BILL ANALYSIS Ó
AB 1055
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Date of Hearing: May 11, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
AB 1055
Baker - As Introduced February 26, 2015
Majority vote. Fiscal committee. Tax levy.
SUBJECT: Personal Income Tax Law: exclusion: student loan debt
forgiveness: disability and blindness.
SUMMARY: Provides that gross income does not include discharged
student loan debt if the individual is disabled or blind.
Specifically, this bill:
1)Defines an "eligible individual" as an individual who meets
either of the following during the taxable year:
a) The individual is entitled to benefits based on
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blindness or disability under the federal Social Security
Act, Title II or Title XVI; or,
b) The individual files a disability certification with the
Franchise Tax Board (FTB).
2)Defines a "disability certification" as a certification that
satisfies the FTB and provides both of the following:
a) The individual has a medically detrimental physical or
mental impairment that results in marked and severe
functional limitations that can be expected to result in
death, a medically determinable physical or mental
impairment that has lasted for a continuous period of not
less than 12 months, or is blind, within the meaning of the
federal Social Security Act Section 1614(a)(2); and,
b) A copy of the individual's diagnosis relating to the
individual's relevant impairment signed by a physician
meeting criteria of the federal Social Security Act Section
1861(r)(1).
3)This section shall apply to discharges of indebtedness
occurring on or after January 1, 2015.
4)Takes effect immediately as a tax levy.
EXISTING LAW:
1)Provides that "gross income" includes all income from whatever
source derived, including compensation for services, business
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income, gains from property, interest, dividends, rents, and
royalties, unless specifically excluded.
2)Provides that forgiven student loans are excludible from gross
income in certain circumstances. However, no specific
exclusion from gross income for student loans that are
forgiven on account of an individual's blindness or
disability.
3)Provides that in the case of an individual, gross income does
not include any amount which would normally be included by
reason of discharge of any student loan made by a qualified
lender if the discharge was pursuant to a provision under
which all or part of the indebtedness of the individual would
be discharged if the individual worked for a certain period of
time in certain professions for any of a broad class of
employers. (Internal Revenue Code (IRC) Section 108(f).)
4)Provides that cancellation of an individual's student loan is
not excludible from gross income if the loan was made by an
educational institution and is canceled because of services
the individual performed for the educational institution or
other organization that provided the funds.
5)Provides that the amount of an individual's
cancellation-of-indebtedness income resulting from a cancelled
student loan may be excluded from gross income if the
individual is insolvent. The amount excludible from income is
limited to the extent of the individual's insolvency.
FISCAL EFFECT: The FTB estimates General Fund revenue loss of
$19 million in fiscal year (FY) 2015-16, $12 million in FY
2016-17, and $12 million in FY 2017-18.
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COMMENTS:
1)Author's Statement : The author has provided the following
statement in support of this bill:
[AB] 1050 would exempt, for tax purposes, from California
gross income any student loan debt that is forgiven for
disability or hardship.
2)Arguments in Support : Board of Equalization (BOE) member, 1st
District, states that "AB 1055 addresses an issue brought to
my attention by a constituent last November. She disclosed
that she suffered a disability after graduating and incurring
her student loan debt. Since her only source of income was
Social Security, she applied for debt forgiveness and was
approved for cancellation of her remaining debt.
Understandably, she was surprised to receive a 1099-C form for
the full amount forgiven ($55,000). This created both a
federal and state tax liability, and the following year her
monthly Social Security check was reduced based on the
additional "income" shown on her tax return. Unfortunately,
she continues to pay off this debt."
