Legal Ruling 1958-76

California Franchise Tax Board
Legal Ruling No. 076

June 16, 1958

Doing Business

The time as to when a domestic corporation commences "doing business" requires a factual determination, which must be made in each individual case. The corporation involved here was found to be "doing business" within the meaning of section 23101 of the Bank and Corporation Tax Law during the period that it was engaged in negotiations.

X Inc., was incorporated in January, 1948 by A to engage in the subdivision business. Thereafter A contacted a real estate broker and asked him to find a piece of property advising him that X Inc. would be the purchaser. A agreed to guarantee a certain commission to the broker, which agreement was confirmed in writing in December, 1948. The broker showed several parcels of land to A and offers were made of some, which were rejected. In July, 1948, the broker located a parcel of land and after negotiations for its purchase had extended over several months the parcel was purchased. In May, 1949, A arranged for financing and the first escrow was opened in the following month. Advice is requested whether X Inc. commenced doing business prior to January, 1949.

Section 23101 defines "doing business" as "actively engaging in any transaction for the purposes of financial or pecuniary gain or profit".  Thus, besides meeting the requirement of a profit purpose, the acts of the corporation must also amount to "actively engaging in (a) transaction". The word transaction has been judicially construed to be broader and more comprehensive than a contract. Consequently, a corporation can be actively engaging in a transaction before the time that a binding agreement is reached. Although entering into a contract is excellent evidence of doing business, it is not the exclusive test of when business begins. Furthermore, the legislative history of section 23101 indicates that the term "doing business" was intended to be given a broad and extensive interpretation.

In the instant case, there were acts occurring prior to 1949 which amounted to engaging in a transaction for the purposes of pecuniary gain or profit and, therefore, to doing business. Since improved realty is the stock in trade of the subdividing business, the acquisition of land was certainly an integral part of the business. The negotiations and inspection which must precede the acquisition of the land were surely guided by a profit motive. The negotiations (which included an actual contract, guaranteeing the broker's commission) amount to one or more transactions, within the proper meaning of that term. Therefore, the acts and events which occurred prior to 1949 form a basis for holding that X Inc. commenced doing business prior to 1949.