1 Avoiding Insult to Injury: Extending and Expanding Cancellation of Indebtedness Income Tax Exemptions for Homeowners Dustin A. Zacks This article offers a critical analysis of anti-homeowner arguments that have arisen in the wake of the enactment of the Mortgage Forgiveness Debt Relief Act of 2007 (MFDRA), which excludes forgiven principal residence indebtedness from generating federal income tax liability. Some argue that forgiveness encourages housing speculation and overconsumption or benefits wealthy homeowners more than homeowners of moderate means, while others suggest that forgiveness is not fair to homeowners who paid such taxes prior to Congress s exemption being enacted. This article asserts that such criticisms, even if facially valid, are overstated and do not overcome the importance of eliminating existing homeowner incentives to file bankruptcies in order to avoid cancellation of indebtedness income tax. Furthermore, excluding cancellation of indebtedness income tax prevents disincentives to homeowners from seeking to modify their home loans. Aside from addressing scholarship regarding the temporary Congressional exclusion of principal residence indebtedness, this article also proposes an expansion of the permanent exclusions to cancellation of indebtedness taxation in the Internal Revenue Tax Code (the Code). In particular, the existing purchase-price exception to cancellation of indebtedness taxation should be expanded. Because the purchase-price exception only applies to original lenders negotiating with original purchasers, the exemption has effectively been eliminated for a large Dustin A. Zacks is a member of King, Nieves & Zacks PLLC in West Palm Beach, Florida; B.A., University of Michigan, 2004; J.D., University of Michigan, The views expressed herein are solely those of the author and should not be attributed to the author s firm or its clients.
2 318 ARKANSAS LAW REVIEW [Vol. 66:317 portion of homeowners whose loans have been sold on the secondary market. This article argues that the theoretical justifications for the purchase-price exception should apply whether or not a home loan has been sold, as homeowners exercise no control over whether their loans are transferred from lender to lender. The Code already allows for subjective considerations of infirmity and impropriety at origination to equitably justify the purchase-price exception, and this article asserts that such considerations should be even more closely examined in light of the wildly inflated property values and subprime and exotic loans presented to homeowners at the height of the bubble. Therefore, even without a permanent extension of the MFDRA s temporary exemption, expanding the purchaseprice exemption would provide homeowners with incentives to renegotiate their home loans or to negotiate walkaways rather than filing for bankruptcy. I. INTRODUCTION The housing crisis produced a number of obvious side effects and symptoms, including an escalating number of foreclosures, a precipitous decline in property values, and a sharp downturn in the real-estate market. As a result of financial hardship or a decline in property values, many homeowners under threat of foreclosure opted not to attempt to modify their loans but, rather, to attempt a short sale or a deed-in-lieu-of-foreclosure settlement to escape liability for a potential deficiency between the selling price of the distressed property and the amount owed on the original loan. 1 For federal income purposes, the cancellation of indebtedness (COD) is generally considered ordinary income. 2 Thus, many homeowners were placed at risk not only of losing their homes, but also of owing thousands of dollars in income taxes. As a result of the escalating risk of former homeowners owing taxes on properties they surrendered, 1. Fannie, Freddie Short Sales Hit Record High, INMAN NEWS (Jan. 7, 2013), (noting nearly 38,000 such settlements among Fannie Mae and Freddie Mac loans in the third quarter of 2012). 2. See I.R.C. 61(a)(12) (2006).
3 2013] TAX EXEMPTION FOR HOMEOWNERS 319 Congress passed the MFDRA, which forgave COD income stemming from forgiven liability on primary home loans. 3 A year later, Congress extended the relief until the end of Therefore, as Congress wrestled with the approaching fiscal cliff of 2013, the MFDRA faced extinction, and distressed homeowners faced the possibility that in 2013 they could surrender their homes only to confront income tax liability. In an eleventh-hour bill to avoid the fiscal cliff crisis, Congress extended the MFDRA once again to December 31, The academic reception to the MFDRA was chilly at best, with some commentators voicing outright hostility to the idea of forgiveness. 6 The primary arguments against COD income tax forgiveness are that it encourages homeowners to overconsume or buy larger houses than they otherwise would have, that it benefits wealthy taxpayers more than ordinary homeowners, and that it violates fundamental fairness to those who paid COD income tax prior to the congressional acts. 7 This article engages the existing arguments against forgiveness and argues that such views, even if facially valid, are vastly overstated. The article stresses that forgiveness is vitally important in steering homeowners away from bankruptcy. Finally, forgiveness respects fundamental fairness by recognizing that many homeowners were taken advantage of at the height of the bubble through overstated appraisals and through the extension of exotic and expensive loan terms when they otherwise could have afforded more reasonable terms. 3. Mortgage Forgiveness Debt Relief Act of 2007, Pub. L. No , 121 Stat (2007) (codified as amended in scattered sections of the I.R.C.); see Mortgage Workouts: Now Tax-Free for Many Homeowners, INTERNAL REVENUE SERVICE, Homeowners%3B-Claim-Relief-on-Newly-Revised-IRS-Form (last updated Aug. 3, 2012). 4. Emergency Economic Stabilization Act of 2008, Pub. L. No , 303, 122 Stat. 3765, 3807 (2008) (codified in part at I.R.C. 108); see Mortgage Workouts, supra note American Taxpayer Relief Act of 2012, Pub. L. No , 126 Stat (2013). 6. See infra Part III. 7. See infra Part III.
