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Legal Ruling No. 038

June 26, 1958


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.

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