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Can you let me know whether this was a remedy provided in a court of law .... and if so, is this indemnification only (for breach of contract) .... in other words paying you back interest that you should not have been charged ... or are there punitive damages as well?
... still don't see you coming into the chat ... I'll switch us to the "Question & Answer" mode ... Maybe that will help ... (We can still continue a dialogue there, just not in real-time as we can here)
Not a court of law. A bank has understated the finance charge on the Truth in Lending statement for closed end credit because a prepaid finance charge was not included in the finance charge originally disclosed. The Truth in Lending Act states that the proper remedy is to pay the borrower the amount that the finance charge was overstated; however, because the fee was deducted from the loan amount, it's not like this fee came out of pocket for the borrower. I'm not sure if this qualifies as 1099-C income given that the borrower never "owed" the finance charge (as it came out of the borrower's loan).
Let me know a little ore about (1) order directing the restitution payments (Court, jurisdiction, arbitration, etc)
ahhh ok let me read
So the borrower was never out of pocket, the amount was never added tothe loan amount (or if was was deducted) and the payments are being payed anyway?, as pinitive damage for the lask of disclosure? (rather than to indemnify a loss)?
the bank essentially volunteered because th borrower called them on it?
sorry for the typos ... "punitive," meaning NOT to make whole for a loss, or to REPAY the borrower, but rather to punish the bank for the lack of disclosure?
So, the borrower takes out $10k, but a $500 finance charge is deducted from that amt so that the borrower receives $9,500 and repays the same amount. The TIL disclosure understated the finance charge because it did not include this prepaid amount in the disclosed finance charge as required by law. The Truth in Lending Act (16 USC 1640(b)) says that in the event of an understated finance charge, the bank must make sure that the borrower does not pay more than what was disclosed. Since the fee was already technically paid, banks typically rectify this situation by doing a "reimbursement" (which the FDIC calls "restitution").
YOu mean the borrower repays 10,000
No the borrower repays 9500. 500 comes out of their loan right away. They only net 9500.
Pays the 500 out of pocket?
I'm missing something
Either the borrower paid back a loan based on the amortization of 10,000, paid 500 out of pocket up fron or was never OUT the money
So, it's basically like, the borrower borrows $10k and then pays back $500 of it right away. Its like an up front fee.
I understand thet the client only received 9500, but paid a loan based on 10,000 right?
ok we're on the same page now
let me look at both the regs under title 26 and (16 USC 1640(b))
I can tell you right off, that under the doctrine of substance over form, IRS will say that there was no increase in net wealth here, and so not taxable
taxpayer is being indemnified IF paying a loan based on 10m000
But if the person is paying back $10k, isn't that forgiveness of debt?
NO, because her's paying 10, that he never contracted to pay
For, e.g., $500 (if that is the amt reimbursed)? Or no because they paid 500 and they are getting it back?
you can't forgive debt based on breach of contract
that's right ... it's because they are just getting it back
the contracted to pay back 10,000 with interest, after receiving 10,000
not to pay back 10,00 with interest
after receiving only 9500
soeey HE contracted
the bank promised to loan 10,000 at a certain rate of interest NOT to loan 9500 then have the borrower pay back 10,000 puls that interest
I guess I was hoping to find some authority that said in these situations (i.e. where a financial institution reimburses a borrower), this isn't income. Would the def of taxable income in the code be the answer?
its breach of contract
your probably very close ... WHAT is included and excluded
In court cases, for example where emplkoyees sue for income that wasn't paid
If the ndidn;t ever receive the income, tey have to pay tax
in a contract, (loan agreement is a contract) one of the elements is consideration
each side gives to get
borrower pays back an amortization of 10,000 that was (under the terms of the contrat) supposed to ptovide 10,000 up front
He is losing that 500
the back is giving it back to him
he gave his part... tey did not
When a taxp[ayer is being made whole, indemnified for a loss, that is not taxable
Well...technically the contract disclosed that there was a prepaid finance charge. The issue is that it wasn't included in the finance charge box disclosed on the TIL. So the bank needs to reimburse the borrower for the amt that the TIL was understated. So, they never overpaid--they were just disclosed an amt that was lower than what they were supposed to pay. But, they got their full loan amt...
hang on and let ke search WestLaw for taxation of indemnification
Ahhh, if there was no eonomic loss that is being repaid, then this IS a punitive damage and IS taxable
hang on let me verify
OK ready t read?
BotXXXXX XXXXXne Punitive Damages are not considered as excludable from income (ayorney's fees are , if that were the case)
See this (Citation is at the bottom)
The issue is that it's not money that the person is losing, right? So: I take out a loan for $10,000 and my finance charge is disclosed, let's say, at 0 (but the contract, i.e. promissory note, says: you will not get 10k, you will get 9500). But really, the lender takes out $500 and gives me $9500. Now, the lender, per the statutory requirement, needs to pay me $500. I never lost that 500. It's 500 that i didn't have before. And when i go to pay back my loan, I will pay back 9500. I guess i'm not sure how it's not forgiveness of debt.
Oh, sorry, just saw your case. i will read.
this is not a forgiveness of debt issue
It as PUNITIVE DAMAGES are not excludable from taxable income issue
Bagley v. C.I.R., 105 T.C. 396 (Tax 1995) aff'd, 121 F.3d 393 (8th Cir. 1997)
this is essentially a punitive damage (punishment to the bank for not disclosing)
If the borrower is OUT the money and the bank is making the, whole, then it's indemification and it's nots taxable
If the borrower is NOT out the money and then bank is essentially being punished for its lack of disclosure, its taxable (NOT excludable from income)
Yes, that makes sense.
I appreciate your help.
... welcome .. also, I did the Keycite on the case , and it's still good law, nothing s been overturned
Ok, thank you again.
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