BILL ANALYSIS                                                                                                                                                                                                    



                                                                    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


















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