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Petitioner commenced business in California during 1987 and
for its Federal tax year ended March 31, 1988, deducted $879,500
for California franchise tax paid on its 1987 California
franchise tax income. That deduction was based on a January 1,
1988, accrual date. Respondent did not question that deduction.
Instead, the controversy in Schwab I concerned whether petitioner
was entitled to a $932,979 franchise tax deduction for its short
(9-month) Federal tax year ended December 31, 1988.8
In that case, respondent argued that petitioner was not
entitled to the $932,979 franchise tax deduction for its short
1988 calendar year because the 1972 amendments in California law
(1972 amendments) resulted in a proscribed acceleration of the
accrual under section 461(d)(1). In particular, respondent
argued that the 1972 amendments, which changed the accrual date
from January 1 to the preceding December 31, caused the section
461(d)(1) proscription to apply. Under respondent’s argument
petitioner would not have been entitled to claim the $932,979
franchise tax deduction until its calendar year ended December
8 Petitioner, for purposes of reporting Federal tax,
converted from a Mar. 31 fiscal year to a Dec. 31 calendar year
during 1988 so that its calendar year ended Dec. 31, 1988, was a
short year consisting of 9 months. Petitioner had not deducted
the $932,979 on its Federal return for the short year ended Dec.
31, 1988. Instead, it had deducted that amount on its 1989
Federal return. In Schwab I, petitioner changed from its
reporting position and claimed the $932,979 for the short Federal
tax year ended Dec. 31, 1988, leaving the 1989 Federal year
without a deduction for California franchise tax.
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