The Charles Schwab Corporation and Includable Subsidiaries - Page 1

                                      107 T.C. No. 17                                        

                                 UNITED STATES TAX COURT                                     

                    Petitioner v. COMMISSIONER OF INTERNAL REVENUE,                          

                Docket No.  1271-92.                Filed November 14, 1996.                 

                     P, an accrual basis taxpayer, provides discount                         
                securities brokerage services for which it earns a                           
                commission fee.  As a discount broker, P does not                            
                engage in activities, such as research and portfolio                         
                management, that are normally conducted by a full-                           
                service broker.  P executes a customer’s order to buy                        
                or sell securities on the trade date, but the                                
                securities are not actually transferred and payment is                       
                not due until the settlement date, which was generally                       
                5 days after the trade date.  Between those dates, P                         
                performs certain functions to record, confirm, and book                      
                the customer’s trade.                                                        
                     P commenced business in the State of California on                      
                Apr. 1, 1987.  P deducted its California franchise                           
                taxes based on income for its first year ended Dec. 31,                      
                1987, on its Federal income tax return for the taxable                       
                year ended Mar. 31, 1988.  P then changed to a calendar                      
                year for Federal income tax purposes and is attempting                       
                to deduct its California franchise taxes based on                            

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