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LEGAL RULING NO. 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.