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section 461(d) is not so limited in its application and that it
proscribes any acceleration of the accrual of State tax produced
by post-1960 legislation.
Under respondent’s interpretation, petitioner would not be
entitled to a franchise tax deduction for its 1989 calendar
year.7 Respondent contends that the fact that petitioner does
not receive a 1989 franchise tax deduction is due to unique
factual circumstances surrounding petitioner’s 1989 reporting
year. Conversely, petitioner’s interpretation of section 461(d),
if correct, would result in franchise tax deductions greater than
those originally claimed, including those for petitioner’s 1989
tax return.
Section 164(a) generally provides for the deduction of
qualified State and local taxes in the year paid or accrued. The
California franchise tax is a type of tax that would normally be
deductible under section 164(a). The application of section 164
was modified during 1960 by the enactment of section 461(d),
7 Petitioner’s original reporting position for 1989 was to
claim a $932,979 deduction for California franchise tax and no
deduction for its short taxable year ended Dec. 31, 1988. In
Charles Schwab Corp. & Includable Subs. v. Commissioner, 107 T.C.
282 (1996) (Schwab I), affd. on another issue 161 F.3d 1231 (9th
Cir. 1998), cert. denied 528 U.S. 822 (1999), it was decided that
petitioner was entitled to deduct the $932,979 in its short
taxable year ended Dec. 31, 1988, leaving the 1989 year with no
deduction for California franchise tax. Petitioner then claimed
that $1,806,588, originally deducted for 1990, should be
deductible for 1989. In turn, respondent amended the answer in
response to petitioner’s change from its reporting position.
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