QSBS IRS Ruling: PLR 201717010– Companies Questioning if They are a “Qualified Business” in the Health Services under § 1202(e)(3)

QSBS ruling

On April 28, 2017, the IRS released Private Letter Ruling (PLR 201717010), addressing whether a Founder of a C-corporation operating in the services for health providers is qualified for the partial exclusion of gain under the Section 1202(a). Additionally, whether the corporation meets QSBS criteria for being a “Qualified Trade or Business” under Section 1202(e)(3).

The Company in Question in this PLR:

  • Created a tool that would allow health care providers receive diagnostic information at a more rapid and extensive way.
  • The company uses their technology to test for a specific diagnostic, with one person being the only one that can legally perform the testing (i.e no other employees are legally allowed).
  • The one performing the testing has expertise that is focused on the company’s patented technology.
  • The company’s clients are doctors and healthcare providers.
  • The provided documents to healthcare providers do not diagnose nor recommend treatment to the health providers patients.
  • Company receives compensation per report requested from healthcare providers. Only compensated directly from the patients when they are uninsured or their insurance pays them directly.


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)

Since the taxpayer acquired the companies stocks prior to 2009, Section 1202(a)(3) states that:

“In the case of qualified small business stock acquired after the date of the enactment of this paragraph and on or before the date of the enactment of the Creating Small Business Jobs Act of 2010

(A)paragraph (1) shall be applied by substituting “75 percent” for “50 percent”

26 U.S.C.A § 1202(a)(3)

Section 1202(c)(2)(A) states that:

“Stock in a corporation shall not be treated as qualified small business stock unless, during substantially all of the taxpayer’s holding period for such stock, such corporation meets the active business requirements of subsection (e) and such corporation is a C corporation.”

Finally, whether a service that provides lab results to health providers qualifies as a “Qualified Business” relies on Section 1202(e)(3)(A):

“For purposes of this subsection, the term “qualified trade or business” means any trade or business other than—

(A)any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees…”

26 U.S.C.A § 1202(e)(3)


The company does provide health services, but does not diagnose any patient nor do they recommend or provide treatment. The company is secluded on the diagnostics of the healthcares patients. The main takeaway is that,

“Company’s sole function is to provide healthcare providers with a copy of its laboratory report.

I.R.S. Priv. Ltr. Rul. 201717010 at 3.

Furthermore, the company does not discuss the diagnostics/lab results with the health provider’s patients. The only contact with the patient comes from billing in the case the patient is uninsured or insurance pays them directly. An additional important fact from the ruling states:

“[Y]ou represent that the skills employees bring to Company are not useful in performing X tests and that skills they develop at Company are not useful to other employers.”

I.R.S. Priv. Ltr. Rul. 201717010 at 3.

Lastly, the company does not gain compensation from the patients directly; rather, the companies compensation is from the healthcare providers per report requested. 


The Ruling was concluded by describing why the Company—a testing lab that delivers results to health providers—was considered a qualified business under § 1202(e)(3):

“[W]e conclude that for purposes of § 1202(e)(3), Company is not in a trade or business (i) involving the performance of services in the field of health or (ii) where the principal asset of the trade or business is the reputation or skill of one or more of its employees.”

I.R.S. Priv. Ltr. Rul. 201717010 at 4.

The Ruling added a “caveat” section to further clarify that the § 1202(a) material was for the Founder’s purpose only. Although, the material provided under § 1202(a) is beneficial for anyone who wants to exercise options that are Qualified Small Business Stock (QSBS).

Source: I.R.S. Priv. Ltr. Rul. 201717010 (Jan. 23, 2017).

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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.