3)Rationale of Taxing Forgiven Debt : The practice of taxing
debt cancellation reflects sound tax policy because it
recognizes the fact that an individual's net worth has
increased by the cancellation of debt. According to
Commissioner v. Glenshaw, the Court defined "income" as an
accession to wealth that is clearly realized and over which
the taxpayer has complete dominion. (Commissioner v Glenshaw
Glass Co., 348 U.S. 426, 431 (1955).) When debt is cancelled,
money that would have been used to pay that loan is now free
to be used on whatever the taxpayer wants. Therefore, because
certain assets have been freed, the taxpayer has experienced
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an accession to wealth. Additionally, under the rules of
symmetry, the increased wealth when the loan is taken out is
also offset by the obligation to pay the same amount. If the
debt is cancelled, the symmetry is destroyed. The borrower is
in a much better position after the debt is cancelled.
Additionally, as noted by Debora A. Grier, Professor of Law at
Cleveland State University, in her statement before the United
States Senate Committee on Finance, without this tax rule,
"the borrower will have received permanently tax-free cash in
the year of the original receipt," i.e., the year in which the
borrower received the loan.
4)Insolvency : Cancellation of debt is not included in income to
the extent the taxpayer is insolvent immediately before the
debt is cancelled. A taxpayer is insolvent immediately before
the cancellation of debt to the extent that the amount of
total liabilities exceeds the fair market value of all assets
immediately before the cancellation. This provision may be
used in lieu of an exclusion of student loan debt from gross
income. It is important to remember, however, that the
exclusion applies only to the extent of insolvency. As an
example, assume a taxpayer has discharged debt of $5,000.
Before the cancellation of debt, the taxpayer had $10,000 in
liabilities and the fair market value of all assets is $7,000,
meaning that before the cancellation, the taxpayer was
insolvent to the extent of $3,000 (total liabilities minus
fair market value of assets). Therefore, the taxpayer may
exclude $3,000 from income and include $2,000 as income of the
discharged debt.
5)What Does this Bill Do ? This bill provides that a discharge
of student loan debt will not be included in gross income if
the individual qualifies for Social Security Income (SSI),
Social Security Disability Insurance (SSDI), or upon
satisfaction of the FTB. SSI is a program that pays monthly
cash benefits to adults who are blind, disabled, or over the
age of 65. To qualify for SSI, a person must have no more
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than $2,000 worth of assets. If a taxpayer were to have
his/her student loans forgiven while on SSI, most of the
forgiven debt would be excluded from gross income because the
taxpayer would be insolvent. Under SSI, a taxpayer with
$55,000 worth of liabilities and $2,000 worth of assets would
be insolvent to the extent of $53,000.
Other than SSI, the criteria established by this bill do not
consider an individual's ability to pay. Specifically,
eligibility under SSDI is based on the condition of the
individual and his/her work history. Similarly, the third
provision of this bill, namely the proposed certification,
only needs to show that a person has a medically detrimental
physical or mental impairment that can result in death, has a
disability that has lasted for a continuous period of not less
than 12 months, or is blind. The Committee may wish to
consider the appropriateness of providing an exclusion from
gross income to an individual who potentially has sufficient
income and assets to satisfy his/her tax liability.
6)Delegation of Authority : This bill grants the FTB with the
discretion to provide an exclusion from gross income for the
discharge of student loan debts upon the filing of a
"disability certification." A disability certification
requires a showing that the person is blind or disabled.
However, the "disability certification" must also satisfy the
FTB. The guidelines needed for satisfying the FTB are not
provided. As such, the FTB may be able to deny a claim even
after an individual provides documentation of a disability.
By failing to specify clear criteria for granting the
exclusion, this bill may constitute an unlawful delegation of
legislative authority.
7)Out of Conformity : As noted above, California conforms, in
general, to federal law with respect to the taxability of
student loan forgiveness. In general, state conformity with
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federal law promotes greater simplicity and eases
administration of complex tax laws. By excluding loan amounts
cancelled due to a disability, this bill would take California
further out of conformity with federal law.
REGISTERED SUPPORT / OPPOSITION:
Support
California State Student Association
Member, State Board of Equalization, District 1
Opposition
None on file
Analysis Prepared by:Carlos Anguiano / REV. & TAX. / (916)
319-2098
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