The Charles Schwab Corporation and Subsidiaries - Page 18

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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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