4 320 ARKANSAS LAW REVIEW [Vol. 66:317 The article argues that, even if Congress had not extended temporary tax relief to struggling homeowners, the Code s current purchase-price exception should be extended to encompass cases where property values have vastly declined but the original lender is not the current owner of the loan. The jurisprudence regarding the purchase-price exception to COD income already considers equitable concerns such as infirmity and fraud at origination. 8 This article posits that such equitable considerations should be even more closely examined in light of the vast amounts of questionable lending practices that occurred at the height of the housing bubble. Part II briefly explains the genesis of COD income tax and discusses the congressional acts that forgave such taxes in the case of primary-home loans. Part III counters the existing literature and the anti-forgiveness arguments propounded by scholars and commentators. Part IV discusses the fundamental reasons why forgiveness should be extended. Part V explains the purchase-price exception and describes how and why it should be permanently extended to relieve homeowners in a down housing market. Part VI concludes the article. II. THE STATE OF THE LAW AND THE MFDRA Uniquely among nations, the United States recognizes and taxes as income those debts forgiven by creditors. 9 Because income recognized from cancellation of indebtedness does not result in cash in the hand of the taxpayer, such income has sometimes pejoratively been called phantom income, producing a bill for money that they never saw. 10 The long and winding road of the development of COD income tax treatment has often been 8. See infra notes and accompanying text. 9. Richard C.E. Beck, The Tax Treatment of Cancelled Interest and Penalties on Consumer Debt, 53 N.Y. L. SCH. L. REV. 1025, 1026 (2009). 10. Rue Toland, Note, No Tax for Phantom Income : How Congress Failed To Encourage Responsible Housing Consumption with Its Recent Tax Legislation, 85 CHI.-KENT L. REV. 345, 353 (2010) (quoting 153 CONG. REC. H11, 291 (daily ed. Oct. 4, 2007) (statement of Rep. Philip English)); see also Joseph C. Mandarino, The Tax Effects of Debt Cancellation A Primer for Non-tax Lawyers, 24 PROB. & PROP. 20, 21 (2010).
5 2013] TAX EXEMPTION FOR HOMEOWNERS 321 discussed in academic texts. 11 Despite the extent to which COD taxes and exceptions thereto have been discussed, no uniformly accepted theory to justify such taxation exists. 12 In light of the lack of a unifying theory, judges and Congress have mitigated the harshness of recognizing COD income by creating exceptions and deferrals dating back to the Great Depression. 13 First, judges created an insolvency exception, later codified in 1954, providing that insolvent debtors can be eligible for a waiver of COD taxes. 14 However, the IRS and the courts have drastically reduced the insolvency exception over time. 15 Secondly, the purchase-price exception provides that when an original lender bargains with an original purchaser, a reduction in principal may be deemed an exception to COD income in cases of failing market conditions or reduced property values. 16 Third, amounts discharged in a bankruptcy proceeding are not deemed COD income. 17 Fourth, debts subject to a bona fide dispute as to amounts due do not generate COD income tax liability. 18 The development of these exceptions has always been controversial. 19 As this article examines, the congressional exemption for primary residence COD income has generated similar controversy and consternation. In the context of the housing crisis, COD income taxes and the existing exceptions regained scholarly attention as 11. See, e.g., James L. Musselman, Is Income from Discharge of Indebtedness Really Income at All? A Proposal for a More Reasoned Analysis, 34 U. MEM. L. REV. 607, (2004) (providing a historical examination of the taxability of income from the cancellation of debt). 12. Id. at Monica D. Armstrong, From the Great Depression to the Current Housing Crisis: What Code Section 108 Tells Us About Congress s Response to Economic Crisis, 26 AKRON TAX J. 69, (2011). 14. See I.R.C. 108(a)(1)(B) (2006); see also Armstrong, supra note 13, at 77, Casey R. Kroma, Cancelled Debt and the Unexpected Tax Burden, 79 REV. JUR. U.P.R. 375, (2010). 16. See I.R.C. 108(e)(5) (2006); see also Armstrong, supra note 13, at See I.R.C. 108(a)(1)(A) (2006); see also Curt Hochbein, Comment, Mortgage Forgiveness Debt Relief Act of 2007, 38 CAP. U. L. REV. 889, 919 (2010). 18. Mandarino, supra note 10, at 22 (noting that disputing the enforceability of a debt does not alone trigger the purchase price exception without a dispute as to the amount owed); Martin J. McMahon, Jr. & Daniel L. Simmons, A Field Guide to Cancellation of Debt Income, 63 TAX LAW. 415, 435, 439 (2010). 19. Beck, supra note 9, at 1026.
