CBA Record January-February 2023

YOUNG L AWYERS S EC T I ON : BU I LD I NG BR I DGE S

State Conformity Rules The next question is whether the bor rower’s state of residence completely con forms to, partially conforms to, or entirely decouples from the above-mentioned fed eral rules. Conformity issues arise because under the 10th Amendment to the U.S. Constitution, all states enjoy concurrent income tax jurisdiction with the federal government. In practice, this means each state may conform to the federal income tax rules as much or as little as it wants. In general, three categories of confor mity exist: (1) rolling, (2) static, and (3) selective. Under rolling conformity, a state follows the current federal tax rules and requires some legislation to decouple from those rules. Static conformity means the state follows all federal tax rules as of some static date and requires legislation to adopt federal rules enacted after that static date. By contrast, selective conformity entails the state following some federal tax rules as of each rule’s specified date and requires legislation to update those rules and adopt additional rules not previously conformed to. Local interests, administrative conve nience, and taxpayer certainty are some reasons why a state chooses one type of conformity over another. Wisconsin is an example of a static con formity state. As of this article’s publication date, Wisconsin follows federal income tax laws in effect as of December 31, 2020. On

one hand, this means Wisconsin follows the federal default inclusion rule because that rule was in effect before December 31, 2020. However, this also means Wis consin ignores the second exception to that rule (President Biden’s plan) because this exception is in effect for discharges of debt that occur after December 31, 2020, but before January 1, 2026. As a result, if a borrower obtains relief under the plan and resides in Wisconsin, then they will pay state income tax on that relief even though they will not pay federal income tax on that same relief. WIS. STAT. §71.01(6) (m); American Rescue Plan Act of 2021, Pub. L. No. 117-2, §9675(a), 135 Stat. 4. Illinois, in contrast, is a rolling con formity state. This means Illinois follows the federal default inclusion rule and the second exception to that rule (President Biden’s plan). Consequently, if a borrower obtains relief under the plan and resides in Illinois, then they will not pay state nor federal income tax on that relief. 35 ILCS 5/203(a); 35 ILCS 5/1501(a)(11). Summary If President Biden’s plan survives litigation, then certain tax benefits and burdens will follow. Nationally, borrowers will enjoy a tax benefit by excluding the forgiven amount from federal gross income. Locally, whether the plan produces a benefit, or a burden depends on the state’s

conformity (or lack thereof ) to the federal rules. If a borrower resides in a state that does not conform to the second exception in the federal rules—such as Arkansas, California, Indiana, Minnesota, Missis sippi, North Carolina, and Wisconsin— then the plan will likely increase their state income tax bill. However, if a borrower resides in a state that does conform to the second exception—such as Illinois— then the plan will not increase their state income tax bill. Jake Berger, a partner at Tabet DiVito & Roth ste in LLC, prac t i ces primarily in commercial litigation in state and federal courts, received the 2022 Excellence in Pro Bono Award from the United States District Court for the Northern District of Illinois, and is co-editor-in-chief of the YLS Journal.

Te d Kon t opou l o s , a senior tax consultant II at FORVIS, LLP in its tax controversy and procedure group, serves as co-chair on the YLS Fed eral Taxation Committee and is co-editor-in-chief of the YLS Journal.

Pro Bono Fair 2022 Over 150 attorneys attended the 29th Annual Pro Bono & Community Service Fair sponsored by the CBAYoung Lawyers Section, The Chicago Bar Foundation, and Kirkland & Ellis LLP. Pictured from left: YLS Chair Dan Berkowitz, Aronberg Goldgehn, and Second Vice-Chair Kenny Matuszewski, Goldberg Segalla.

36 January/February 2023