The Internal Revenue Service is contemplating limited relief for depositors whose money is frozen in the three Maryland savings and loans under conservatorship, a spokesman said yesterday.
The IRS's district office in Baltimore is awaiting approval from attorneys in Washington for a plan to allow customers to defer taxes on interest income earned by savings accounts during the freeze. When the funds become available, the tax would be due, but there would be no interest or penalties. In other words, taxes would be due only when the income is actually available to the depositor, according to Domenic J. LaPonzina of the Baltimore office.
There would be no relief for customers of other state thrifts, where a $1,000 monthly limit on withdrawals is still in effect, because interest can be withdrawn. In the case of First Maryland Savings & Loan, where a temporary freeze is now in effect, taxes would be due at the normal time on all interest earned this year provided the freeze has ended by year end, LaPonsina said.
Three savings and loans -- Old Court, Merritt Commercial and Community -- remain under conservatorship for an indefinite period. The institutions continue to pay contracted rates on certificates of deposit until maturity, at which time the interest reverts to 5.5 percent.
Should the S&Ls not be taken over or the situation otherwise resolved so that the funds are available by the end of this year, under the proposed plan customers would only have to pay taxes on the interest credited to their accounts before the freeze.
For example, a depositor at Old Court with a $100,000 account paying $1,000 a month interest would have to pay 1985 taxes on the approximately $5,000 earned through May, but not on the $7,000 or so earned thereafter. Taxes on the $7,000 would be due after the account is unfrozen.
Customers unable to pay the taxes on interest credited before the freeze because they have no other source of funds, would be dealt with on a case-by-case basis by the IRS under the hardship rule, LaPonzina said. The IRS would consider eliminating or reducing late-payment interest and penalties, he said.
Normally, interest that is credited to an account and available to the customer -- even though it is not withdrawn -- is regarded by the IRS as "constructively" received and subject to taxation. If the IRS attorneys decide that the interest paid, but not available because of the freeze, is not constructively received, then taxes can be deferred. LaPonzina said he expects the IRS would allow 1985 interest income to be added to a person's 1986 income rather than requiring taxpayers having to amend their 1985 returns.
However, that will depend upon the S&Ls being able to reprogram their computers so that the 1099 forms for 1985 sent to the IRS show only the interest credited before the freeze. The IRS says it hopes to meet soon with the conservators of the three S&Ls to work this out.
When third-quarter payments for 1985 federal income taxes came due, Maryland Gov. Harry Hughes intervened to allow hardship withdrawals from S&Ls with the $1,000 a month limit. However, the governor does not have the power to allow hardship withdrawals from those S&Ls under conservatorship, LaPonzina said.