Did a foreign corporation begin doing business in California when it negotiated, contracted for, and financed a local plant to process products it would sell?

Plain-English summary

California Legal Ruling 90 held that a foreign corporation was doing business in California in 1946 when it negotiated, contracted for, and financed construction of a plant serving its regular product business.

The acts were not merely isolated or incidental. They were the beginning of an intended series of California activities and involved a substantial in-state investment.

The corporation did not need to own the plant directly; a local partnership would own it, but the facility would process the corporation's products and the corporation would supply the construction financing.

Facts addressed by the ruling

Employees of the foreign corporation negotiated in California with a local partnership in 1946.

The partnership would own a California processing plant. The plant would process the taxpayer's products, which the taxpayer would then sell.

The taxpayer agreed to loan the partnership the money needed to construct the plant.

During 1946:

• the contract was signed in November;
• the taxpayer qualified in California to protect its contractual rights;
• plant construction began;
• processing machinery was ordered and delivered to the site; and
• a bank account was opened with the construction-loan funds.

Historical isolated-act principle

The ruling said that more than an isolated or occasional local act ordinarily was required for income- or franchise-tax doing-business status.

But an initial local act could count when it was:

• the first of an intended series of acts; and
• not merely incidental to the corporation's chartered purpose.

A substantial California investment gave the act additional significance.

Why these activities crossed the line

The processing plant directly supported commodities sold in the taxpayer's ordinary business.

The taxpayer's employees negotiated the arrangement in California, the corporation signed the agreement, and it committed money to construct the facility.

The surrounding implementation steps showed an ongoing commercial plan rather than one disconnected transaction. FTB therefore concluded that doing business began in 1946.

What this means for you

Foreign corporations

Under the historical ruling, early development and financing steps could establish California business activity before a plant began operations.

Multistate businesses

Using a local owner or partner did not necessarily keep the investing corporation outside California tax when the facility served its regular business and it drove the project.

Accountants and tax professionals

Review negotiation locations, contracts, financing, registration, construction activity, equipment deliveries, bank accounts, investment amounts, and how the project relates to the corporation's ordinary business.

Common questions

Q: Did the foreign corporation own the California plant?

A: No. The local partnership would own it.

Q: Why was the corporation still doing business here?

A: It negotiated the project, signed the contract, financed construction, qualified in California, and took implementation steps for a plant serving its regular product sales.

Q: Was signing one contract alone necessarily enough?

A: The ruling considered the contract together with negotiations, investment, construction, machinery, funding, and the intended continuing activity.

Q: When did doing-business status begin?

A: In 1946.

Q: Did the plant have to be operational first?

A: No. The ruling reached its conclusion during the construction and financing stage.

Citations and references

• No statute or case citation is printed in the official ruling.

Source

• Landing page: California FTB Legal Rulings
• Official HTML: Legal Ruling 90

Original ruling text

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Legal Ruling 1958-90

California Franchise Tax Board
Legal Ruling No. 090

June 26, 1958

Doing Business: Foreign Corporations

Execution of contract for construction and financing of a processing plant for taxpayer’s products, together with preliminary negotiations and other acts, constitutes doing business.

In 1946 employees of taxpayer, a foreign corporation, conducted preliminary negotiations in California with a local partnership regarding the construction of a processing plant in this State. The plant was to be owned by the partnership but would process the products of the taxpayer who in turn would sell them. Taxpayer was to loan the money with which the partnership would construct the plant. In November, 1946, the contract was signed, and taxpayer qualified in California to protect its rights under the contract. Also in 1946 construction of the plant was begun, processing machinery ordered and delivered to the site, and a bank account opened with the money that was to be loaned for construction of the plant. Advice is requested as to whether taxpayer commenced doing business in California in 1946.

For income or franchise tax purposes more than an isolated or occasional local act is required before a taxpayer is doing business and subject to the tax. However, when the isolated local act is the first of an intended series of acts and not merely incidental to the corporate purpose stated in its charter, the corporation is regarded as doing business. And, additional significance attaches to the isolated act if the corporation makes a substantial investment in the state.

In the instant case taxpayer entered into a contract to have constructed a plant which would process the commodities sold in the course of its regular business. The negotiations in connection with this were carried on in California. In addition to the act of signing the contract, the fact that the corporation contracted to invest in the construction of the plant gives added emphasis. Therefore, it is concluded that taxpayer was doing business within California in 1946.

Last updated: 09/24/2025