The Charles Schwab Corporation and Subsidiaries - Page 5

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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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