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Monthly Archives: October 2016

Designing Delusion Doctrine

Joshua C. Tate, Personal Reality: Delusion in Law and Science, 49 Conn. L. Rev. __ (forthcoming 2017), available at SSRN.

In Personal Reality, Professor Tate takes us on a wide-ranging tour through cases of delusional testators, empirical psychological studies, and assorted doctrinal reform proposals. This is all in the service of figuring out what to do with the insane delusion doctrine, which gives rise to cases with colorful facts but also judicial applications that raise red flags. In the end, Tate presents us with his solution: transforming the insane delusion doctrine from a sword for will contestants into a shield for will proponents. This is a clever and useful contribution to the lively debate over this doctrine, and this article is a must-read for those intrigued by this area of trusts and estates law.

The article starts with a history of the insane delusion doctrine. Beginning in the early 1800s, the legal doctrine developed concurrently with the scientific concept of monomania, or an irrationally held false belief on one subject that coexists alongside an otherwise rational mind. For example, in the case of Dew v. Clark, a testator believed that his daughter was from infancy an agent of Satan despite her being by all accounts of good character; he otherwise did not possess any other peculiar beliefs. If such a delusion affects the disposition in a will, as the court found that it did in that case, the delusion can lead to the will’s invalidation. The doctrine was not limited to the estates and trusts context, but its development in the realm of contract law took a different path. There, the legal realists made it a primary target, claiming that it was just a proxy for fairness determinations, which should be made explicit. As a result, the doctrine was eventually phased out and replaced with an inquiry geared towards assessing the fairness of the contractual transaction and the effects of undoing it.

The law of donative transfers was not as amenable to this type of doctrinal reformulation. Since the primary theoretical foundation for trusts and estates doctrine is the freedom of disposition, the key inquiry is whether a transaction accurately reflects donor intent, not whether the transaction is fundamentally fair in some broader sense. This does not mean, however, that the doctrine does not have its own share of problems. First, there is a line-drawing issue. In many cases, it may be difficult to assess whether a belief is in fact delusional. For example, some individuals strongly believe that their spouses are cheating on them, but absent a sex tape or a child whose DNA may be tested, it is not easy for a court to assess whether the belief is so far-fetched as to be delusional. Second, there is a causation problem. Even if there is a clear delusional belief, it may be difficult to assess whether a particular donative provision or document derives from that belief as opposed to some other cause. These uncertainties open the door for judges to impose their own beliefs about what a fair distribution of the testator’s assets would be, raising the same concerns that the legal realists had with the doctrine in contract law.

It is no wonder, then, that some commentators have argued for the abolition of the insane delusion doctrine. Tate thinks that this is premature, as delusions may still be relevant in determining whether a testator has general testamentary capacity. To reinforce this point, he describes the active efforts of psychologists and psychiatrists to better understand delusions and their relationship to other cognitive impairments. Thus far, the empirical studies have been inconclusive, but so long as such relationships might exist, Tate argues that it would be prudent to preserve the doctrine in some form.

The author goes on to review and critique two existing proposals to reform the insane delusion doctrine. Professor Amy Ronner suggests importing a distinction embraced in the Diagnostic and Statistical Manual of Mental Disorders—bizarre versus non-bizarre delusions—into the general mental capacity doctrine, subsuming insane delusion into it. Bizarre delusions are clearly implausible while non-bizarre delusions are understandable to same-culture peers or could derive from ordinary life experiences. For example, the belief that a surgeon sneaks into your bedroom every night and removes an internal organ without leaving any evidence would be a bizarre delusion, while a belief that a friend is saying awful things about you behind your back without any evidence would be a non-bizarre delusion. Tate believes this raises similar line-drawing and bias problems as exist with the current doctrine. Specifically, many individuals hold strong beliefs in supernatural phenomena, especially of a religious nature. Requiring courts to evaluate whether religious beliefs are bizarre delusions would put them in an awkward position, to say the least.

Professor Alan Oxford’s reform proposal focuses instead on the remedy provided by the doctrine. Instead of striking down an entire will on the basis of insane delusion, he suggests that it should only lead to partial invalidity of provisions that resulted from the delusion. While recognizing the merits of this proposal in many cases, Tate argues that it does nothing to address the issues of personal bias that afflict the doctrine. Further, it would not help in cases where the insane delusion is the foundation of the entire donative document, as partial invalidity is the equivalent of complete invalidity in these cases.