6 322 ARKANSAS LAW REVIEW [Vol. 66:317 distressed homeowners sought loan modifications and forgiveness of home loans. First, in cases where homeowners sought to keep their homes with modified loan terms, such modifications have traditionally been treated as COD income if such modifications are deemed significant. 20 Significant modifications include a change in the interest rate of at least twenty-five basis points or a five percent change in the annual yield. 21 Thus, in a market where millions of homeowners are either delinquent or in foreclosure, 22 loan modifications may sometimes raise the spectre of tax liability to homeowners. Secondly, in cases where homeowners were unwilling or unable to modify their loans, short sales and deeds in lieu of foreclosures have generated COD taxation discussions. 23 In such scenarios, homeowners bargain for a settlement whereby a lender accepts less than the full amount owed in return for a sale to a third party or for the relinquishment of the deed. 24 In return for generating such a sale or for returning the property to the lender in acceptable condition, lenders often waive their right to collect the deficiency, the difference between the amount owed on the original loan and the amount actually realized through a short sale or a foreclosure auction. 25 The forgiveness of the remaining debt owed is a classic example of COD income and would normally generate tax liability at ordinary income rates. 20. See Treas. Reg (a) (2012) ( [T]he gain or loss realized... from the exchange of property for other property differing materially either in kind or in extent, is treated as income or as loss sustained. ); Treas. Reg (b) (2012) ( A modification that is not a significant modification is not an exchange for purposes of (a). ); see also Mandarino, supra note 10, at See Mandarino, supra note 10, at Paul Kiel, Foreclosure Fail: Study Pins Blame on Big Banks, PROPUBLICA (Sept. 11, 2012, 11:35 AM), (noting that two million people remained in foreclosure in late 2012). 23. See infra Part IV.C. 24. See Francie Cohen Spahn, Deeds in Lieu of Foreclosure, PRAC. REAL ESTATE LAW., July 2010, at 47, 47-48; see also In re Anderson, No SSM, 1997 WL , at *6 (Bankr. E.D. Va. Aug. 29, 1997). 25. Some states limit a lender s ability to pursue a homeowner personally to collect a deficiency. See 1 GRANT S. NELSON & DALE A. WHITMAN, REAL ESTATE FINANCE LAW 8.3 (5th ed. 2007); see also Weinstein v. Rocha, 145 Cal. Rptr. 3d 93, (Ct. App. 2012) (discussing California s anti-deficiency statute).
