In the last few weeks, there have been some new decisions on topics that we discussed earlier. Given that Congress is on vacation this week – celebrating Remembrance Day and otherwise probably spending time with voters – we thought it was a good time to update.
Qualified shares for small business
Last year, we covered a private letter decision from the IRS (‘PLR’), which ruled that an insurance brokerage business is eligible for preferential tax treatment under Section 1202 as Qualifying Shares for Small Business (‘QSBS’). You can now add a pharmaceutical business to your list of active transactions or eligible businesses. It is important to remember that the Internal Revenue Code defines eligible trade or business by exclusion. In other words, it lists non-compliant activities, including, but not limited to, health and brokerage services.
The taxpayer in question does not manufacture medicines, but has exclusive distribution agreements with manufacturers. It employs pharmacists who fill out prescriptions written by doctors and non-pharmacists to coordinate with patients and deal with insurance issues. Employees do not diagnose, recommend specific treatments, or manage any aspect of patient care. All proceeds are strictly from the sale of drugs.
On the basis of these facts, the PLR concludes that the taxpayer’s employees are not involved in the provision of medical services and therefore the taxpayer’s trade or activity does not involve “the provision of health services”. In addition, the taxpayer’s main asset is his exclusive rights to distribute pharmaceutical products, not the reputation or skills of one or more employees. Therefore, he is not disqualified from skilled trade or business on the basis of this criterion.
Contrary to the maxim that it is easier to ask for forgiveness, that it is to get permission when it comes to QSBS, it seems that the IRS is quite inclined to decide what meets and what does not meet the requirements. So, given the size of the potential tax savings, taxpayers should ask for a PLR.
Prior to the Tax and Employment Reduction Act 2017 (“TCJA”), alimony or individual alimony payments are deducted by the payer under certain conditions:
- Payment must be specified in a divorce or separation agreement
- A divorce or separation agreement cannot define a payment as one that is NOT included in the recipient’s gross income or is deductible by the payer
- The payer and the payee cannot live together when the payment is made; and
- Payments must end with the death of the beneficiary spouse without any liability for post-death replacement payments
Although the provision was repealed by the TCJA, payments made under a divorce or separation agreement in force before 1 January 2019 (and not amended to apply the TCJA after that date) are still deductible. Which brings us to the case of Dr. Ibrahim.
He and his wife, each of whom had been married before, decided to try again. This marriage is also over. The separation agreement states that ”
In court, Dr. Ibrahim argued that regardless of the explicit language of the Agreement, payments should be considered maintenance under Missouri law. The tax court was not convinced, citing the fact that the language in the Agreement was clear and explicit. As neither party had to pay alimony, Dr. Ibrahim’s payments failed second on the list of claims. The fact that the Missouri court in the divorce proceedings did not find his wife entitled to alimony did not help his argument. And because he could not prove a reasonable cause or that he acted in good faith, he was also punished with a penalty of punctuality.
Rely on Friedman
Like many generalized opinions of the tax court, this one begins with the words: “this opinion is not treated as a precedent for every other case”. This does not mean that the lesson of the case is not applicable. Tax breaks exist by legal grace. They are not right. So to take advantage of them, follow the rules. Your Friedman LLP advisor can help you stay within the guardrail.