Schwab loses Calif appeal on federal tax deduction

By Jonathan Stempel

NEW YORK, Aug 2 (Reuters) - In a ruling that may affect many California companies, a federal appeals court has rejected Charles Schwab Corp's (SCHW.O) bid to deduct payment of a state business tax sooner from its federal tax bill.

A three-judge panel of the Ninth Circuit Court of Appeal in San Francisco said the discount brokerage cannot deduct its annual state franchise taxes on its federal returns until Jan. 1 of the year after they were accrued for state tax purposes. Schwab had sought to deduct them on Dec. 31 of the prior year.

The ruling in favor of the Internal Revenue Service may impact growing in-state companies because franchise tax is tied to a company's income, the court said. Had the court ruled the other way, federal deductions for growing companies that owe franchise tax could have been higher, and tax bills lower.

According to the opinion, Schwab argued that a Dec. 31 accrual date should apply for its 1989 to 1992 tax years, when profits were growing rapidly.

But the appeals court disagreed, saying Schwab was entitled on its 1989 to 1992 federal tax returns to deduct its franchise tax obligations based on its 1988 to 1991 income.

"Naturally, we're disappointed in the outcome," said Greg Gable, a spokesman for San Francisco-based Schwab. He said the company has not decided whether to appeal to a larger Ninth Circuit panel or the U.S. Supreme Court.

According to the opinion, most businesses operating in California must pay a yearly state franchise tax for the privilege of operating.

The court found that under the Internal Revenue Code, the accrual date of state franchise tax liability for federal tax purposes is no earlier than it would have been under state law in 1960.

At that time, state franchise tax did not accrue until the first day after the year in which a company earned income forming the basis of the assessment, the court said. Federal law nullifies state efforts to move up the date, it said.

The Ninth Circuit decision affirmed a ruling of the U.S. Tax Court.

((Editing by Gary Hill; Reuters Messaging: jon.stempel.reuters.com@reuters.net, 646 223 6317)) Keywords: CHARLESSCHWAB RULING/TAXES

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