Temporary staffing business qualified under the small-business-stock rules

Plain-English summary

A shareholder sold stock in a C corporation that matched experienced executives and managers with clients needing temporary staff or permanent executives. For temporary placements, clients identified their needs, supervised the workers, and supplied their tools and workstations. The corporation did not develop clients' business plans, even when clients used outside consultants before hiring the corporation to provide staff. The IRS ruled that the temporary staffing business was a qualified trade or business under section 1202(e)(3), rather than consulting or a business whose main asset was employee reputation or skill. The ruling did not decide whether the stock met the other requirements for the section 1202 gain exclusion, including the 80-percent asset test or the required period of qualified activity.

Ruling snapshot

• Question: Was the corporation's temporary staffing business a qualified trade or business for the section 1202 small-business-stock exclusion?
• Outcome: approved
• Key authorities: IRC §§ 1202(a), 1202(c), and 1202(e)

Full text (IRS public release)

Internal Revenue Service                                    Department of the Treasury
                                                            Washington, DC 20224

Number: 202352009                                           Third Party Communication: None
Release Date: 12/29/2023                                    Date of Communication: Not Applicable
Index Number: 1202.00-00
                                                            Person To Contact:
-------------------                                         ---------------------, ID No. -----------------
-----------------------------                               Telephone Number:
--------------------------                                  --------------------
                                                            Refer Reply To:
                                                            CC:ITA:B04
                                                            PLR-107933-23
                                                            Date:
                                                            October 03, 2023




                                                LEGEND

Taxpayer       = -----------------------------------------------

Company = -------------------------------------

Year 1         = -------

Date 1         = -----------------


Dear -------------:

This is in response to a letter sent on your behalf by your representatives dated -----------
-------. Taxpayer requests a ruling that Company was engaged in a qualified trade or
business as defined in section 1202(e)(3) of the Internal Revenue Code (Code).

                                                  FACTS

Taxpayer founded Company, a C Corporation, in Year 1. Company was owned by
Taxpayer and other shareholders. Since its formation, the Company operated as an
interim staffing services business with a focus on matching experienced executives and
managers with the staffing needs of its clients.

As part of its business, Company provided two main categories of staffing services that
included interim staffing and executive searching. Interim staffing services consisted of
matching professionals with Company’s clients’ self-identified needs as temporary or
interim employees for particular positions or projects. Company billed clients at an
agreed upon rate for the time professionals spent on projects. Company also billed for
engagement oversight and project communication services provided by its own
employees.

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Additionally, Company provided executive search services, which consisted of placing
permanent professionals in executive positions with its clients. Company’s clients
provided the specifications for the desired executives and Company searched for
candidates based on the client-provided criteria and specifications. Clients engaged
Company for a total fee equal to a percentage of the executive’s actual first year
compensation, with Company entitled to a portion of the fee upon signing of the
agreement prior to performance of search services.

Company’s clients often engaged a third-party consulting firm to provide analysis,
counsel, and business development plans. Following such consultations, clients would
engage Company to provide professionals to implement the plan or fulfill other business
needs. Company did not participate in the analysis, counsel, or business development
plans developed for the clients. Company’s role was to provide the professionals
identified in the plan or to fill other business needs identified by the clients.

Although Company processed the payroll of a professional who fulfilled the staffing
needs of a client, the client was the professional’s employer for state law purposes and
federal income tax purposes. Further, the client was responsible for the direction,
supervision, and quality review of a professional’s work product, as well as providing all
resources, workstations and other tools to the professional. Additionally, the client was
responsible for monitoring and controlling the engagement.

On Date 1, Taxpayer represents that an unrelated third-party buyer acquired all shares
in Company, including Taxpayer’s shares, via a transaction that was treated as a stock
sale.

Taxpayer represents that more than 80% of Company’s assets were used in its staffing
business.

                                          LAW

Section 1202(a)(1) of the Code provides that in the case of a taxpayer other than a
corporation, gross income does not include 50 percent of any gain from the sale or
exchange of qualified small business stock held for more than 5 years.

