QSBS IRS Ruling: PLR 202125004- Potential QSBS Implications for a Medical Manufacturer Company Being a Qualifying Business under §1202(e)(3)

Corporate Tax QSBS

On June 25, 2021, the IRS released Private Letter Ruling (PLR 202125004), addressing whether a company that would “evaluate, measure, design, fabricate, manufacture, adjust, fit, and service” prescriptions for a third-party healthcare provider is not considered to be engaged in a business involving the performance of services in the fields of health under Section 1202(e)(3)(A).

The Company in Question in this PLR:

  • Company is a C-Corporation that designs products that are prescribed from third-party healthcare providers
  • The Taxpayer in this situation has employees that specialize on evaluating the prescribed amount in order to adjust, fit, and service the product as ordered by the healthcare provider
  • All revenue is from the sales of the products that are manufactured
  • Payments are made by insurance companies, hospitals, and/or uninsured patients
  • Property consist of a corporate office, labs, and fabrication facility


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.”

26 U.S.C.A. § 1202(c)(2)(A)

Section 1202(e)(1)(A)-(B) states that:

“For purposes of subsection (c)(2), the requirements of this subsection are met by a corporation for any period if during such period—(A)at least 80 percent (by value) of the assets of such corporation are used by such corporation in the active conduct of 1 or more qualified trades or businesses, and (B)such corporation is an eligible corporation

26 U.S.C.A. § 1202(e)(1)(A)-(B)

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)

Finally, Section 1202(e)(3) states that:

“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 Ruling starts out stating that the Company in question provides their customers with a tangible Class of Products rather than the healthcare providers gaining value from the Company’s service. As seen in several other Private Letter Rulings, PLR 201717010 and PLR 201436001, the analysis explains that the Company,

“[M]anufactures these products for individuals as prescribed by health care providers who are not employed by Taxpayer….[and] may directly interact with referred individuals and their respective diagnoses, the interaction is incidental in ensuring these individuals receive a Form of Product as provided by their prescription.”

I.R.S. Priv. Ltr. Rul. 202125004 at 3.

Furthermore, the Company was said to be more closely related to a manufacturing company rather than performing services based on their expertise, and that “although the Products produced by Taxpayer are associated with the health industry”, the IRS concludes that for the purposes of § 1202(e)(3), the “taxpayer is not in the 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.”


The IRS ruled that the Company’s business was not considered to fall under a business performing services in the health industry under Section 1202(e)(3) and therefore could be QSBS eligible:

“Based on the facts and representations submitted, the Taxpayer is engaged in a qualified trade or business under § 1202(e)(3).”

I.R.S. Priv. Ltr. Rul. 202125004 at 3

Source: I.R.S. Priv. Ltr. Rul. 202125004 (Mar. 29, 2021)

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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.