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expressed exception to this approach concerns corporations with a
tax year beginning or ending during the taxable year.
Generally, and before the 1972 amendments, a corporation
beginning its first full taxable year in California paid
franchise tax based on the net income for the first taxable year.
In the next and successive years (second year and later) the
corporation’s franchise tax liability was based on the income
year (first or preceding year). Cal. Rev. & Tax. Code sec. 23222
(West 1992).
When a corporation’s first operational year is less than 12
months, California’s franchise tax treatment is different. The
difference occurs with respect to the second operational year.
For the first year the corporation is required to file a
franchise tax return within 2-1/2 months from the end of the
first short year. In effect, this tax is a prepayment of the tax
for the second year. For the second year, the corporation would
again file a return within 2-1/2 months from the end of the
second year and pay tax based on its second year’s net income.
Because of the prepayment based on the first short year, the
corporation is entitled to a credit against the second year’s
franchise tax liability. In that type of situation, beginning in
the third year, the franchise tax obligation would be based on
the income year (second year or first complete year in this
example) and so on. See id. sec. 23222(a).
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