The 700 billion bailout by the feds also included a provision with extended the mortgage debt forgiveness law out until 2012.
So as it stands now - If you have a principle residence and acquisition debt - you will not have to pay taxes on the loan forgiveness to the feds until 2012.
However, California has only aligned itself with the feds on this law until the end of 2008. If you have not started your short sale by now. You should review all your options before you sign that short sale listing agreement in California.