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obligations for 1987, 1988, and 1989, without considering the
limitation of section 461(d), were $879,500, $932,979, and
$1,806,588, respectively. Considering respondent’s concession
and the section 461(d) limitation on the amount deductible under
pre-1972 California law, petitioner is entitled to deduct
$879,500, $932,979, and $932,979 for the three reporting periods.
The confusion arises from the confluence of petitioner’s
conversion from a fiscal to a calendar year and the proscription
of section 461(d) limiting the amount deductible to amounts that
would have accrued in accord with the pre-1972 California law.
The net effect of employing section 461(d) is to limit
petitioner’s deductions for the 1987, 1988, and 1989 years to
amounts which total $873,609 less than was accrued and paid to
the State of California for franchise tax under the 1972 law.
The following table reflects how the $873,609 difference
occurs:
Year Tax Accrued and Paid Deduction Allowed Difference
1987 $879,500 $879,500 -0-
1988 932,979 932,979 -0-
1989 1,806,588 932,979 $873,609
Accordingly, for 1989 and each successive year, petitioner will
be paying California franchise tax based on the reporting year’s
California income but is only entitled, for Federal tax purposes,
to deduct an amount of franchise tax measured by the prior year’s
California income.
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Last modified: May 25, 2011