Did membership in a California nonprofit stock cooperative make foreign corporate members taxable when they had no California property or business activity?

Plain-English summary

California Legal Ruling 173 held that foreign corporations were not taxable solely because they belonged to a California nonprofit stock cooperative when they owned no California property and conducted no California business activity.

FTB did not attribute the cooperative's acts, property, and sales to its shareholder members for California doing-business purposes.

The ruling separately held that the cooperative's historical section 24404 deduction covered marketing income, not income from unrelated or extraneous activities.

Facts addressed by the ruling

X was a California nonprofit stock cooperative owned by producers of agricultural products grown entirely on foreign soil.

Its 28 members consisted of:

• 23 foreign corporations;
• four domestic corporations; and
• one copartnership.

The members had no employees or tangible property in California and conducted no business affairs in the state.

X processed and marketed its members' agricultural products and also received some income from sources outside those marketing and processing functions.

Why membership did not create California taxation

A federal tax decision involving X had characterized the cooperative as acting as trustee for its members. Based on that characterization, an argument was made that X's acts, property, and sales should be treated as the shareholders' own.

The ruling rejected that attribution for California doing-business purposes.

It relied on Irvine Co. v. McColgan and subsequent State Board of Equalization treatment for the proposition that a cooperative's acts were not the members' acts.

Without property or business activity of their own in California, the foreign corporate members were not subject to tax merely because of their ownership interests in X.

Treatment of the cooperative's other income

The ruling applied the principle that a deduction required a clear statutory provision.

Former section 24404 allowed a deduction for income derived from marketing activities. X's income from extraneous activities did not fall within that description and was not deductible under the ruling.

What this means for you

Foreign corporate members

Under the historical ruling, passive membership in a California cooperative did not itself create doing-business status when the member had no California property, employees, or activity.

Agricultural cooperatives

The ruling separated member nexus from the cooperative's own tax computation. Even when members were not taxable, the cooperative still had to classify marketing and nonmarketing income correctly.

Accountants and tax professionals

Review member-level property, payroll, employees, contracts, agency authority, and in-state activity separately from the cooperative's operations. For the cooperative, identify the statutory basis for every claimed deduction and segregate extraneous income.

Common questions

Q: Were foreign corporate members taxable merely because they owned shares in X?

A: No, not when they had no California property or business activity.

Q: Were X's California activities automatically attributed to its members?

A: No. The ruling treated the cooperative's acts as distinct from the members' acts for doing-business purposes.

Q: Did the ruling say the cooperative itself was untaxed?

A: No. It separately addressed which income X could deduct.

Q: Was all of X's income deductible under former section 24404?

A: No. The ruling limited the deduction to marketing income and excluded income from extraneous activities.

Q: What member facts were important?

A: The absence of California employees, tangible property, and business affairs.

Citations and references

• Former Cal. Rev. & Tax. Code § 24404
• Irvine Co. v. McColgan, 26 Cal. 2d 160
• Appeal of Times Mirror Company (Cal. St. Bd. of Equal., October 27, 1953)

Source

• Landing page: California FTB Legal Rulings
• Official HTML: Legal Ruling 173

Original ruling text

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Legal Ruling 1957-173

California Franchise Tax Board
Legal Ruling No. 0173

October 29, 1957

Cooperatives: Taxability of Foreign Members of a Domestic Cooperative

Foreign corporations which neither own property nor carry on business activity within the State are not subject to taxation because of their membership in a domestic nonprofit stock cooperative organization.

X, a domestic nonprofit stock cooperative, is owned by producers of agricultural products whose products are grown entirely on foreign soil. The twenty eight members, consisting of twenty three foreign corporations, four domestic corporations, and a copartnership have no employees, tangible property, or conduct any business affairs within this State. X's function is to process and market the agricultural product of its members. X does receive some income from extraneous sources other than marketing and processing.

Advice is requested whether the twenty eight shareholder members are "doing business" or "deriving income from sources within this State", and whether income from sources other than marketing activities are deductible by X under Section 24404 of the Bank and Corporation Tax Law.

A Ninth Circuit case involving X in a federal tax matter held X to be acting as a trustee for the members. It is argued for the purpose of "doing business" its acts, property, and sales should be considered the acts, property, and sales of the shareholders. Prior to the Ninth Circuit decision, in Irvine Co. v McColgan, 26 Cal 2d 160, in a matter involving the Franchise Tax Law, and the California Supreme Court completely disregarded the above theory, holding that the acts of the cooperative were not the acts of the members for purposes of "doing business". This view has been followed by the Board of Equalization since that time a number of the appeals have arisen subsequent to the Ninth Circuit decision. See Appeal of Times Mirror Company, State Board of Equalization, (October 27, 1953). It is therefore concluded that the shareholder members of X should not be taxed in the absence of any property or business activity within the state.

A deduction may be taken only if there is a clear provision for the particular deduction. The deduction allowed under Section 24404 is for income derived from marketing activities. Therefore income derived from extraneous activities is not deductible.

Last updated: 09/24/2025