7 2013] TAX EXEMPTION FOR HOMEOWNERS 323 Many lenders were keen to forgive potential deficiencies in exchange for a short sale or deed-in-lieu settlement. 26 Through such settlements, lenders avoid a drawn out and expensive foreclosure process and further risk deterioration of the property. For homeowners, such settlements are an optimal pathway to avoid liability and evade the necessity of a bankruptcy to avoid a lender pursuing a deficiency judgment. Unfortunately, homeowners utilizing waivers of deficiency faced a gloomy prospect: they could declare bankruptcy and discharge personal liability, or they could settle with their lender and face ordinary income taxes on the amount forgiven. 27 Given that COD income is taxed at ordinary income rates, many homeowners were faced with a Hobson s choice between a bankruptcy costing a few thousand dollars in attorney s fees and a settlement with a lender generating many more thousands of dollars of tax liabilities. The escalating number of homeowners who faced such an unpleasant choice eventually garnered congressional attention. In 2007, Congress passed the MFDRA. 28 The Act created a new exception to COD income tax: forgiveness of debt stemming from the purchase of a qualified principal residence. 29 Experts have predicted that the MFDRA has saved taxpayers more than $600 million dollars in the three-year span from 2007 to Congressional rationales for the forgiveness generally referenced the desire to avoid punishing people who were perceived as already being in an unfortunate situation. 31 In 2008, Congress extended the MFDRA to include debt 26. See Fannie, Freddie Short Sales Hit Record High, supra note See I.R.C. 61(a)(12), 108(e)(1) (2006); see also Armstrong, supra note 13, at 77; Hochbein, supra note 17, at See Mortgage Forgiveness Debt Relief Act of 2007, Pub. L. No , 121 Stat (2007) (codified in scattered sections of the I.R.C.); see also Mortgage Workouts, supra note I.R.C. 108(a)(1)(E) (2006 & Supp. V 2011). 30. Thomas A. Humphreys, Tales from the Credit Crunch: Selected Issues in the Taxation of Financial Instruments and Pooled Investment Vehicles, 7 J. TAX N FIN. PRODUCTS 23, 29 (2008). 31. Rachel Carlton, Recent Development, Mortgage Forgiveness Debt Relief Act of 2007, 45 HARV. J. ON LEGIS. 601, 601 (2008).
8 324 ARKANSAS LAW REVIEW [Vol. 66:317 forgiven through December 31, Congress recently passed another short-term extension of the MDFRA; it is now set to expire on December 31, Reaction to the congressional benevolence was swift and harsh. III. THE ANTI-FORGIVENESS ARGUMENTS AND THE WEAKNESSES THEREIN Commentators have frequently criticized politicians for singling out real estate and homeownership for beneficial tax treatment. 34 The congressional exclusion of COD income for homeowners generated further concerns in this respect. The chief arguments against forgiving homeowner COD taxes include that such forgiveness spurs overconsumption and speculation, generates fairness concerns, creates a regressive tax structure, and penalizes previous payers of COD taxes. This article critiques these arguments in turn. The article also examines other tangential arguments made in the face of homeowner COD tax forgiveness. A. Forgiveness Spurs Speculation Perhaps the most virulent critic of the MFDRA and of COD forgiveness, Bradford Anderson, continually asserts that forgiveness is not justified due to its benefits accruing to real estate speculators. 35 Anderson repeatedly refers to the effects of the MFDRA on speculators and people who roll the dice on real estate. 36 He asserts that COD forgiveness adds fuel on the fire of real estate speculation. 37 Several glaring errors exist with regard to this argument against COD forgiveness. 32. Emergency Economic Stabilization Act of 2008, Pub. L. No , 303, 122 Stat. 3765, 3807 (2008) (codified in part at I.R.C. 108); see Mortgage Workouts, supra note American Taxpayer Relief Act of 2012, Pub. L. No , 126 Stat (2013). 34. Humphreys, supra note 30, at 30 (criticizing the MFDRA for making housing even more favored in the tax code). 35. Bradford P. Anderson, Robbing Peter To Pay for Paul s Residential Real Estate Speculation: The Injustice of Not Taxing Forgiven Mortgage Debt, 36 SETON HALL LEGIS. J. 1, 10 (2011). 36. Id. at 5, 10, Id. at 25.
