Was a liquidating corporation still doing business when it sold its hotel for interest-bearing notes and collected interest during the wind-down?

Plain-English summary

California Legal Ruling 38 held that a corporation remained doing business during liquidation because it converted its principal asset into interest-bearing notes and collected interest income.

The ruling distinguished ordinary wind-down activities, which generally lack a profit purpose, from the corporation's continuing use of seller financing to earn interest.

It found doing-business status for 1950 and at least part of 1951.

Facts addressed by the ruling

The corporation disposed of its operating assets in 1949.

After December 31, 1949, its activities consisted of:

• collecting accounts and notes receivable and related interest;
• purchasing government securities;
• disposing of notes and securities; and
• distributing liquidating dividends.

Its principal asset had been a hotel. When it sold the hotel in 1949, it accepted the purchasers' interest-bearing notes for the price.

The purchasers paid principal and interest until mid-1951, when they refinanced and settled the notes at a discount.

General rule for liquidation activities

The ruling said activities such as paying debts, collecting accounts receivable, and pursuing tax refunds generally did not constitute doing business during liquidation.

Those acts ordinarily lacked a purpose of financial or pecuniary gain and simply completed the wind-down.

Why the interest-bearing notes changed the result

This corporation did more than collect a fixed noninterest-bearing amount.

It exchanged its chief tangible asset for notes designed to earn interest and then collected that interest over an extended period.

The ruling treated that interest component as the necessary element of financial gain.

It contrasted the facts with the Appeal of Johnson Foundry and Machine Co., where the Board had emphasized that the collected accounts were noninterest-bearing.

What this means for you

Liquidating corporations

Under the historical ruling, labeling activity as liquidation did not control. Assets intentionally producing interest during the wind-down could preserve doing-business status.

Real-estate sellers

Seller-financed disposition of a major asset involved different tax consequences from simply collecting an old noninterest-bearing receivable.

Accountants and tax professionals

Identify which wind-down assets earn interest, when income continues, whether securities are bought or sold, settlement dates, discounts, and the current consequences of remaining in doing-business status.

Common questions

Q: Do ordinary liquidation activities always constitute doing business?

A: No. The ruling said paying debts, collecting ordinary receivables, and pursuing refunds generally did not.

Q: What made this case different?

A: The corporation took interest-bearing notes for its hotel and continued earning interest.

Q: Was the corporation doing business in 1950?

A: Yes.

Q: How long did the interest activity continue?

A: Until mid-1951, when the purchasers refinanced and settled the notes at a discount.

Q: Why did noninterest-bearing receivables matter to the comparison?

A: They lacked the ongoing financial-gain element that FTB found in these notes.

Citations and references

• Appeal of Johnson Foundry and Machine Co. (Cal. St. Bd. of Equal., November 17, 1948)

Source

• Landing page: California FTB Legal Rulings
• Official HTML: Legal Ruling 38

Original ruling text

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Legal Ruling 1958-38

California Franchise Tax Board
Legal Ruling No. 038

June 26, 1958

Doing Business: Liquidating Activities

Taxpayer by converting its chief tangible asset into interest bearing notes was doing business in California notwithstanding that its activities were otherwise confined to liquidation.

Taxpayer, a corporation, disposed of its operating assets in 1949. Its only activities since December 31, 1949 have consisted of making collections of accounts and notes receivable and interest thereon, making a purchase of government securities, disposing of notes and securities, and distributing liquidating dividends. taxpayer’s principal asset was a hotel. Upon its sale in 1949, taxpayer took the purchaser's interest-bearing notes for the purchase price. The purchasers made payments of principal and interest until mid-1951 when they obtained refinancing and settled the notes with taxpayer at a discount. Advice is requested as to whether taxpayer was doing business during taxable year 1950.

As a general rule liquidating activities such as paying debts, collecting accounts receivable and pursuing tax refund claims do not constitute doing business because the purpose of financial or pecuniary gain is missing.

In the instant case, however, there is an element of financial gain present. As a step toward liquidation taxpayer converted its chief tangible asset, the hotel, into interest bearing notes and then proceeded to collect interest income. This activity continued until mid-1951 and is sufficient basis for finding the taxpayer to be doing business. It is significant that in holding that collection of accounts receivable did not amount to doing business in the Appeal of Johnson Foundry and Machine Co., November 17, 1948, that the appeal board took pains to point out that the accounts were noninterest bearing. Taxpayer was doing business in 1950 and during a part at least of 1951.

Last updated: 09/24/2025