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Sunday, August 04, 2013


The IRS office of Chief Counsel addressed a SCIN transaction, and concluded that the value of the note was includible in the gross estate of a decedent. While not binding on taxpayers, the Chief Counsel Advice is indicative of areas that the IRS will scrutinize in SCIN transactions.

A self-cancelling installment note (SCIN) is a promissory note issued to a seller, typically in exchange for the sale of property or a loan of funds. What makes the SCIN unique is that if the holder dies while any amounts are unpaid under the note, the remaining balance is cancelled and does not have to be repaid. Estates of decedents holding a SCIN at death will usually argue that the SCIN balance at death is not subject to estate tax, and that there was no gift on the establishment of the SCIN.

In the SCIN at issue, the term of the notes were based on the taxpayer’s life expectancy under the Section 7520 tables. The notes required interest payments only, with a balloon principal payment at the end of the term. To compensate the notes for the risk of loss by reason of death, some of the notes provided for a principal amount double of that which a normal note would carry, and others included an above-market interest rate.

Factors and Considerations of the IRS as to Whether the Decedent Received a SCIN of Equal Value to What Was Sold – i.e., Avoiding a Gift on Creation, or Whether Transferred Property Should be Included in the Issuer’s Gross Estate Under Section 2038:

     a. Family SCINS are presumed to be gifts, citing Estate of Costanza v. Comm'r, 320 F. 3d 595 (6 th Cir. 2003).

     b. The presumption may be rebutted by an affirmative showing that there existed at the time of the transaction a real expectation of repayment and intent to enforce the collection of the indebtedness.

          1. Helpful facts are that the note provides for regular principal and interest payments, and that the issuer needed the payments for living expenses.

          2. Unfavorable facts are balloon principal payments and lack of need of payments for living expenses.

          3. If the payor does not have sufficient assets to pay the obligations in full, that can be used to show there is no expectation of full payment. Thus, where the payor is a trust or entity that does not have sufficient seed money or cash flow to pay the enhanced principal and interest amounts in full, this will be a bad fact.

     c.  Code Section 7520 tables are not useful in valuing the SCIN or setting the note repayment term. Instead, the notes should be valued based on the willing-buyer willing-seller standard of Treas. Regs. §25-2512-8.

          1. Illness or other items impacting life expectancy must be factored in, including in regard to the term of the SCIN.

CCA 201330033

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