The Internal Revenue Service ruled today that depositors in Maryland savings and loan institutions do not have to pay taxes on interest they earned but could not withdraw from their accounts last year.
Under the plan announced today, the IRS said that an affected taxpayer will have to pay income tax for 1985 only on interest actually withdrawn from his or her account during that year and only after all of his or her previous deposits also have been withdrawn. Without the special ruling, depositors would have had to pay taxes on any interest they earned, even if they did not have access to it.
If, for example, an account earned interest of $1,000 during 1985 and had a year-end balance of $1,200, the taxpayer would not be required to report or pay tax on any interest earned on that account on the 1985 federal tax return, the IRS said.
If the year-end balance in that same account, however, is $800, then the taxpayer would report and pay tax on $200 as taxable interest income.
"If taxpayers could not withdraw any money there will be no interest taxed," Teddy R. Kern, IRS district director for Maryland and the District of Columbia, said at a news conference. "They will only pay taxes on interest they received."
Taxpayers who receive the relief must treat any interest earned but not reported in the 1985 tax year as if it had been earned on the first day of the 1986 tax year assuming the crisis is over by the end of this year, the IRS said.
Under Gov. Harry Hughes' proposed pay-back plan, however, many depositors may not gain access to all of their money for four years. According to Kern, depositors will be taxed when they actually get the interest they have earned.
The tax relief plan is expected to affect most of the Maryland depositors whose funds were limited or frozen in a savings and loan, Kern said.
"The vast majority of depositors will be pleased with this relief," said Kern. "About 70 to 80 percent won't pay any taxes on the interest they earned."
More than 100,000 depositors have money still tied up in Old Court Savings & Loan of Baltimore, which is in receivership, and First Maryland Savings and Loan of Silver Spring, Community Savings & Loan of Bethesda and Ridgeway Savings and Loan of Catonsville, which are under state control. Another eight institutions, with over $126 million in deposits, still have a $1,000 limit on withdrawals.
Members of Congress from Maryland had asked the IRS to exempt interest on the deposits after worried Maryland depositors made numerous calls to lawmakers' offices.
Only taxpayers with deposits at institutions that agree to implement the IRS plan are eligible for tax relief. Eleven of the 12 affected institutions have indicated they will accept the plan.
Only Ideal Savings and Loan Association in Baltimore has not yet agreed to administer the plan, according to Kern.
The IRS would not speculate or comment on why Ideal had not yet agreed to the proposal. Ideal officials could not be reached for comment tonight.
The deadline to send taxpayers "1099" or "amended 1099" forms, which tell how much interest their accounts have earned, will be extended to Feb. 28 for the participating thrifts.
Those forms are needed to complete individual income tax returns. When the forms are mailed to taxpayers, further information explaining the new IRS guidelines will be provided. The IRS advised affected taxpayers to wait until they receive these forms to file their tax returns.
The four savings and loans with deposits still frozen have not yet sent these forms to taxpayers. Funds in Old Court no longer earn interest, although they did for much of last year, but deposits in the other three thrifts continue to accrue interest that cannot be withdrawn.
The state of Maryland will grant the same administrative relief as the IRS, said George H. Spriggs Jr., director of the income tax division of the Maryland controller's office.
"It would have been very difficult to explain why taxpayers would have had to report income if they didn't have the benefit of that income," Spriggs said.