On December 29, 2023, the IRS released a Private Letter Ruling (IRS Private Letter Ruling 202352009), addressing whether a corporation that provides interim staffing and executive search services meets the Section 1202 / QSBS criteria of being a “Qualified Trade or Business.”
The company in question specializes in matching skilled managers and executives with the staffing requirements of its clients. They offered two main services:
- Interim Staffing: Connecting professionals with client-identified needs for specific projects or positions. The company charged an agreed-upon rate for the time the professionals spent on projects and also billed for the engagement oversight and project communication services provided by its own employees.
- Executive Search: Placing permanent executives in client businesses based on client-provided specifications. The clients paid the company a total fee, which was a percentage of the executive’s actual first-year compensation, and the company was entitled to a portion of the fee upon signing the agreement before performing the search services.
The company’s clients often sought advice, analysis, and business development plans from third-party consulting firms. Upon completion of the consultations, the company was engaged to provide professionals to execute the plan or fulfill other business requirements. The company’s role did not involve participating in the analysis, advice, or business development plans provided by the consulting firms. Rather, it was responsible for providing professionals as outlined in the plan or meeting other business needs identified by the clients.
Do the Company’s Services Constitute Consulting?
The question is whether this type of company is eligible for QSBS. According to 1202(e)(3), certain service industries are not considered qualified trade or business. For instance, consulting services are usually excluded from this category since the primary business asset is the expertise of one or more employees. However, in this particular case, the company was not classified as falling under this exclusion.
The IRS determined that the company primarily facilitated placements based on client needs rather than professional judgment. Clients control work direction, supervision, and quality review, distancing the company from consulting services. Similarly, the executive search function primarily involved a search based on client criteria rather than relying on the company’s own expertise. Third-party consultants handled analysis, counsel, and business development plans, further solidifying the company’s distinction.
The ruling took these circumstances into account and concluded that the “Company was not engaged in a trade or business (i) involving the performance of services in the field of consulting or (ii) where the principal asset of the trade or business was the reputation or skill of one or more of its employees.” As a result, the company is considered to be operating in a qualified trade or business for QSBS purposes.
Considerations for Other Businesses
This ruling represents a positive development for companies operating in the interim staffing and executive search companies. It clarifies the potential QSBS eligibility for such businesses, opening doors for substantial tax benefits upon stock sale.
It’s important to understand that a favorable Private Letter Ruling (PLR) received by one company does not necessarily mean that other companies will receive the same ruling. Each case is unique and will be evaluated based on its facts and circumstances. Therefore, it’s crucial to realize that this specific PLR should not be used as a precedent for other cases. If you are considering a similar request, it’s highly recommended to consult with QSBS experts to ensure that you have a clear understanding of the requirements and potential outcomes of your particular case. By doing so, you can make informed decisions that take into account the unique aspects of your specific situation.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.