9 2013] TAX EXEMPTION FOR HOMEOWNERS 325 First, Anderson vastly overstates the extent to which the MFDRA benefits true speculators. Surely countless individuals bought second and third homes using exotic loan terms with the goal of quickly flipping them for a profit while housing prices escalated quickly. But congressional relief only applies to principal home residences. 38 Thus, the most irresponsible, speculative indebtedness will not be forgiven under the MFDRA. Secondly, as Congress only exempted primaryresidence indebtedness, Anderson s argument regarding unfair benefits to speculators would only be valid if most homeowners receiving such forgiveness were hardcore capitalist speculators guilty of rolling the dice. 39 Yet Anderson presents no evidence to suggest that most homeowners at the height of the bubble sought to turn a quick speculative profit on their principle personal residences. His statement of the argument suggests that any investor or homeowner hoping for eventual positive returns on their personal residence is as crazy as a penny stock investor or a roulette wheel gambler. It is far more realistic to expect that homeowners rationally sought a safe investment that would yield a positive return over time. Given that housing prices had taken seventy years to decline at historically significant rates, 40 investing in a home, even during periods of high price appreciation, can hardly be equated to rolling the dice. Homes are often Americans primary long-term investments and for good reason: they have traditionally been sound investments that appreciate over long periods of time. Therefore, little, if any, evidence exists to suggest that most homeowners obtaining COD tax forgiveness were short-term flippers or speculators. Undoubtedly, part of the rise in homeownership during the bubble has been blamed on government policies encouraging homeownership. 41 As a thought experiment to 38. See I.R.C. 108(a)(1)(E), (h)(5) (2006 & Supp. V 2011). 39. Anderson, supra note 35, at Katie Curnutte, Home Value Declines Surpass Those of Great Depression, ZILLOW BLOG (Jan. 11, 2011), 41. See, e.g., Lucas Kawa, The Federal Housing Authority Might Be Fueling the Next Housing Bubble, BUS. INSIDER (Dec. 13, 2012, 4:13 PM),
10 326 ARKANSAS LAW REVIEW [Vol. 66:317 give the benefit of the doubt to Anderson s argument that COD forgiveness should be included in a list of blameworthy government policies, let s assume what to many is a given namely, that some of the increase in the rate of homeownership during the bubble was due to people encouraged to speculate on quick real estate profits. Still, for Anderson s position to make sense (that COD forgiveness only benefits risky speculators), he would have to first show that homeowners obtaining COD relief were the same homeowners who bought real estate primarily to speculate on quick, risky profits, rather than long-term homeowners caught up in a failing market. Anderson has not or could not make this showing. Anderson would then have to produce evidence that potential forgiveness of taxes in the case of property-value loss drove the speculators behavior. Quite simply, even if speculation was a primary driver for the increase in principal home ownership, Anderson can point to no evidence that would show that the reduction in home ownership as a result of heightened foreclosure numbers was primarily a reduction among speculators who would then unjustly gain COD tax forgiveness. Rather, in the face of skyrocketing unemployment and adjusting variable rate mortgages, it is far more realistic to assume that most homeowners were forced out of their primary residences due to economic hardship rather than homo economicus cost-benefit analysis. 42 Lastly, Anderson s argument assumes that the COD exemption is a primary driver of whether investors speculate on real estate. 43 However, Anderson presents no evidence to support this theory. Considering some commonly accepted basic behavioral science biases, it is unlikely anyone could produce such evidence. One such insider.com/fha-and-the-next-housing-bubble See, e.g., Brent T. White, Underwater and Not Walking Away: Shame, Fear, and the Social Management of the Housing Crisis, 45 WAKE FOREST L. REV. 971, (2010). White shows that many people do not walk away from their homes in a strategic default even though it would be to their economic benefit to do so. Id. If so many people were speculators and strictly economic actors, as Anderson seems to suggest, surely any homeowner significantly underwater would walk away from their mortgage and property. Id. 43. Anderson, supra note 35, at 5.
11 2013] TAX EXEMPTION FOR HOMEOWNERS 327 bias is the overoptimism bias, or the human tendency to believe that bad things will not happen. 44 Another bias is the belief that bad things happen to other people. When considering these biases in the context of a rapidly increasing market (and when combined with Anderson s lack of empirical support), it is practically inconceivable to envision an investor whose decision to speculate in real estate hinges on tax treatment of homes sold at a loss. The far more likely culprit is highlighted in Anderson s own article the fact that real estate investment profits are not taxed on primary residences up to $250, The existing literature does suggest that tax considerations can have an effect on default. 46 It is unlikely, however, that tax treatment on primary home losses somehow spurs additional speculation. B. Forgiveness Spurs Irresponsibility As a corollary to the assertion that forgiveness encourages speculation, Anderson claims that Congress s COD exemption encourages homeowners to act irresponsibly, and hope that many others do the same, because then you will receive preferential treatment. 47 Like many commentators who blame the housing crisis or its symptoms on deadbeat homeowners, 48 Anderson simply does not accept that market conditions could excuse a homeowner s responsibility to pay back a home loan. Two major problems are present in this line of thinking. First, homeowner responsibility is not just mitigated by the unprecedented market downturn. Rather, during the height of the bubble, homeowners were victims 44. See, e.g., Eric A. Zacks, Unstacking the Deck? Contract Manipulation and Credit Card Accountability, 78 U. CIN. L. REV. 1471, 1502 nn (2010); see also DANIEL KAHNEMAN, THINKING, FAST AND SLOW (2011). 45. Anderson, supra note 35, at 5 & n.10; see also I.R.C. 121 (2006). 46. Hoon Cho, Brian A. Ciochetti & James D. Shilling, Are Commercial Mortgage Defaults Affected by Tax Considerations? 25 (KAIST Bus. Sch. Working Paper Series, Working Paper No. KBS-WP , 2007), available at 47. Anderson, supra note 35, at Marco Villarreal, Deadbeat Homeowners Causing False Sense of Appreciation in Valley, KTNV (Dec. 28, 2012), html.
