II 110th CONGRESS 1st Session S. 1394 IN THE SENATE OF THE UNITED STATES May 15, 2007 Ms. Stabenow (for herself, Mr. Voinovich, Mr. Kerry, Mr. Levin, and Ms. Snowe) introduced the following bill; which was read twice and referred to the Committee on Finance A BILL To amend the Internal Revenue Code of 1986, to exclude from gross income of individual taxpayers discharges of indebtedness attributable to certain forgiven residential mortgage obligations.

1.

Short title

This Act may be cited as the Mortgage Cancellation Relief Act of 2007.

2.

Exclusion from gross income for certain forgiven mortgage obligations

(a)

In general

Paragraph (1) of section 108(a) of the Internal Revenue Code of 1986 (relating to exclusion from gross income), is amended by striking or at the end of subparagraph (C), by striking the period at the end of subparagraph (D) and inserting , or, and by inserting after subparagraph (D) the following new subparagraph: (E)in the case of an individual, the indebtedness discharged is qualified residential indebtedness. . (b)

Qualified residential indebtedness shortfall

Section 108 of such Code (relating to discharge of indebtedness) is amended by adding at the end the following new subsection: (h)

Qualified residential indebtedness

(1)

Limitations

The amount excluded under subparagraph (E) of subsection (a)(1) with respect to any qualified residential indebtedness shall not exceed the excess (if any) of— (A)the outstanding principal amount of such indebtedness (immediately before the discharge), over (B)the sum of— (i)the amount realized from the sale of the real property securing such indebtedness reduced by the cost of such sale, plus (ii)the outstanding principal amount of any other indebtedness secured by such property. (2)

Qualified residential indebtedness

(A)

In general

The term qualified residential indebtedness means indebtedness which— (i)was incurred or assumed by the taxpayer in connection with real property used as a residence and is secured by such real property, (ii)is incurred or assumed to acquire, construct, reconstruct, or substantially improve such real property, and (iii)with respect to which such taxpayer makes an election to have this paragraph apply. (B)

Refinanced indebtedness

Such term shall include indebtedness resulting from the refinancing of indebtedness under subparagraph (A)(ii), but only to the extent the refinanced indebtedness does not exceed the amount of the indebtedness being refinanced. (C)

Exceptions

Such term shall not include qualified farm indebtedness or qualified real property business indebtedness. . (c)

Conforming amendments

(1)Paragraph (2) of section 108(a) of such Code is amended— (A)in subparagraph (A) by striking and (D) and inserting (D), and (E), and (B)by amending subparagraph (B) to read as follows: (B)

Insolvency exclusion takes precedence over qualified farm exclusion; qualified real property business exclusion; and qualified residential indebtedness exclusion

Subparagraphs (C), (D), and (E) of paragraph (1) shall not apply to a discharge to the extent the taxpayer is insolvent. . (2)Paragraph (1) of section 108(b) of such Code is amended by striking or (C) and inserting (C), or (E). (3)Subsection (d) of section 121 of such Code is amended by adding at the end the following new paragraph: (12)

Special rule relating to discharge of indebtedness

The amount of gain which (but for this paragraph) would be excluded from gross income under subsection (a) with respect to a principal residence shall be reduced by the amount excluded from gross income under section 108(a)(1)(E) with respect to such residence. . (d)

Effective date

The amendments made by this section shall apply to discharges after the date of the enactment of this Act.