Were building-material transfers between commonly owned corporations nontaxable intercompany transactions because the companies formed a joint venture?

Plain-English summary

An audit examined two separate redacted corporations with identical officers and stock ownership. Corporation R was a building contractor. Corporation W bought and sold building materials. W had not reported its markups on material sales to R as taxable gross receipts.

W gave three reasons: the markups were arbitrary, the transfers were merely intercorporate transactions, and R could have bought the materials from another supplier at the same price. The source supplies no invoices, markup computations, contracts, books or audit schedules, although its conclusion says both corporations' books treated the transfers as sales.

After the audit, staff found California Tax Service Annotation 1594.20. As quoted, it treated two identically owned neon-sign corporations as a single company when they operated as a joint enterprise under Sales Tax General Bulletin 59-3. The supporting neon source and bulletin are not included, so the current memorandum supplies only the quotation.

Tax Counsel George A. Trigueros explained that a joint venture was a joint undertaking to carry out one business enterprise for profit. It required a community of interest, sharing of profits and losses, each venturer's right to direct the others through a fiduciary relationship, joint proprietary interest in the venture property and joint participation in the business.

Separate corporations could form a joint venture, but common ownership and mutual financial benefits were not determinative. These corporations appeared to have been formed to separate responsibility for different business functions and activities. Counsel found they had not formed or operated as a joint venture and treated W's building-material transfers to R as taxable retail sales, consistent with both companies' book entries.

The memorandum does not state the audit period, sales or markup amounts, tax rate, assessment, penalties, interest, taxpayer response, petition, hearing or final outcome.

Source posture

The live 415.0060 annotation, in the 2026 revision of the Business Taxes Law Guide, retains the identical ownership and officers, seller/contractor roles, mutual financial benefits, missing single-enterprise agreement, absent community and profit/loss sharing, separate-person conclusion and taxable retail-sale result. It omits the audit and unreported markups, W's three arguments, quoted neon-sign annotation and Bulletin 59-3, complete joint-venture elements, separate-business-purpose finding, book entries, missing records and absent outcome. Its statement that the corporations have not agreed is more definite than the supporting memorandum's broader does not appear finding based on the supplied facts.

CDTFA's Annotated Legal Opinions collection says the letters are summarized as annotations and that statutory law controls whenever a statute and annotation conflict. The official two-page 415.0060 PDF has a clean native text layer and no raster images, so no OCR was required. It prints Calif. Tax Service Annotation 1594. 20 and switches from W to w; those source forms remain verbatim below. Both fresh direct PDF downloads and both live-annotation downloads were byte-identical, and duplicate default PDF text extractions matched. The original-text section below remains byte-identical to its committed version and matches the fresh official extraction after removing only the extractor's terminal newline and form feed.

What this means for you

Related corporations and tax professionals

Common ownership does not erase transactions between separate corporations. Document agreements, ownership, control, property interests, operations, books, transfer prices, profits and losses. If related companies do not genuinely conduct one joint enterprise with the required elements, retail-sale treatment can apply to intercompany transfers and markups. Check current entity, joint-venture, related-party and tax law.

Common questions

Q: Did identical officers and shareholders create a joint venture?

A: No by themselves. Counsel required the full joint-enterprise elements and found they did not appear on the supplied facts.

Q: Were the supplier's markups taxable gross receipts?

A: Yes. W had omitted the markups, but counsel treated the transfers as taxable retail sales as shown by both corporations' books. The source supplies no amounts or final assessment.

Q: Why did the neon-sign annotation not control?

A: As quoted, it involved two neon-sign corporations operating as a joint enterprise. W and R instead appeared organized to separate business functions and lacked the required joint-venture elements.

Q: Did the source include the neon-sign authority or Bulletin 59-3?

A: No. It quotes Annotation 1594.20 and names the bulletin but reproduces neither supporting source.

Q: Did the source show the audit assessment or appeal outcome?

