Was a liquidating corporation 'doing business' merely because it prosecuted a disputed receivable and defended a damages claim arising from completed prior-year work?

Plain-English summary

California Legal Ruling 264 held that a liquidating corporation was not doing business merely because it pursued a disputed receivable and defended a damages cross-claim arising from work completed in prior years.

The litigation did not create a new profit-seeking transaction. It determined whether the corporation had already earned a contract profit and whether it owed a liability from the same completed work.

The ruling treated both sides of the case as part of settling old rights and obligations during liquidation.

Facts addressed by the ruling

The shareholders adopted a complete liquidation and dissolution plan in 1956.

By 1957, the corporation had distributed all assets except funds retained in a bank account to meet claims.

The underlying dispute arose from a 1954 contract to furnish materials and equipment for dredging work. The corporation considered its performance complete by 1956, when $40,000 remained unpaid.

The customer disputed performance and refused to pay. The corporation filed suit in 1957, and the customer filed a cross-complaint alleging incomplete or improper work and loss-of-use damages.

The case was settled without trial in 1959. The corporation received $10,000, and the cross-complaint was dismissed.

Historical doing-business definition

Former section 23101 defined doing business as actively engaging in a transaction for financial or pecuniary gain or profit.

The ruling said prior authorities had established that collecting non-interest-bearing accounts receivable during liquidation did not meet that definition.

This claim was disputed rather than settled, but FTB found the same principle applicable.

Why pursuing the receivable was not doing business

All activities that could have earned the contract income occurred in earlier years. The corporation had completed performance, and any profit had been realized before 1958.

The lawsuit merely determined whether a valid prior claim existed and how much was due. Any recovery restored an amount that allegedly already belonged to the taxpayer rather than generating profit from a new transaction.

The ruling therefore treated prosecuting or settling the disputed account as outside the historical doing-business definition.

Why defending the cross-claim had the same result

FTB reached the same conclusion for resisting the customer's damages claim.

The defense addressed an alleged liability arising from earlier business activity. It was the opposite side of settling an old receivable, not a new transaction undertaken for financial gain.

What this means for you

Liquidating corporations

Under the historical ruling, limited litigation over completed pre-liquidation business did not itself restart active business. The result was tied to winding up old claims rather than pursuing new operations.

Corporate officers

Maintain records showing when active work ended, when assets were distributed, what funds were retained, and how each remaining claim arose.

Accountants and tax professionals

Distinguish collecting or defending old claims from activities that generate new income or profit. Also analyze current filing, minimum-tax, dissolution, and suspension rules separately.

Common questions

Q: Did filing the collection lawsuit constitute doing business?

A: No, because the claim arose from work completed in prior years and sought to establish whether a prior profit had been earned.

Q: Did defending the damages cross-claim constitute doing business?

A: No. It concerned an alleged liability from the same earlier activity.

Q: Did the corporation retain operating assets?

A: The ruling says it had distributed all assets except bank funds retained to meet claims.

Q: How much did the corporation seek and recover?

A: The unpaid balance was $40,000, and the 1959 settlement paid the corporation $10,000 while dismissing the cross-claim.

Q: Would new profit-making activity receive the same treatment?

A: The ruling did not address new activity. Its reasoning depended on litigation over rights and liabilities created by completed prior-year work.

Citations and references

• Former Cal. Rev. & Tax. Code § 23101
• Appeal of Johnson Foundry & Machine Co. (Cal. St. Bd. of Equal., November 17, 1948)
• Legal Memoranda Nos. 37, 118, 119, and 157

Source

• Landing page: California FTB Legal Rulings
• Official HTML: Legal Ruling 264

Original ruling text

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Legal Ruling 1964-264

California Franchise Tax Board
Legal Ruling No. 264

September 17, 1964

Franchise-Doing Business: Litigation by Liquidating Corporation

Prosecuting a collection claim and resisting a claim for damages based on activities during prior years does not constitute doing business.

In 1956, the shareholders of the taxpayer adopted a plan of complete liquidation, providing for the liquidation and dissolution of the company. As of 1957, the taxpayer had distributed all of its assets to its shareholders in complete liquidation except for certain funds retained in a bank account to meet claims.

In 1954, the taxpayer had entered into a written contract with A Company to furnish materials and equipment for certain dredging work. The taxpayer performed all of the work it deemed required under the contract by 1956.  At that time a balance of$40,000 was due on the contract price. A dispute arose between the parties on the performance of the contract, and A Company refused to pay the balance. Consequently, the matter was then referred to the taxpayer’s attorneys for collection, and suit was filed in 1957. Some time in 1957, an answer to this complaint was filed; and at the same time A Company filed a cross-complaint alleging that the work had been improperly and incompletely performed, with resulting damage by reason of loss of use of the property. An answer to this cross-complaint was filed by the taxpayer in 1957. Thereafter, the case was given a trial date for 1958. The case was then reset for trial in 1959.

In 1959, the case was settled without trial. As a result of the settlement, the taxpayer received $10,000 on its claim, and the cross-complaint against it was dismissed. The taxpayer’s return for the income year 1957 stated that the corporation is dissolved and will not be doing business in 1958, and the minimum tax of $25 was self-assessed and paid.

Does litigation by a liquidating corporation over claims arising from prior business activities constitute "doing business"?

Section 23101 defines "doing business" to mean "actively engaging in any transaction for the purpose of financial or pecuniary gain or profit." The section has been construed a number of times in respect to the activities of corporations in liquidation. As a result, it is well established that the collection of accounts receivable that are not interest-bearing does not constitute doing business. Appeal of Johnson Foundry & Machine Co., State Board of Equalization, November 17, 1948; Legal Memo #37, November 8, 1950; Legal Memo #118, July 24, 1951; Legal Memo #119, July 24, 1951; Legal Memo #157, May 22, 1952.

In the instant situation the taxpayer is not engaged in merely collecting a settled account but, rather, is engaged in litigation to establish the validity of its claim and to resist a counter suit for damages. However, the determining fact would seem to be that all of the activities or transactions which gave rise to the earning of income took place in prior years.  The performance was completed and the profit, if any, was realized prior to 1958. The litigation, to establish whether a valid claim exists, determines only whether a profit was in fact earned in the prior period. Although the settlement or collection of a controverted claim may, in a sense, be considered an economic benefit, the efforts to establish a claim or the settlement of an uncertain account, arising from prior activities or events, have not themselves been considered to be transactions for financial or pecuniary gain or profit. In Appeal of Johnson Foundry & Machine Co., supra, it was held that filing a claim for relief from a tax was not in the nature of a transaction entered into for pecuniary gain because, if allowed, it would only restore that which rightfully belonged to the taxpayer before the claim was filed. Similarly, any recovery by the taxpayer in the instant situation would only give it that which rightfully belonged to it before the litigation began. It has previously been concluded that settling disputed accounts was not "doing business." Likewise, the prosecution of Federal tax claims and the determination of the ultimate amount of contingent notes receivable were considered not to be "doing business." It follows that prosecuting the recovery of an alleged account receivable or settling upon the amount due does not constitute "doing business."

For the same reasons it must also be concluded that resisting a claim for damages based on activities engaged in during prior years does not constitute "doing business." The situation is identical except that the parties are in opposite positions, and as to the instant taxpayer it involves the settlement of an alleged liability rather than a receivable.

Last updated: 09/24/2025