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years prior to 1989, including the short year ended December 31,
1988.
The Court in Schwab I held that petitioner was entitled to
deduct California franchise tax for the short year ended December
31, 1988, of $932,979, which, for California franchise tax
purposes, accrued on December 31, 1988, and was also measured by
petitioner’s 1988 California income. As previously explained,
under one of the exceptions to pre-1972 California law, the
franchise tax obligation for a year (1988) after a short year
(1987) accrued on December 31 of the reporting year (1988) and
was measured by the California income of the reporting year.
Accordingly, in Schwab I, petitioner, for its short Federal tax
year ended December 31, 1988, was allowed to deduct $932,979 in
franchise taxes that had accrued on December 31, 1988, and were
based on petitioner’s 1988 California income. As noted above,
petitioner did not claim a California franchise tax deduction for
its short year ended December 31, 1988. Also, as noted above,
petitioner, under the 1972 law, incurred a $932,979 obligation
for franchise tax on December 31, 1988.
Petitioner claimed a $932,979 franchise tax deduction on its
1989 corporate Federal income tax return, which, as explained
above, was computed on petitioner’s 1988 California income. The
$932,979 claimed for 1989 Federal tax purposes was computed in
accord with the pre-1972 California franchise tax general rule
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