QSBS IRS Ruling: PLR 201636003- Potential QSBS Implications Surrounding What Determines a Stock a “Qualified Small Business Stock”

Corporate Tax QSBS

On September 02, 2016, the IRS released Private Letter Ruling (PLR 201636003), addressing whether, after several name changes to the company and a conversion from a LLC to a C-corporation, does the reorganization under § 1202(h) and § 368 have any effect on the stock—having no formal stock certificates—being considered QSBS?

The Facts in Question in this PLR:

  • Company originally started out as a C-Corporation later moving and amending incorporation to change the name of the company
  • A third name change occurred on a later date with an entity classification election so this name will be taxed in association with a C-Corporation
  • Conversion from a LLC to a C-Corporation occurred converting all the common stock from the taxpayers from “name 3” into the new Corporation (final name) 
  • No additional shares were acquired
  • Sometime in the future taxpayers sold 100% of shares to unrelated party 


Section 1202(a)(1) states that:

“gross income shall not include 50 percent of any gain from the sale or exchange of qualified small business stock held for more than 5 years”

26 U.S.C.A § 1202(A)(1)

Section 1202(c)(1) states that:

(1)In general—Except as otherwise provided in this section, the term “qualified small business stock” means any stock in a C corporation which is originally issued after the date of the enactment of the Revenue Reconciliation Act of 1993, if—(A)as of the date of issuance, such corporation is a qualified small business, and (B)except as provided in subsections (f) and (h), such stock is acquired by the taxpayer at its original issue (directly or through an underwriter)—(i)in exchange for money or other property (not including stock), or (ii)as compensation for services provided to such corporation (other than services performed as an underwriter of such stock).”

26 U.S.C.A § 1202(c)(1)

Section 1202(f) states that:

“If any stock in a corporation is acquired solely through the conversion of other stock in such corporation which is qualified small business stock in the hands of the taxpayer—(1)the stock so acquired shall be treated as qualified small business stock in the hands of the taxpayer, and (2)the stock so acquired shall be treated as having been held during the period during which the converted stock was held.

26 U.S.C.A § 1202(f)

Most important provision for this Ruling falls under Section 1202(h) stating that:

“[I]n the case of a transaction described in § 351 or a reorganization described in § 368, if qualified small business stock is exchanged for other stock which would not qualify as qualified small business stock but for this subparagraph, such other stock shall be treated as qualified small business stock acquired on the date on which the exchanged stock was acquired.

I.R.S. Priv. Ltr. Rul. 201636003 at 2. See also 26 U.S.C.A § 1202(h)

Finally, Section 368(a)(1)(F) states:

the term “reorganization” means—(F)a mere change in identity, form, or place of organization of one corporation, however effected

26 U.S.C.A § 368(a)(1)(F)


The Ruling expressed the difference between ownership of a Corporation versus the ownership of an LLC. The owners of a Corporation are commonly known to be tied to stock ownership; meanwhile, an owner of a LLC holds interest rather than stock. The name changes and conversion from a C-Corporation to a LLC and then back to a C-Corporation is where the confusion lies. In short, the most important phrase from the Ruling comes in the analysis:

“[T]he term “stock” for federal tax purposes is not restricted to cases where formal stock certificates have been issued. Rather, it has been consistent Service position that for federal tax purposes stock ownership is a matter of economic substance, i.e., the right to which the owner has in management, profits, and ultimate assets of a corporation”

I.R.S. Priv. Ltr. Rul. 201636003 at 3.


The Ruling was concluded by describing why the Company’s “stock” was considered to meet the definition of “Qualified Small Business Stock” under §§§ 1202(c),(f),(h):

“The presence or absence of pieces of paper called “stock” representing that ownership is immaterial. See Rev. Rul. 69-591, 1969-2 C.B. 172

I.R.S. Priv. Ltr. Rul. 201636003 at 3

The Ruling added a section to further clarify that the basis of the Ruling was to determine that “stocks” do not have to have formal stock certificates to be considered Qualified Small Business Stocks. However, there is no implication or mention to the Company or owners satisfaction on:

  1. The Company is a qualified “active” business under § 1202(e) and
  2. Any concern that the conversion and name changes affected the stock qualifying under § 368(a)(1)(F).

Source: I.R.S. Priv. Ltr. Rul. 201636003 (June 01, 2016).

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This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.