12 328 ARKANSAS LAW REVIEW [Vol. 66:317 of a wide variety of intentional market distortions. It is generally accepted that appraisals were vastly overinflated. 49 Surely no serious commentator can expect an average homeowner to have been capable of combatting systematic overappraisals. Likewise, a wide variety of questionable origination practices are now known to have occurred during the housing boom. 50 Perhaps most disturbing among these practices is empirical data that shows that many homeowners could have afforded more traditional fixed-rate loans but were only offered higher rate or exotic loans and data that shows minorities were afforded differently priced credit options regardless of creditworthiness. 51 Accordingly, market conditions alone do not completely evince responsibility to repay loans, but, rather, active perpetration of overappraisals and the peddling of unnecessarily risky or high cost home loans mitigate the duty to repay. Secondly, even if the forgiveness of COD income tax encouraged social or moral irresponsibility, that forgiveness only mimics the forgiveness already given to banks. Large banks which, by many accounts, were to blame for the housing boom and bust, received billions of dollars of taxpayer money. 52 If tax relief for distressed homeowners excuses a small portion of homeowners who overspeculated and are now strategically defaulting (choosing to default even though able to pay, an arguably irresponsible or immoral action to some), that tax relief still only comprises a small portion of the tax relief afforded to homeowners. 53 When compared to the billions of taxpayer dollars directly given to an industry that has been widely lambasted for 49. S. Mitra Kalita & Carrick Mollenkamp, Judgment Call: Appraisals Weigh Down Housing Sales, WALL ST. J., Aug. 12, 2011, html ( The housing bubble that burst a few years ago was inflated, in part, by overly generous appraisals. ). 50. See, e.g., Henock Louis, Minority Lending and the Subprime Foreclosure Crisis 3 (Aug. 12, 2012) (unpublished working paper), available at com/sol3/papers.cfm?abstract_id= Id. at Crisis Mismanagement, ECONOMIST, Oct. 27, 2012, at 85, 85-86, available at 53. See, e.g., White, supra note 42, at
13 2013] TAX EXEMPTION FOR HOMEOWNERS 329 systematic abuses that helped lead to the bust, 54 homeowners escaping some tax liability certainly seems pedestrian. Lastly, Anderson ignores the fact that congressional tax relief protected against some of the more irresponsible conduct of which some homeowners were guilty. The MFDRA did not excuse COD tax liability for any residence other than primary residences. 55 Any idea of homeowners who bought four and five properties for a quick flip benefiting from the MFDRA, therefore, is simply not in accordance with reality. Additionally, Congress specifically mandated that the only home loan indebtedness that qualifies for tax exemption is indebtedness incurred for the purpose of purchasing or improving property. 56 Second and third mortgages taken out to pay credit card debts or to buy flat-screen televisions do not qualify for COD tax forgiveness. C. Forgiveness Unfairly Favors the Wealthy Anderson argues that [t]he current exclusion of taxation on forgiven residential mortgage debt favors the wealthy and those who engaged in high stakes speculation because [a] wealthy individual receives a greater tax benefit from untaxed forgiven mortgage debt, not just in real dollars, but proportionately than a lower income individual. 57 This stems from the fact that wealthy homeowners, presumably living in more expensive homes with more sizable debt, will naturally have more debt to be forgiven. Furthermore, when that debt is forgiven, the 54. CONGRESSIONAL BUDGET OFFICE, REPORT ON THE TROUBLED ASSET RELIEF PROGRAM OCTOBER 2012, at 1-3 & tbl.2 (2012), available at 55. See I.R.C. 108(a)(1)(E), (h)(5) (2006 & Supp. V 2011). 56. See I.R.C. 108(h)(2) (2006 & Supp. V 2011) ( For purposes of this section, the term qualified principal residence indebtedness means acquisition indebtedness.... ); I.R.C. 163(h)(3)(i) (2006) (defining acquisition indebtedness as an indebtedness incurred in acquiring, constructing, or substantially improving a principle residence); see also Mortgage Workouts, supra note Anderson, supra note 35, at (footnote omitted).