A California resident borrows against the cash value of a non-MEC life insurance policy. Under California personal income tax law, the loan proceeds are:

Why C is correct

California's Personal Income Tax Law conforms to the federal Internal Revenue Code for this purpose, and the federal rule treats a policy loan as a debt rather than a distribution. Consequently, borrowing against the cash value is not a taxable event for California personal income tax, just as it is not for federal income tax. The loan is not income to the borrower and no gain is recognized while the policy remains in force. California does not impose a separate early-distribution penalty on a routine policy loan from a non-MEC contract.

Why the other options are wrong

• A) A policy loan is not income and therefore cannot be California-source taxable income; conformity to federal law means no taxation on the borrowing itself. There is no state taxable event to report.
• B) Policy age does not change the treatment; the loan is a debt regardless of how long the policy has been in force, so there is no five-year waiting rule.
• D) The 10% penalty is a federal rule tied to MEC or retirement-account distributions, not to ordinary policy loans from a non-MEC contract. No penalty arises on this borrowing. This is simply not a penalty event.

Memory hook

California mirrors Washington: a policy loan is debt, not income — no state tax.