Legal Ruling 1957-173

Cooperatives: Taxability of Foreign Members of a Domestic Cooperative

Foreign corporations which neither own property nor carry on business activity within the State are not subject to taxation because of their membership in a domestic nonprofit stock cooperative organization.

X, a domestic nonprofit stock cooperative, is owned by producers of agricultural products whose products are grown entirely on foreign soil. The twenty eight members, consisting of twenty three foreign corporations, four domestic corporations, and a copartnership have no employees, tangible property, or conduct any business affairs within this State. X's function is to process and market the agricultural product of its members. X does receive some income from extraneous sources other than marketing and processing.

Advice is requested whether the twenty eight shareholder members are "doing business" or "deriving income from sources within this State", and whether income from sources other than marketing activities are deductible by X under Section 24404 of the Bank and Corporation Tax Law.

A Ninth Circuit case involving X in a federal tax matter held X to be acting as a trustee for the members. It is argued for the purpose of "doing business" its acts, property, and sales should be considered the acts, property, and sales of the shareholders. Prior to the Ninth Circuit decision, in Irvine Co. v McColgan, 26 Cal 2d 160, in a matter involving the Franchise Tax Law, and the California Supreme Court completely disregarded the above theory, holding that the acts of the cooperative were not the acts of the members for purposes of "doing business". This view has been followed by the Board of Equalization since that time a number of the appeals have arisen subsequent to the Ninth Circuit decision. See Appeal of Times Mirror Company, State Board of Equalization, (October 27, 1953). It is therefore concluded that the shareholder members of X should not be taxed in the absence of any property or business activity within the state.

A deduction may be taken only if there is a clear provision for the particular deduction. The deduction allowed under Section 24404 is for income derived from marketing activities. Therefore income derived from extraneous activities is not deductible.