1099-C --- state liability from a federal loan ?

I don't know if cancellation of debt specifically has been litigated, but in general your state of residence can tax all the income you receive while a resident, regardless of why you're receiving it. I believe it was CA that tried to tax retirement income of nonresidents who had worked in CA. They lost that one.

Phil Marti VITA/TCE Volunteer

They get to tax it because you are a resident of CA. It never made sense to me why they can tax the dividends of my Russian stock, but I guess that's the way it is.

See publication 17 -> Chapter 12 Other Income -> Canceled Debt ->

Exceptions

They say canceled debts from student loans may not be income. I don't know if this applies to you, but worth a look.

It has indeed been challenged in court. The US Supreme Court ruled in

1937 that a state could tax all of the income of a resident, from whatever source. New York ex rel. Cohn v. Graves, 300 U.S. 308 (1937). This was a case where a New York resident challenged New York's jurisdiction to tax his income from real property located in New Jersey.

Most states exercise this authority to its fullest extent, taxing all income received during a period of residence, even if it arose from an out-of-state source and accrued before the (cash-basis) taxpayer became a resident. California used to have a statute that excluded income that accrued prior to residence, but it was repealed in 2002. It would not have have helped in your situation anyway, because in order for the income to be excluded, all events would have had to have occurred to establish your right to the income and to compute the amount with reasonable certainty before you became a California resident.

Katie in San Diego

Most states, before 1996, taxed (or attempted to tax) retirement income of nonresidents on a source basis. California was just one of the most active. It was a big issue in California because unlike many other states, California taxes the pensions of retired state and local government employees, and withheld the tax from their payments. On the other hand, a person who retired from industry after a career spent mostly or entirely in California would receive his pension from a trustee, maybe a Chicago bank, that had no idea where he worked and cared less. So you could have two people living next door to each other in Ft Lauderdale, one of whom had his California tax withheld from his pension, and another who would be horrified at the thought -- and whom California (or any other state where he worked) couldn't cost- effectively identify.

It took about 10 years, but a group of retired California teachers, mostly in Nevada, finally succeeded in getting a bill through Congress prohibiting states from taxing certain kinds of retirement income on a source basis. P.L. 109-294, 4 USC § 114, effective for payments received on or after January 1, 1996.

Katie in San Diego

Actually I was thinking can the income also be taxed by OR? Taxed by CA because you're a resident, and taxed by OR because it Oregon-source income. On your CA return you would get a credit for tax paid to OR. I don't think it is OR source income, but just wondering.

Anyway, look on the bright side. If CA could not tax it, the OR could tax it. And the OR tax might be more (depends on your income).

No, it is not Oregon source income. No income-related event occurred when the loan originated. The income-related event was the cancellation of debt in 2009. This intangible income has its source in the state of residency at the time received.

-Mark Bole

Agreeing with Mark: the income arises from an intangible and has its source at the taxpayer's residence.

Katie in San Diego