Index: wp-includes/taxonomy.php
===================================================================
--- wp-includes/taxonomy.php	(revision 17497)
+++ wp-includes/taxonomy.php	(working copy)
@@ -15,6 +15,8 @@
  * Creates the initial taxonomies when 'init' action is fired.
  */
 function create_initial_taxonomies() {
+	global $wp_rewrite;
+	
 	register_taxonomy( 'category', 'post', array(
 		'hierarchical' => true,
 	 	'update_count_callback' => '_update_post_term_count',
@@ -22,7 +24,7 @@
 		'rewrite' => did_action( 'init' ) ? array(
 					'hierarchical' => true,
 					'slug' => get_option('category_base') ? get_option('category_base') : 'category',
-					'with_front' => false) : false,
+					'with_front' => ( get_option('category_base') && ! $wp_rewrite->using_index_permalinks() ) ? false : true ) : false,
 		'public' => true,
 		'show_ui' => true,
 		'_builtin' => true,
@@ -34,7 +36,7 @@
 		'query_var' => 'tag',
 		'rewrite' => did_action( 'init' ) ? array(
 					'slug' => get_option('tag_base') ? get_option('tag_base') : 'tag',
-					'with_front' => false) : false,
+					'with_front' => ( get_option('category_base') && ! $wp_rewrite->using_index_permalinks() ) ? false : true ) : false,
 		'public' => true,
 		'show_ui' => true,
 		'_builtin' => true,