A recent IRS Private Letter Ruling found that a company providing interim staffing and executive search services was engaged in a qualified trade or business and, therefore, eligible for IRC Section 1202 gain exclusion. The ruling, PLR 202352009, stated that the Company, a C corporation that provided interim staffing services and executive searching for its clients, was engaged in a qualified trade or business as defined in IRC Section 1202(e)(3). The IRS concluded that the Company was not engaged in a trade or business related to the performance of consulting services or in which the principal asset of the trade or business was the reputation or skill of one or more of its employees.
Is the company performing “consulting” services?
An analysis of the PLR from EY highlights how the IRS focused on how the criteria provided to the staffing agency to source potential candidates for clients limits the “advice and counsel” (i.e. consulting) performed by the company itself.
Furthermore, the article provides hypothetical examples of how the IRS might have ruled had the facts been different. For example, if the clients had requested the staffing agency to identify criteria for an eligible candidate and then conducted a search based on those criteria, the IRS might have hesitated to conclude that the staffing agency was not engaged in a trade or business related to the performance of consulting services or in which the principal asset of the trade or business was the reputation or skill of one or more of its employees.
Another hypothetical example provided by EY is that if the staffing agency employed the placed staff members under state law and for federal income tax purposes, the IRS could have taken the position that the staffing agency was engaged in a trade or business in which the principal asset of its trade or business was the skill of its employees (i.e., the temporary staff).
No “one-size-fits-all”
This ruling serves as a reminder that not all service-oriented companies are ineligible for the IRC Section 1202 gain exclusion.
However, it’s vital to recognize that a favorable Private Letter Ruling (PLR) received by one company may not necessarily apply to other companies. Each case is unique and evaluated based on its own facts and circumstances. Therefore, it is crucial to realize that this specific PLR cannot be used as a precedent for other cases. If you’re considering a similar request, we highly recommend consulting with QSBS experts who can provide you with clear guidance on 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 situation. Don’t hesitate to seek guidance from the experts to ensure that you’re on the right track!
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.