BILL ANALYSIS Ó
AB 2234
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Date of Hearing: May 4, 2016
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Lorena Gonzalez, Chair
AB
2234 (Steinorth) - As Amended April 20, 2016
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Urgency: No State Mandated Local Program: NoReimbursable: No
SUMMARY:
This bill extends the tax relief for income generated from the
discharge of qualified principal residence indebtedness (QPRI).
Specifically, this bill:
1)Provides that the Internal Revenue Code (IRC) Section 108,
relating to income from discharge of QPRI, as amended by The
Protecting Americans from Tax Hikes Act of 2015, shall apply,
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except as otherwise provided.
2)Applies to discharges of QPRI occurring from January 1, 2014
to January 1, 2017.
3)Provides that, notwithstanding any other law, no penalties or
interest shall be due to the discharge of QPRI for the 2014 or
2015 taxable year, regardless of whether or not a taxpayer
reports the discharge during the 2014 or 2015 taxable year.
4)Makes findings and declarations stating that the retroactive
application of this bill is necessary for the public purpose
of preventing undue hardship to taxpayers whose QPRI was
discharged on or after January 1, 2014, and before January 1,
2016, and does not consider a gift of public funds.
FISCAL EFFECT:
Annual GF revenue loss of $95 million in FY 2015-16 and $50
million in FY 2016-17.
COMMENTS:
1)Purpose. According to the author, AB 2234 will remove an
obstacle to financial independence for troubled homeowners. By
allowing those who get mortgage debt relief to avoid paying
taxes on that relief, this legislation provides relief to
these families who hope to stabilize their finances.
2)Background. Qualifying principal residence indebtedness is
defined under federal law as the acquisition indebtedness or
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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 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 expired 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 case
law, 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
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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.
3)Related legislation. SB 907 (Galgiani) would extend the state
exclusion of mortgage forgiveness debt relief for three years.
The bill is currently pending in the Senate Appropriations
Committee.
Analysis Prepared by:Luke Reidenbach / APPR. / (916)
319-2081
AB 2234
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