                         T.C. Memo. 2000-112



                       UNITED STATES TAX COURT



             EARTHQUAKE SOUND CORPORATION, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 17551-98.               Filed March 30, 2000.



     Gregg M. Anderson, for petitioner.

     Margaret S. Rigg, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     SWIFT, Judge:    Respondent determined a deficiency of $4,760

in petitioner's corporate Federal income tax for 1993.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the year in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.
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     The $4,760 deficiency determined by respondent is based on a

change in petitioner's method of accounting for its California

franchise tax liabilities.   Petitioner does not dispute the

change in its method of accounting for California franchise tax

liabilities.   Petitioner, however, contests the $14,000 section

481 adjustment relating thereto that respondent made.


                          FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

     At the time the petition was filed, petitioner, a Delaware

corporation, maintained its principal place of business in Menlo

Park, California.   Since December 26, 1989, petitioner has been

subject to the California Bank and Corporation Franchise Tax

(franchise tax).    See Cal. Rev. & Tax. Code sec. 23151 (West 1992

& Supp. 1999).

     The franchise tax is imposed on corporations for the

privilege of doing business in California each year (privilege

year).   The franchise tax for the privilege year is computed on

the basis of the corporation's net income earned in the previous

year (income year).

     From 1990 to 1995, for Federal income tax purposes,

petitioner generally used the accrual method of accounting to

compute its income and deductions.      Petitioner, however, computed

its deductions for its franchise tax liabilities under the cash

method of accounting.   On its 1992 corporate Federal income tax
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return, petitioner deducted a total of $24,603 in franchise tax

paid in 1992 relating to privilege year 1992 ($10,603) and to

privilege year 1993 ($14,000).    On its 1993 corporate Federal

income tax return, petitioner deducted a total of $36,229 in

franchise tax paid in 1993 relating to privilege year 1993

($11,029) and to privilege year 1994 ($25,200).

     Respondent audited petitioner's corporate Federal income tax

returns for 1993, 1994, and 1995.    During the audit, respondent

required petitioner for 1993 and subsequent years to change its

cash method of accounting for the franchise tax liabilities to

the accrual method of accounting, under which a deduction in the

privilege year is allowed only for franchise tax due for that

year.

     Respondent concluded that the change in petitioner's

accounting method resulted in a deduction of the same $14,000

franchise tax both on petitioner's 1992 and 1993 corporate

Federal income tax returns.   By the time respondent required the

above change in petitioner's method of accounting for California

franchise tax, under the period of limitations applicable to

1992, petitioner's 1992 corporate Federal income tax return was

closed for assessment.

     Relying on section 481, respondent then charged petitioner

with a $14,000 section 481 adjustment for 1993.
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                              OPINION

     Section 481(a) requires that, if changes in methods of

accounting occur, certain other adjustments to taxable income be

made.   The purpose of adjustments under section 481 is "to

prevent amounts from being duplicated or omitted" as a result of

changes in methods of accounting.   Sec. 481(a)(2).

     Section 6501(a) provides generally that the amount of any

tax imposed by the Code is to be assessed within 3 years after

the filing of a tax return.

     Petitioner contends that respondent's $14,000 section 481

adjustment against petitioner for 1993 should not be allowed

because it in effect reopens petitioner's 1992 closed Federal

income tax return, violating the period of limitations applicable

to petitioner's 1992 corporate Federal income tax liability.

     The courts consistently hold that section 481 adjustments

may be made in spite of the fact that the related years in which

the duplicate deductions were taken have been closed by the

applicable period of limitations.   See, e.g., Peoples Bank &

Trust Co. v. Commissioner, 415 F.2d 1341, 1344 (7th Cir. 1969),

affg. 50 T.C. 750 (1968); Graff Chevrolet Co. v. Campbell, 343

F.2d 568, 572 (5th Cir. 1965); Superior Coach, Inc. v.

Commissioner, 80 T.C. 895, 912 (1983); German v. Commissioner,

T.C. Memo. 1993-59, affd. without published opinion 46 F.3d 1141
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(9th Cir. 1995).   In German, we explained the relationship

between sections 481 and 6501 as follows:


     While respondent may be precluded by the statute of
     limitations from determining deficiencies in income tax
     for some of the prior years, section 481 authorizes an
     adjustment to income for the * * * [open] taxable year
     for the amount * * * erroneously deducted under * * *
     [petitioner's] accounting practice during closed years.
     * * * It is not meant to provide a means to correct
     errors of past years, but rather is intended to take
     into account in the year of change * * * those
     adjustments which are necessary solely by reason of the
     change in accounting method in order to prevent amounts
     from being duplicated or omitted. [Citations omitted.]


     As explained in Graff Chevrolet Co. v. Campbell, supra at

572, section 481 confers on respondent "ample power to change

accounting methods and reassess income for open years; section

481 would be virtually useless if it did not affect closed

years."

     Respondent contends that the section 481 adjustment does not

constitute an adjustment to petitioner's income for 1992, a

closed year, but rather that it constitutes an adjustment to

petitioner's income for 1993, an open year.   We agree with

respondent.

     Respondent's section 481 adjustment for 1993 did not effect

a change in petitioner's 1992 taxable income.   The change in

petitioner's method of accounting for franchise tax beginning for

1993 caused petitioner to deduct the same $14,000 amount twice.

Respondent's section 481 adjustment for 1993 was necessary to
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eliminate the double deduction of the $14,000.    We conclude that

respondent's section 481 adjustment did not violate section 6501.

     Petitioner also suggests that the $14,000 franchise tax

deduction in question did not, for petitioner, constitute a

"material item" and therefore that the section 481 adjustment

should not be allowed.

     Sections 1.446-1(e)(2)(ii)(a) and 1.481-1(a)(1), Income Tax

Regs., provide generally that a change in method of accounting

includes, among other things, a change in the treatment of a

material item.   Petitioner herein has failed to prove that the

duplication of the $14,000 franchise tax deduction for 1993 was

not material.    A mere assertion in a brief that the parties did

not stipulate as to the materiality of an item is not sufficient

to establish the nonmateriality thereof.

     We hold that section 6501 does not bar respondent from

making the section 481 adjustment involved herein.

     To reflect the foregoing,

                                         Decision will be entered

                                    under Rule 155.
