United States v. Centennial Savings Bank FSB (1990)
- Docket
- 89-1926
- Decided
- 1990-01-01
Summary
Question: Can a bank list the exchange of properties that have equal fair market value as a loss on its federal Income Tax return if the property it loses is worth significantly less at the time of the exchange than it was when the property was initially acquired? May a bank treat money received from early withdrawal penalties as "income from the discharge ... of indebtedness" under 26 U.S.C. 108(a)(1)(C)? Conclusion: Yes and no. On the exchanged mortgage question, the Supreme Court referred to a companion case, Cottage Savings Association v. Commissioner of Internal Revenue , 499 U.S. 554, decided at the same time, in holding that the mortgages exchanged were "materially different" and could therefore be deducted as losses. On the question of early withdrawal penalties, however, the Court sided with the IRS. Justice Thurgood Marshall, writing for the majority, stated that income comes from the "discharge ... of indebtedness" only when it is the result of the forgiveness of an obligation to repay assumed by the debtor (in this case the bank) at the outset of the debtor-creditor relationship. Because the early withdrawal fee was stipulated in the contract agreed upon at the outset of the certificate of deposit agreements, its payment was not the forgiveness of any obligation on behalf of the bank but rather the fulfillment of an obligation on behalf of the creditor. The bank was therefore required to list the penalties as income.