Mr. and Mrs. Costanza owned a restaurant and retail office property in Michigan and transferred their interests in these properties to revocable trusts. Their son Michael was the residual beneficiary of Mr. Costanza's trust.

Mrs. Costanza died in 1991, and in 1992 Mr. Costanza decided he wanted to retire and return to Italy after transferring his restaurant and retail properties to Michael. To minimize estate and gift taxes, his attorney counseled him to have his trust sell the properties to Michael in exchange for a self-canceling installment note (SCIN). This would require Michael to make monthly payments for an increasing interest rate, but upon Mr. Costanza's death, no more payments would be due and the note would be cancelled. The transaction was completed and the note executed in December 1992 and January 1993, but all documents were backdated to December 15, 1992.

For the first few months, Michael failed to make any payments on the SCIN. Then in March, he wrote three checks to make the payments for January, February, and March. Each check was backdated to the first day of the month in which its payment was due. Michael did not make any more payments before Mr. Costanza died in May 1993.

The estate filed an estate tax return indicating no tax due. The IRS issued a notice of deficiency in the amount of $803,868, explaining that "the sale between decedent's trust and [Michael] is not recognized because it is not a bona fide sale and because full and adequate consideration was not received." The IRS also stated that if the transaction is valid, it was a bargain sale, and the amount of the bargain is a taxable gift.

The Tax Court, noting Michael's payment history and the backdating of the transaction documents, agreed that the transfer was not a bona fide transaction for full and adequate consideration. The Court did not agree with the IRS that Mr. Costanza had retained a power to revoke the transfer. However, the Court did agree that the transfer was part sale and part gift. The amount of the taxable gift, the Court determined, was $816,870.

This is an example of a good idea wasted. In general, following a plan half way can be as bad as or worse than having no plan at all.