Internal Revenue Service Form 1099 is the form on which miscellaneous forms of taxable income are reported to taxpayers, who are then required to report this income on their tax returns (and pay taxes on it as required by their financials and the tax code). 

In every state, every short sale or foreclosure can give rise to the bank issuing the borrower/former homeowner a form 1099 to report what is called Cancellation of Debt Income (CODI). 

The theory is that you were not required to report the money you borrowed as income at the time you took the mortgage, because it was not income -- it was a loan. When any portion of that debt is forgiven, whether through a short sale, a loan modification or a foreclosure, those funds convert from a loan to income, and must be reported to the IRS. 

 Any lender that wipes out debt in the context of a loan restructuring or a foreclosure has the right to issue the former borrower a 1099 form on the deficiency amount: the difference between what the lender recoups on the property through auction sale, short sale or a reduced loan balance, and what the borrower owed on the property. (The lender may not do it, but has the right to -- and most lenders do.)As a result, in foreclosures involving equity lines or loans or refinance loans that resulted in cash out (i.e., were not used to purchase the home or to refinance a purchase loan), that bank may not issue a 1099 because that line or loan has not been forgiven -- the bank retains the right to pursue the borrowers for those funds in California. 

Early on in this housing crisis, it was widely believed that a short sale would generate income tax while a foreclosure would not. This was largely misinformation, misinterpretation and misunderstanding of the relevant tax rules, largely due to the fact that we had simply seen very few cases of short sales or foreclosures until this wave of foreclosures came four years ago.