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pay higher commissions to cover the costs of those services. For
Federal income tax purposes, petitioner reports income and
deductions under the accrual method of accounting and has adopted
the “recurring item exception” under section 461(h)(3).
On February 9, 1987, petitioner qualified to do business in
California and on April 1, 1987, began operations. Petitioner
used a calendar year for California franchise tax purposes.
Petitioner’s first tax year for Federal income tax purposes ended
on March 31, 1988. In its second and successive years,
petitioner’s tax year for Federal income tax purposes was changed
to the calendar year.
Petitioner’s California franchise tax liabilities were
originally deducted on its Federal corporate income tax returns
in the following manner:
California
California Income Franchise
Computational Tax Base Federal Tax Year Tax Liability
1987 calendar year FYE 3/31/88 $879,500
1988 calendar year 1989 calendar year 932,979
1989 calendar year 1990 calendar year 1,806,588
1990 calendar year 1991 calendar year 2,066,547
1991 calendar year 1992 calendar year 3,778,547
1992 calendar year 1993 calendar year 5,578,718
Petitioner, on its Federal corporate income tax return for the
short (9-month) year ended December 31, 1988, did not claim a
California franchise tax deduction.
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