IRS written determination 201436001

Private letter rulings and published taxpayer determination letters. Native document type is retained separately; a determination letter is not labeled a private letter ruling. These taxpayer-specific releases cannot be used or cited as precedent under 26 USC 6110(k)(3); applicability and current legal force are not independently certified. Keep repeated UILC subjects attached to one actual numbered document.

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 201436001
Release Date: 9/5/2014
Index Number: 1202.00-00
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Third Party Communication: None
Date of Communication: Not Applicable
Person To Contact:
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Telephone Number:
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Refer Reply To:
CC:ITA:B04
PLR-102304-14
Date:
May 22, 2014
TY:------
Dear -----------------------:
This letter responds to your request for a ruling under § 1202 of the Internal Revenue
Code. In particular, you requested a ruling on whether the business of Company was a
qualified trade or business as defined in § 1202(e)(3) notwithstanding the proximity of its
business activities to the field of health.
FACTS
Taxpayers own stock in Company. Company provides products and services primarily
in connection with the pharmaceutical industry. In particular, Company works with
clients to help commercialize experimental drugs. Its business activities include
research, development, manufacture and commercialization. More specifically, its
activities under these broad headings include (1) research on drug formulation
effectiveness; (2) pre-commercial testing procedures such as clinical testing; and (3)
manufacturing of drugs. In addition, Company works with clients to solve problems in
the pharmaceutical industry, such as developing successful drug manufacturing
processes. To perform these tasks, Company uses its physical assets, such as its
manufacturing and clinical facilities, as well as its intellectual property assets, including
its patent portfolio. Company’s successful performance of these activities in the past
has earned the company several valuable relationships in the pharmaceutical industry.
Taxpayers disposed of some or all of their stock in Company on or about Date.
Taxpayers=----------------------------------------------------------------------------------
Company=----------------------------------------------------
Date=---------------------

PLR-102304-14
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LAW
Section 1202 provides that gross income does not include 50 percent of any gain from
the sale or exchange of qualified small business stock held for more than 5 years.
Section 1202(c)(2) provides that stock in a corporation is not treated as qualified small
business stock unless the corporation meets the active business requirements of
subsection (e).
Section 1202(e)(1) provides that a corporation meets the active business requirement of
(c)(2) if at least 80 percent of the assets of the corporation areused by the corporation
in the active conduct of one or more qualified trades or businesses.
Section 1202(e)(3) generally provides that a qualified trade or business means any
trade or business other than a trade or business involving the performance of services
in the fields of health, law, engineering, architecture, accounting, actuarial science,
performing arts, athletics, financial services, brokerage services, consulting, or any
other trade or business where the principal asset of such trade or business is the
reputation or skill of one or more of its employees. Section 1202(e)(3) further provides
that the term qualified trade or business does not include businesses in which the
principle activity involves providing services in the fields of finance,insurance, banking,
investing, leasing, farming, mining, or running a hotel, motel, restaurant or similar
businesses.
ANALYIS
Section 1202(e)(3) excludes various service industries and specified non-service
industries from the term “qualified trade or business.” Thus, a qualified trade or
business cannot be primarily within service industries, such as restaurants or hotels or
the providing of legal or medical services. In addition, § 1202(e)(3) excludes
businesses where the principal asset of the business is the reputation or skill of one or
more of its employees. This works to exclude, for example, consulting firms, law firms,
and financial asset management firms. Thus, the thrust of § 1202(e)(3) is that
businesses are not qualified trades or businesses if they offer value to customers
primarily in the form of services, whether those services are the providing of hotel
rooms, for example, or in the form of individual expertise (law firm partners).
Company is not in the business of offering service in the form of individual expertise.
Instead, Company’s activities involve the deployment of specific manufacturing assets
and intellectual property assets to create value for customers. Essentially, Company is
a pharmaceutical industry analogue of a parts manufacturer in the automobile industry.
Thus, although Company works primarily in the pharmaceutical industry, which is
certainly a component of the health industry, Company does not perform services in the

PLR-102304-14
3
health industry within the meaning of § 1202(e)(3). Neither are Company’s business
activities within any of the prohibited categories set forth in § 1202(e)(3).
RULING
Based on the facts submitted we rule that Company is engaged in a qualified trade or
business under § 1202(e)(3) notwithstandingthe proximity of its business activities to
the field of health.
CAVEATS
Except as expressly provided, we do not express or imply any opinion concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter. In particular, we do not rule on whether Taxpayers meet other qualifications
under § 1202, such as the holding period requirement or the asset usage requirement.
This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.
The taxpayer must attach a copy of this letter to any income tax return to which it is
relevant. Alternatively, a taxpayer filing its returns electronically may satisfy this
requirement by attaching a statement to the return that provides the date and control
number of the letter ruling.
The ruling contained in this letter is based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.
Sincerely,
J. Peter Baumgarten
Assistant to the Branch Chief, Branch 4
Office of Associate Chief Counsel
(Income Tax & Accounting)
cc: