BILL ANALYSIS Ó
AB 99
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Date of Hearing: May 27, 2015
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Jimmy Gomez, Chair
AB
99 (Perea) - As Amended May 20, 2015
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|Policy |Revenue and Taxation |Vote:|9 - 0 |
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Urgency: Yes State Mandated Local Program: NoReimbursable: No
SUMMARY:
This bill extends, for one additional taxable year, in modified
conformity to recently-enacted federal law, tax relief for
income generated from the discharge of qualified personal
residence indebtedness occurring on or after January 1, 2014,
and before January 1, 2015.
California currently limits the amount of discharge of
indebtedness excludable from income to $250,000 for single
filers and $500,000 for joint filers, and limits qualifying
loans from which exclusion can be made to $400,000 for single
filers and $800,000 for joint filers.
AB 99
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FISCAL EFFECT:
1)Minor and absorbable administrative costs to the Franchise Tax
Board (FTB).
2)Estimated GF revenue decreases of $47 million and $5 million
in FY 2014-15 and FY 2015-16, respectively. No estimated
revenue impact thereafter.
COMMENTS:
1)Purpose. According to the author, this bill extends tax
relief on forgiveness of mortgage debt by conforming
California to the recently-enacted extension under federal
law. Discharge of indebtedness income most often results from
a bank cancelling or forgiving a portion of mortgage debt
following loan modifications or short sale of a property.
Without excluding the value of cancelled debt, many taxpayers
will be taxed on that income. Proponents argue borrowers who
negotiated loan modifications will find themselves unable to
make mortgage payments if they must pay tax on their discharge
of indebtedness income.
2)Real Income, But Can It Be Collected? Qualifying principal
residence indebtedness is defined under federal law as the
acquisition indebtedness or indebtedness incurred for
substantial improvement to the residence. Current federal law
allows taxpayers to exclude income up to $1 million for
individuals and $2 million for married couples for discharge
of the qualifying principal residence indebtedness. Current
California law limits the total amount of qualifying
indebtedness to $400,000 for individuals or $800,000 for
AB 99
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married couples, and allows taxpayers to exclude income up to
$250,000 for individuals and $500,000 for married couples from
the discharge of the qualifying indebtedness, though that
exclusion expires for income incurred after January 1, 2014.
Income from the cancellation of indebtedness is normally
taxable because the individual's net worth has been increased
as a result of the debt cancellation, just as any other income
increases an individual's net worth. Under California
caselaw, income is generally defined as accession to wealth,
that is clearly realized, over which the taxpayer has complete
dominion. When debt is cancelled, money that was given to the
taxpayer as loan is freed from future obligation, allowing the
taxpayer to use it in the same manner as any other income.
Without this fundamental rule, cancelled debt becomes simply a
tax-free receipt of cash.
Problems can arise, however, with the collection of such tax
owed because the circumstances that often gave rise to the
debt cancellation reflect the inability of the borrower to
pay. This is particularly true for mortgage debt, where the
loan received was spent entirely on a property and is not
available as a liquid asset to the borrower. Cancellation of
a portion of this debt may occur in order to restructure the
financial position of the borrower, and may be preferable to
lenders over foreclosure. However, because the borrower
realizes the value of the cancelled debt through a
restructured mortgage, the borrower often does not have
sufficient cash to pay the tax that results. The estimated
decrease in revenues resulting from this bill reflect the lost
income tax that ought to be paid on this debt cancellation,
but whether FTB could successfully collect this tax without
considerable effort may be debatable.
AB 99
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Analysis Prepared by:Joel Tashjian / APPR. / (916)
319-2081