Tate’s solution is to change insane delusion doctrine from being a basis to contest a will into a doctrine of partial sanity that would allow will proponents to defend portions of a will. After there has been a finding that the testator lacked mental capacity, proponents of the will could argue that the lack of mental capacity was due to a delusion. If this was true, then the court could grant the remedy of upholding the portion of the will that does not derive from the delusion.

There is much to like in Tate’s doctrinal reform. First, it advances valuable concepts in trusts and estates law. Making the insane delusion doctrine a vehicle for protecting partial testamentary intent rather than a means of importing personal biases into will contests further advances the freedom of disposition. Reformulating the doctrine in this way also reinforces the important ideas that capacity is context-specific and that there is a presumption of capacity for all adults. Second, it promotes doctrinal coherence in trusts and estates law. As Tate points out, converting insane delusion doctrine into grounds for partially upholding a will brings it into harmony with other doctrines, such as fraud, undue influence, and duress, which only serve to partially invalidate portions of wills that derive from those tainted influences. Third, as a practical matter, it mitigates the problems of bias in the insane delusion doctrine, serving the same ends that the reformulation of the doctrine in contract law did.

While the legal argument is tight, I was left wondering what place the science of delusions had in the piece. It was certainly interesting and informative to read about what scientists have been studying and discovering about delusions, but some more development of the legal implications of these inquiries would be helpful. In other words, what might scientists be able to tell us that would inform how we structure or apply the insane delusion doctrine? If scientists conclusively establish that delusions are connected to other cognitive impairments, these findings might not be relevant to a particular testator in a given case, and courts are likely already capable of figuring out when a delusion might be relevant for the four-part test of mental capacity. If scientists conclusively establish that delusions are not connected to other cognitive problems, these findings might not warrant abolition of the doctrine, given how delusions might still impact the legal test of mental capacity and how Tate’s doctrinal reformulation positions the doctrine as useful regardless. Developing the proper contours of the interface between the mind sciences and the law generally is a useful endeavor, and this article may provide a further avenue through which to explore that relationship and its utility to legal scholars.

Cite as: Alexander Boni-Saenz, Designing Delusion Doctrine, JOTWELL (October 31, 2016) (reviewing Joshua C. Tate, Personal Reality: Delusion in Law and Science, 49 Conn. L. Rev. __ (forthcoming 2017), available at SSRN), http://trustest.jotwell.com/designing-delusion-doctrine/.

Reducing Valuation Error

Nancy A. McLaughlin, Conservation Easements and the Valuation Conundrum, 19 Fla. Tax Rev. 225 (forthcoming 2016), available at SSRN.

In this practical and timely article, Nancy McLaughlin undertakes a comprehensive analysis of the case law addressing valuation disputes of conservation and façade easements (conservation easements that are designed to maintain the historic character of a building’s façade). She reveals a number of ways in which taxpayers overvalue their easements, and uses what she finds to propose common-sense reforms.

Valuing property for purposes of determining a tax base is usually subjective and often contentious, so valuation-based taxes like the federal transfer taxes are vulnerable to valuation abuse. But property valuation also forms the basis for certain income tax deductions. Section 170(h) of the Internal Revenue Code, enacted in 1980, permits a deduction against the income tax for taxpayers who permanently contribute certain conservation or façade easements to governmental entities or charities. This provision is famously subject to abuse, and McLaughlin points out that valuation abuses have likely worsened over time, while the IRS has also become more adept at identifying abuses. According to McLaughlin’s calculations drawn from the case law, façade easement overvaluation by taxpayers in reported cases has increased from an average of about twice the court-determined value in the early cases to more than four times the court-determined value in the more recent cases. In the conservation easement category, overvaluation as determined from the case law has jumped from an average of about twice the court-determined amount to a whopping ten times over that amount in the more recent cases.

McLaughlin first describes the rules governing valuation and the penalties that can be imposed on taxpayers and their appraisers for overstating value. As in the case of the transfer taxes, the value of the charitable contribution of a conservation easement is “fair market value,” defined as “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.” The Treasury Regulations acknowledge that the best way to value a conservation easement is by reference to records of sales of comparable easements. Unfortunately, such a record is rarely, if ever, available. For this reason, most taxpayers use an alternative method approved by the regulations: the “before and after method.” This method values the easement as the difference between the value of the underlying property immediately before the donation and that of the property after its encumbrance by the donated easement. Each valuation is done at the property’s “highest and best use.”

