The Charles Schwab Corporation and Includable Subsidiaries - Page 23

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          31, 1988, for the franchise tax it paid for the California income                  
          year 1987.  Regardless of whether the franchise tax properly                       
          accrued on December 31, 1987, as petitioner contends, or on                        
          January 1, 1988, as respondent contends, both parties agree that                   
          the deduction was proper in petitioner’s first Federal taxable                     
          year.  Instead, the parties’ dispute centers on the deductibility                  
          of the California franchise tax for petitioner’s second Federal                    
          taxable year.                                                                      
                To understand the crux of the dispute, it is necessary to                    
          understand some of the history with respect to the California                      
          franchise tax.  California imposes an annual franchise tax on                      
          most corporations doing business within the State of California                    
          for the privilege of exercising their corporate franchises.  Cal.                  
          Rev. & Tax. Code sec. 23151(a) (West 1992).  In general, the tax                   
          computed for the "taxable year"8 is based upon the net income of                   
          the preceding year, which is designated the "income year".  Id.                    
          secs. 23041(a), 23042(a), 23151(a) (West 1992).                                    
                Prior to the 1972 amendments to the California franchise tax                 
          statutes, the California franchise tax generally accrued on the                    
          first day of the taxable year.  In Central Inv. Corp. v.                           
          Commissioner, 9 T.C. 128, 132-133 (1947), affd. per curiam 167                     
          F.2d 1000 (9th Cir. 1948), we held that even though the                            


                8The "taxable year" is the year for which the California                     
          franchise tax is payable.  Cal. Rev. & Tax. Code sec. 23041(a)                     
          (West 1992)                                                                        




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