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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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