Was a Mexican resident's $150,000 profit from selling an airplane purchase contract back to the California manufacturer California-source income?

Plain-English summary

California Legal Ruling 174 held that a Mexican resident's $150,000 profit from selling an airplane purchase contract was not California-source income.

The airplane was still under construction and not yet in deliverable condition. The taxpayer therefore had not acquired title or a property interest in the tangible airplane.

What the taxpayer sold back to the California manufacturer was an intangible contract right. The historical ruling placed that right's situs at the taxpayer's domicile in Mexico.

Facts addressed by the ruling

The taxpayer lived in Mexico and contracted to buy an airplane from a California company.

Before the airplane was completed, the taxpayer decided not to complete the purchase. The taxpayer sold the contractual interest back to the company for a $150,000 profit.

The question was whether that gain came from California merely because the airplane was being built and the manufacturer was located there.

Tangible property rule

The ruling described former regulation 17211-17214(c) as taxing a nonresident's gain from selling tangible personal property in California.

If the taxpayer had owned and sold a completed California airplane, that rule could have been relevant.

But the ruling found that the taxpayer did not own the airplane when the contract was sold.

Why the airplane was still a future good

Under former Civil Code section 1796, goods that still had to be manufactured were "future goods."

The purchaser acquired no title or property interest until the goods were placed in deliverable condition. Because construction was incomplete, title to the airplane had not passed.

Why the gain was sourced outside California

The taxpayer transferred only the intangible right created by the purchase agreement.

The ruling applied the historical rule that the intangible contract right had its situs at the owner's domicile. Since the taxpayer was domiciled in Mexico, the $150,000 profit was not income from California sources.

What this means for you

Nonresident contract holders

Under the historical ruling, selling a right to acquire property was not the same as selling the property itself when title had not passed.

Aircraft buyers and manufacturers

Completion and deliverability affected whether the buyer owned tangible property or held only a contractual right.

Accountants and tax professionals

Review the contract, manufacturing status, delivery conditions, title-transfer terms, taxpayer domicile, and the nature of what was assigned. Apply current sourcing and commercial-law rules before reaching a conclusion.

Common questions

Q: Was the $150,000 profit taxable as California-source income?

A: No, under the ruling.

Q: Did the taxpayer own the airplane when the contract was sold?

A: No. The airplane was incomplete and not in deliverable condition, so title had not passed.

Q: What did the taxpayer sell?

A: An intangible contract right evidenced by the purchase agreement.

Q: Where did the ruling locate that intangible right?

A: In Mexico, the taxpayer's domicile.

Q: Would the tangible-property rule have applied to the contract right?

A: No. The ruling distinguished the intangible purchase right from a completed tangible airplane.

Citations and references

• Former California regulation 17211-17214(c)
• Former Cal. Civ. Code § 1796

Source

• Landing page: California FTB Legal Rulings
• Official HTML: Legal Ruling 174

Original ruling text

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Legal Ruling 1957-174

California Franchise Tax Board
Legal Ruling No. 174

October 17, 1957

Nonresidents: Income From California Sources

When a nonresident sells his contract right to purchase a tangible asset which is under construction in this state, his profit is not income from sources within the state.

Taxpayer, a resident of Mexico, contracted to purchase an airplane from a California company. Prior to the time the plane was completed, the taxpayer decided not to complete the purchase and sold his interest to the company for a profit of $150,000. Advice is sought as to whether the gain is taxable as income from California sources.

Under Regulation 17211-17214(c) gain from the sale of tangible personal property in California is taxable to nonresidents. Under the law of sales, goods that must be manufactured are "future goods". California Civil Code 1796. The purchaser of these articles acquires no title or property in such goods until they are placed in a deliverable condition. In this case, the airplane was not in deliverable condition until completion and title did not pass to the taxpayer prior to the resale back to the manufacturer. Consequently, when the taxpayer resold the contract he sold only an intangible right evidenced by a purchase agreement. Such a right had its situs in Mexico, the domicile of the taxpayer, and the profit did not constitute income from California sources.

Last updated: 09/24/2025