PLR 201436001 – September 5, 2014
Editor’s Commentary:
The company that requested the PLR provided:
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Research on drug formulation effectiveness
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Pre-commercialization testing procedures
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Manufacturing of drugs
Under 1202(e)(3), businesses in the performance of services in the field of “health” are specifically excluded. This would appear to exclude this company from QSBS treatment.
Instead, the IRS ruled otherwise. The rationale provided by IRS is worth reading in its entirety:
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 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).
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