After carefully and clearly explaining the before and after methodology, McLaughlin launches into the various approaches used in determining fair market value. Here she consults not only the case law and regulations but also the professional valuation literature produced by the appraisal industry, and explains the pros and cons of the various approaches. She then looks at common errors made by appraisers, such as assuming that a property could be rezoned, which she asserts can dramatically increase the value of an appraisal of property before the easement is attached. She also explains certain rules contained in the Treasury Regulations, including those that require the tax deduction to be reduced by benefits that inure to the donor as a result of the easement. McLaughlin then reviews the various overvaluation penalties, including both those that apply to taxpayers and those that apply to appraisers.

McLaughlin then delves into the case law, separately reviewing cases dealing with façade easements and those concerning conservation easements. She concludes, in part, that appraisers often overvalue façade easements by paying too little heed to the mitigating impact of extant historic preservation laws, by using nonlocal comparables in the “sales comparison approach,” and generally misapplying certain methods of valuation. Penalties fail to deter overvaluation, as they are rarely imposed unless they are strict liability penalties. Problems McLaughlin uncovers in the conservation easement area lead her to conclude that appraisers often assert unrealistic highest and best uses, make unrealistic assumptions regarding rezoning possibilities, misapply certain valuation analyses, and fail to consider whether the easement increases the value of other properties owned by the taxpayer. As in the case of façade easements, valuation misstatement penalties are rarely applied unless they are strict liability penalties.

McLaughlin notes that Congress recently made enhanced taxpayer incentives for façade and conservation donations a permanent part of the law, while at the same time failing to pass legislation targeting valuation abuses in the face of the Treasury’s calls for reform. McLaughlin agrees with the Treasury that reform is needed, but dismisses its specific proposals as off the mark. One Treasury proposal calls for donee organizations to be subject to penalties and loss of donee status for accepting overvalued easements where these organizations had actual or constructive knowledge that they were overvalued. McLaughlin concludes that such reforms would have little effect for at least three reasons: high values are good for donees, as they increase the likelihood of donations; valuation is necessarily subjective, and therefore knowledge of overvaluation cannot be asserted except in the most egregious cases; and such a rule would incentivize donees to obtain their own valuations, doubling the IRS’s opponents in any litigation. McLaughlin also criticizes a Treasury proposal for electronic reporting as unlikely to have an effect in most cases. Finally, she asserts that the Treasury’s proposal for creation of a tax credit program as an alternative might actually increase abuse.

McLaughlin offers eight specific proposals for reform. She proposes an increase to the statute of limitations period during which the IRS could challenge the deductions to six years from the current three. She calls for increased and more detailed reporting requirements, and renews her call for the creation of an “Easement Advisory Panel” similar to the Art Advisory Panel that assists the IRS in curbing valuation abuses. She suggests that the Treasury create a comprehensive outline with instructions for a section 170(h) appraisal, similar to the Uniform Appraisal Standard for Federal Land Acquisitions. Appraisals meeting certain criteria that indicate possible abuse should be subject to automatic IRS review, and pre-trial processes for resolving disputes should be improved. Finally, McLaughlin offers concrete proposals for changes to the appraiser penalty provisions and suggests “safe harbor provisions” for certain easement terms so that easements that are valued as though they satisfy legal requirements actually satisfy those requirements.

McLaughlin has apparently been studying and writing about façade and conservation easements for many years. In this comprehensively researched article, she puts her considerable knowledge to use in an effort to suggest reforms designed to make deductions for charitable contributions of certain property interests reflect their actual value. Although experts in the area of conservation easements might have differences with some of McLaughlin’s analyses and prescriptions for reform, this paper stands as an example of how a careful legal scholar can produce work that will lead to better laws.

Cite as: Kent D. Schenkel, Reducing Valuation Error, JOTWELL (October 3, 2016) (reviewing Nancy A. McLaughlin, Conservation Easements and the Valuation Conundrum, 19 Fla. Tax Rev. 225 (forthcoming 2016), available at SSRN), http://trustest.jotwell.com/reducing-valuation-error/.