A: No. It supplies no period, amounts, computation, notice, petition, hearing or final action.

Citations and references

• 20 California Jurisprudence 2d, Joint Adventures — source of the joint-venture elements described in the memorandum
• California Tax Service Annotation 1594.20 (July 30, 1964) — neon-sign passage quoted and distinguished; supporting source absent
• Sales Tax General Bulletin 59-3 — named inside the quoted passage; not reproduced
• September 6 request; corporate, ownership and officer records; agreements; books; invoices; markup computations; audit schedules; assessment; petition; hearing; and outcome — described or implicated but not included

Verbatim support

From the official September 14, 1967 Tax Counsel memorandum:

To establish the existence of a joint venture, there must be proof, as in the case of a partnership, of a community of interest and a sharing of profits and losses.

A joint proprietary interest in the joint adventure property and joint participation in the conduct of the business are essential elements of a joint adventure.

Although two separate corporations, as persons, may form a joint adventure, the fact that the two separate corporations in question mutually derive financial benefits from transactions between themselves is not determinative as to whether they have formed a joint adventure or conducted business operations as such.

Accordingly, it is our opinion that the transfer of building materials from "w" to "R" were taxable retail sales as indicated by the entries in the books of both corporations.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 415.0060
• Original supporting memorandum: 415.0060 PDF

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Mr. X-------------------------

From:

George A. Trigueros
Tax Counsel

415.0060

Date:

Sept. 14, 1967

This is in regard to your memo of September 6 concerning the audit of “W”. It is our understanding that "W” and "R" are two separate corporations which have the same officers and stock ownership. "R" is engaged in business as a building contractor, and "W" is engaged in the business of purchasing and selling building materials. An audit has been made of "W" and it has been found that it has not been reporting as taxable gross receipts its markups on sales of building materials to "R". "W" contends that the amount of the markups should not be regarded as taxable gross receipts because:

1. The amounts of the markups were arbitrary.
2. The transfers are merely "intercorporate transactions".
3. The materials could just as easily have been purchased by "R” from some other
   building supply company, at the same price as that paid by "W". After completion of the audit, the audit staff's attention was directed to Calif. Tax Service Annotation 1594. 20 which states: "Neon Signs--Selling and Leasing. Two corporations with identical officers and stock ownership, one manufacturing, selling, and installing neon signs, the other leasing and maintaining the signs, are but a single neon sign company within the meaning of Sales Tax General Bulletin 59-3 where the companies operate as a joint enterprise. Accordingly, tax applies to the cost of materials of the first company and the receipts of the second company upon the termination of the lease in accordance with the provisions of the bulletin. 7-30-64" In view of the conclusion set forth in the annotation, the question has been raised as to whether "W" and "R" are operating as a joint adventure with respect to the sum total of their operations so that the transfer of tangible personal property between them can be deemed not to be sales under the sales tax law.

As indicated in 20 Cal. Jur. 2d, Joint Adventures, a joint adventure (venture) is an undertaking by two or more persons jointly to carry out a single business enterprise for profit. To establish the existence of a joint venture, there must be proof, as in the case of a partnership, of a community of interest and a sharing of profits and losses. Each joint venturer must have a right to direct the conduct of the other venturers through a fiduciary relation which must exist. A joint proprietary interest in the joint adventure property and joint participation in the conduct of the business are essential elements of a joint adventure. Although two separate corporations, as persons, may form a joint adventure, the fact that the two separate corporations in question mutually derive financial benefits from transactions between themselves is not determinative as to whether they have formed a joint adventure or conducted business operations as such. On the contrary, it appears that the two corporations were formed for the business purpose of separating responsibilities for different business functions and activities between them. In view of the foregoing, it does not appear that "w" and "R" have formed or have operated as a joint adventure. Accordingly, it is our opinion that the transfer of building materials from "w" to "R" were taxable retail sales as indicated by the entries in the books of both corporations.

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