Got Premium? Costanza v. C.I.R. and the Tax Treatment of Intrafamily SCINs Cancelled by Death

Gadi Zohar, Santa Clara University School of Law

Abstract

In 2003, the Sixth Circuit Court of Appeals overturned a Tax Court determination that the self-canceling installment note (SCIN) created by Duilio Costanza and his son, Michael, was a gift because it lacked the features of an arms-length transaction. It is the author's assertion that 1) the Sixth Circuit Court of Appeals overstepped its standard of review, and 2) both courts were lacking in an analysis of the most important evidence of a bona fide transaction: the consideration. Consideration for the transaction should have included a premium accounting for the risk that Duilio would die before the term of the note expired, and that was lacking from the Costanzas' SCIN. Thus, the major theme of this paper is that the premium paid for intrafamily SCINs should be the crux of a court's investigation of such matter. Risk premiums should be jurisdictional, not just suggested as they have been in a number of opinions.

This paper further touches on the tax treatment of SCINs canceled by death, including those incidents when the note is considered a gift due to the absence of a bona fide transaction or adequate and full consideration as well as the income tax treatment of the note when the transaction is considered legitimate, but canceled by death nevertheless. Lastly, this paper evaluates scenarios when SCINs may be contraindicated, including some possible forthcoming changes in tax law.