GOT PREMIUM? COSTANZA V. COMMISSIONER AND THE TAX TREATMENT OF SCINS CANCELLED BY DEATH

By Gadi Zohar^*

I. INTRODUCTION

This article hopes to accomplish one goal for the practitioner who is essentially unfamiliar with self canceling installment notes and another for the seasoned practitioner who is more versed in their use. In the first instance, the article seeks to introduce a practitioner to the basics of the self canceling installment note (SCIN) along with some general considerations regarding their use in practice. A SCIN, usually executed between family members, is different from other notes in that a person’s death (usually the note’s holder) immediately terminates any future obligations to pay on the note. The primary purpose of a SCIN is to get property (typically a closely held business) out of the donor’s estate without incurring transfer taxes.

A basic illustration follows. Mother, seventy-five years old and in average health, owns an auto dealership with a fair market value of $5,000,000. She sells the dealership to Daughter in exchange for a SCIN. The $5,000,000 note matures in eight years, is payable quarterly and accrues interest at a rate of AFR + 5%. Keep in mind that at this point, Mother could live for three years, in which case the note, if respected by the IRS, avoids transfer tax consequences (income tax consequences are discussed below). If Mother lives long enough for the note to mature, she has essentially imposed de facto transfer tax consequences to daughter who paid full price plus a high interest rate for the dealership while Mother paid income taxes on the payments. Moreover, whatever is left of the payments in Mother’s estate is subject to estate taxes. Thus, one can take from this example that a SCIN is only advantageous if the holder dies before maturity.