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not on the relationship between the customer and the purchaser or
seller of the securities.7 The agreement between petitioner and
its customers was that any trade executed by petitioner in
accordance with the customer's instructions could not be
canceled. In contrast, the customer in Hallmark had the right to
return the merchandise without penalty until title passed. Id.
at 33. The essence of the transaction between petitioner and its
customer is the execution of a trade on behalf of the customer.
Accordingly, we uphold respondent’s determination that
petitioner must accrue commission income for the purchase or sale
of securities on the trade date as opposed to the settlement
date.
California Franchise Tax Issue
The next issue we must decide is whether petitioner is
entitled to a deduction for its California franchise tax
liability in the amount of $932,979 on its Federal income tax
return for the taxable year ended December 31, 1988.
Respondent does not dispute that petitioner properly deducted
$879,500 on its Federal return for the taxable year ended March
7We note, however, that the legislative history of the Tax
Reform Act of 1986 indicates that for Federal income tax
purposes, both cash and accrual method taxpayers must recognize
gain or loss on the sale of securities traded on an established
market on the date the trade is executed. S. Rept. 99-313
(1986), 1986-3 C.B. (Vol. 3) 131. Such treatment, while not
controlling as to brokerage commissions, is consistent with our
holding herein.
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