Earthquake Sound Corporation - Page 2




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               The $4,760 deficiency determined by respondent is based on a           
          change in petitioner's method of accounting for its California              
          franchise tax liabilities.  Petitioner does not dispute the                 
          change in its method of accounting for California franchise tax             
          liabilities.  Petitioner, however, contests the $14,000 section             
          481 adjustment relating thereto that respondent made.                       

                                  FINDINGS OF FACT                                    
               Some of the facts have been stipulated and are so found.               
               At the time the petition was filed, petitioner, a Delaware             
          corporation, maintained its principal place of business in Menlo            
          Park, California.  Since December 26, 1989, petitioner has been             
          subject to the California Bank and Corporation Franchise Tax                
          (franchise tax).  See Cal. Rev. & Tax. Code sec. 23151 (West 1992           
          & Supp. 1999).                                                              
               The franchise tax is imposed on corporations for the                   
          privilege of doing business in California each year (privilege              
          year).  The franchise tax for the privilege year is computed on             
          the basis of the corporation's net income earned in the previous            
          year (income year).                                                         
               From 1990 to 1995, for Federal income tax purposes,                    
          petitioner generally used the accrual method of accounting to               
          compute its income and deductions.  Petitioner, however, computed           
          its deductions for its franchise tax liabilities under the cash             
          method of accounting.  On its 1992 corporate Federal income tax             






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