By JIM WASSERMAN (nctimes.com) - April 6, 2010 2:52 pm

Relief appears imminent for thousands of Sacramento homeowners hit with state tax bills for mortgage debts forgiven in 2009.

State lawmakers said Monday they plan to cancel the state tax obligations with a vote Thursday.

The movement in the Legislature means that Californians who got unexpected tax bills of $10,000 or more in recent weeks could soon be off the hook. Most are borrowers who received loan modifications last year or lost their houses in short sales, in which banks accept prices below what they're owed. In both cases, lenders forgave some of the debts owed them, a process that exposes borrowers afterward to taxes.

Shannon Murphy, spokeswoman for Assembly Speaker John Perez, D-Los Angeles, said legislation was to go before the Assembly Revenue and Tax Committee on Tuesday and the Appropriations Committee on Wednesday, and will receive a full vote Thursday.

A similar Senate floor vote planned Thursday would send the bill immediately to Gov. Arnold Schwarzenegger, who has repeatedly stated his support. The new bill is similar to one he vetoed March 25, but this time it omits a part he opposed ---- financial penalties for businesses that routinely seek state tax refunds. Democrats removed the section despite their contention that some firms "fish" for refunds whether or not they're owed.

On Monday, Schwarzenegger spokesman Mike Naple said the governor "hopes the Legislature fully addresses the concerns raised in previous versions of this bill."

"We want to get it done before the (April 15) tax deadline," said Alicia Trost, spokeswoman for Sen. President Pro Tem Darrell Steinberg, D-Sacramento. "We don't want to have people jump through hoops."

Many across the state have anxiously waited for the state to resolve the issue before the tax filing deadline ---- or have filed extensions.

Typically the state and federal governments view forgiven home loan debt as additional income and tax it. But both have backed off amid the housing crash. The federal government has suspended taxes on forgiven mortgage debt from 2007 through 2012. California suspended it for the 2007 and 2008 tax years. But disagreements over the business tax refunds stalled a bill extending it to 2009.

The bill being considered this week, Senate Bill 401, would cancel state tax obligations for forgiven mortgage debt through the 2012 tax year. The Assembly planned to rewrite SB 401 from a bill regarding tax shelters to one that aligns much of California's tax law with that of the IRS. That includes canceling taxes on forgiven mortgage debt and on recipients of federal renewable energy grants.

"We haven't done a tax-conforming bill for four years, so it's important to get that done," Trost said.

Read orginal article at http://www.nctimes.com/business/article_4480002b-c045-54bf-81ad-871959e8e385.html