" by the parties as to the tax consequences of the lump sum payment to him required the settlement agreement to be rescinded, which would permit Krantz to pursue his previously released age discrimination and breach of employment contract claims against the University and the Foundation.

The University moved to dismiss the contract-related claims against it on the basis of the exclusive remedy provisions of the Kansas Act for Judicial Review and Civil Enforcement of Agency Actions (KJRA). The district court granted the motion. In doing so, the district court stated:

"On December 29, 1998, the University advised Krantz by letter that its refusal to pay Krantz for the amounts demanded constituted final agency action on the part of the University, and it identified the party upon whom service should be made if any petition for judicial review were sought.

"The University filed a motion to dismiss Plaintiff's lawsuit pursuant to the [KJRA], K.S.A. 77-601, et seq., contending that Krantz was required, and failed, to file a petition for judicial review within thirty days of final agency action. The University argues that because a petition for judicial review was Krantz's exclusive remedy, the petition (which contains only common law claims) must be dismissed. Krantz contends that the University's refusal to participate in further settlement negotiations did not constitute agency action within the meaning of the [KJRA] ....

"The focal point of this motion is whether the University's refusal to renegotiate its settlement agreement with Krantz constitutes `agency action.' ...

"Administrative agencies are most often creatures of the legislature. They usually operate under the authority of, and with the powers delegated by, the legislature. They are often created to fulfill a specialized role in government. They often have, and in the course of their existence acquire, specialized knowledge and expertise. Their actions are subject to judicial review. However, because of their specialized nature, review of agency determinations is generally limited to determining if the agency acted within its authority and according to the appropriate procedural requirements; and to determining if the agency action is arbitrary, capricious, or an abuse of discretion....

....

"... The University, in rejecting Krantz's request to negotiate the settlement of his age discrimination claim, had no greater expertise than any other employer... in evaluating and deciding this issue. Nevertheless, the University's denial falls into the dragnet of K.S.A. 77-602(b)(3) which defines `agency action' to include `an agency's performance of, or failure to perform, any other duty, function or activity, discretionary or otherwise.' As such, the acts of an employer such as the University enjoy judicial scrutiny in the protective environment of the KJRA. Krantz's common law claims, therefore, must fail."

Although the district court found that Krantz' exclusive remedy was through the KJRA and that Krantz had failed to meet the strict statutory criteria, the district court "converted" Krantz' petition into an...