Pharma Company Qualifies for Small Business Stock Exclusion

Third Party Communication: None

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.

Taxpayers disposed of some or all of their stock in Company on or about Date.

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 are used 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.

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).

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.