Section 1202(a)(3) provides that in the case of qualified small business stock acquired
after February 17, 2009, and on or before September 27, 2010, the exclusion is 75
percent.

Section 1202(a)(4) provides that in the case of qualified small business stock acquired
after September 27, 2010, the exclusion is 100 percent.

Section 1202(c)(1) provides that the term ‘qualified small business stock’ means any
stock in a C corporation which is originally issued after the date of enactment in 1993 if

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as of the date of issuance, such corporation is a qualified small business and except as
otherwise provided, such stock is acquired by the shareholder at its original issue in
exchange for money or other property (not including stock) or as compensation for
services.

Section 1202(c)(2) provides that stock in a corporation is not treated as qualified small
business stock unless during substantially all of the taxpayer's holding period for such
stock, the corporation meets the active business requirements of subsection (e), and
the corporation is a C corporation.

Section 1202(e)(1) provides that the active business requirements are met by a
corporation for any period if during such period at least 80 percent (by value) of the
assets of such corporation are used by such corporation in the active conduct of one or
more qualified trades or businesses, and such corporation is an eligible corporation.

Section 1202(e)(3) provides, in relevant part, that a qualified trade or business means
any trade or business other than (A) a 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 one or more of its employee.

                                       ANALYSIS

Company operated a temporary staffing business that focused on placing experienced
professionals with its clients. Company’s clients engaged Company to provide
professionals to implement business plans or fulfill other business needs. Once
professionals were provided to clients, the clients were considered the employers of the
professionals. The clients were responsible for the supervision of assigned
professionals, and the provision of all resources, workstations, and other tools to
assigned professionals.

Company billed clients at an agreed upon rate for the time the temporary professionals
spent on clients’ projects. Company also billed for engagement oversight and project
communication services provided by its own employees. For permanent executives
placed with clients, Company billed a total fee equal to a percentage of the executive’s
actual first year compensation, with Company entitled to a portion of the total fee upon
signing of the agreement prior to performance of search services.

Therefore, with respect to its temporary staffing business, 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.

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                                   CONCLUSION

We conclude that based on the facts and representations submitted, with respect to its
temporary staffing business, Company was engaged in a qualified trade or business as
defined in section 1202(e)(3) and was not engaged in a trade or business involving the
performance of services in the field of consulting or where the principal asset of the
trade or business was the reputation or skill of one or more of its employees.

                                        CAVEATS

Except as expressly provided herein, no opinion is expressed or implied concerning the
federal income tax consequences of any aspect of any transaction or item discussed or
referenced in this ruling including whether the other statutory and regulatory
prerequisites for exclusion of capital gain under § 1202 were satisfied. Specifically, this
ruling expresses no opinion as to whether more than 80% of Company’s assets were
used in a qualifying trade or business, nor the period of time for which Company was
engaged in a qualifying trade or business.

The ruling is based upon information and representations submitted by Taxpayer and
accompanied by a penalty of perjury statement executed by appropriate parties. This
office has not verified any of the material submitted in support of the request for a ruling.
However, as part of the examination process, the IRS may verify the information,
representations, and other data submitted.

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

This letter ruling is directed only to the taxpayer requesting it. Section 6110(k)(3)
provides that it may not be used or cited as precedent. A copy of the letter is enclosed
showing the deletions proposed to be made when it is disclosed under § 6110.

Pursuant to the Form 2848, Power of Attorney and Declaration of Representation, on
file, we are sending a copy of this letter to Taxpayer's authorized representatives.
This letter is being issued electronically in accordance with Rev. Proc. 2020-29, 2020-
21 I.R.B. 859. A paper copy will not be mailed to Taxpayer.

                                      Sincerely,

                                      Angella L. Warren
                                      Branch Chief, Branch 4
                                      Office of Associate Chief Counsel
                                      (Income Tax & Accounting)

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