Tax Legal Services · Primary-source case analysis

Centennial Savings: The Original Withdrawal Terms Did Not Discharge a Larger Debt

By Aneeta Mishra and Timothy Chan

Published April 25, 2026 · Updated October 18, 2026

Decision: United States v. Centennial Sav. Bank Fsb (Resolution Trust Corp., Receiver), 499 U.S. 573 (1991).

An early withdrawal left the bank paying less than principal plus accrued interest. That difference was income—but was it income from a discharge of debt eligible for the historical exclusion the bank claimed? United States v. Centennial Savings Bank FSB, 499 U.S. 573 (1991), answered no. The original certificate agreement already required the reduced payment upon early withdrawal; the depositor did not later forgive a repayment obligation.

The bank sought a debt-discharge exclusion, not capital-gain treatment

In the 1981 tax year, Centennial collected $258,019 in early-withdrawal penalties. It treated the amount as discharge-of-indebtedness income under the then-applicable section 108 exclusion for qualified business indebtedness and reduced depreciable-property basis accordingly. The dispute was not a section 1234A claim for capital-gain treatment. The version of section 108 and the associated basis-reduction mechanism were central to the actual tax position. This discussion describes that historical law, not a current election available to every bank or debtor. Centennial Savings, 499 U.S. at 575–576, 578 footnote 3, 579–580.

The original agreement already set the withdrawal amount

Each certificate fixed the depositor’s entitlement in advance: Principal and accrued interest, less the specified penalty if withdrawn early. Paying that amount performed the bank’s obligation under the agreement. It did not require a new release of a larger amount otherwise due at that time. To understand the Court’s distinction, compare the original repayment terms with the amount actually paid—not simply a maturity-value figure with the smaller early-withdrawal payment. Centennial Savings, 499 U.S. at 576, 580–581.

A smaller payout did not establish forgiveness

The Court agreed that the difference increased the bank’s income. But the existence of that income did not establish that a creditor had forgiven a debt within section 108. The opinion also declined to decide the government’s alternative theory that the penalties were payments for a separate service: The absence of a discharge already defeated the claimed exclusion. Keep the holding separate from that argument the Court did not reach. Centennial Savings, 499 U.S. at 581–582 and footnote 7.

The Court rejected the exclusion but upheld a separate loss

The judgment was affirmed in part and reversed in part. Centennial prevailed on a separate mortgage-participation exchange loss, governed by the Court’s companion decision in Cottage Savings. It lost the early-withdrawal exclusion because the depositors had not discharged a repayment obligation. A statement that the Supreme Court simply “affirmed” the bank’s tax treatment would miss those opposing results. For a present transaction, current section 108 and other applicable provisions must be checked separately; this case does not decide modern eligibility by itself. Centennial Savings, 499 U.S. at 578–579, 584.

Key takeaways

• Identify the actual exclusion claimed and the tax year governing it.
• Compare the original repayment promise with the amount paid under its early-withdrawal terms.
• Separate an economic gain from the statutory requirement of a debt discharge.
• Distinguish the rejected exclusion from the separate mortgage-exchange loss the Court upheld.