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for full years (that do not follow a short year) using the prior
year (1988) as the measuring year. Because petitioner was
permitted to deduct the same amount ($932,979) by the Court in
Schwab I for its short year ended December 31, 1988, respondent’s
trial position was that petitioner was not entitled to the
franchise tax deduction it had claimed for 1989.
Petitioner alleged in its petition in Schwab II that the
1972 law did not trigger section 461(d), and that petitioner was
entitled to deduct, for Federal purposes, franchise tax for 1989
and later years measured by the California income of the
reporting year. Under the 1972 law, petitioner’s actual 1989
obligation for franchise tax was $1,806,588, which petitioner
contends should be deductible for its 1989 Federal tax year.
In the notice of deficiency (which was issued after the
holding in Schwab I), respondent determined that petitioner was
entitled to the $932,979 deduction that petitioner had claimed on
its return for 1989. After petitioner sought franchise tax
deductions greater than those claimed on its returns, respondent
amended his answer in this proceeding (Schwab II) and argued, in
contravention of his determination in the notice of deficiency,
that petitioner was not entitled to deduct the $932,979 it had
claimed on its 1989 return.
Accordingly, the controversy was framed in a context where
respondent contended that if section 461(d) applied, petitioner
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