In the past few weeks, some new decisions have been made on the topics we discussed earlier. Given that Congress is on a break this week - marking Remembrance Day and otherwise probably hanging out with voters - we thought it was a good time to update.
Qualified shares for small businesses
Last year, we covered the IRS Private Letter Decision (“PLR”) which ruled that an insurance brokerage business was eligible for Preferential Tax Treatment under Section 1202 as a Qualifying Small Business Action (“KSBS”). You can now add a pharmaceutical company to your list of active trades or companies that qualify. It is important to remember that the Internal Revenue Act defines eligible trade or business by exclusion. In other words, he lists activities that do not qualify, including, among other things, health and mediation services.
The taxpayer in question does not manufacture drugs, but has exclusive distribution agreements with manufacturers. It employs pharmacists to fill prescriptions written by doctors and non-pharmacists to coordinate with patients and resolve insurance issues. Employees do not diagnose, recommend specific treatments, or manage any aspect of patient care. All revenues are exclusively from the sale of drugs.
Based on these facts, PLR concluded that the taxpayer’s employees do not provide medical services, and that the taxpayer’s turnover or business does not imply “provision of health services”. Moreover, the taxpayer’s primary assets are his exclusive rights to distribute drugs, not the reputation or skills of one or more employees. Therefore, he is not disqualified from being a qualified trade or business based on that criterion.
Contrary to the maxim that it is easier to ask for forgiveness if it is to get a permit, when it comes to the KSBS, it seems that the tax administration is quite ready to decide on what qualifies and what does not. Therefore, given the size of the potential tax savings, taxpayers are advised to request a PLR.
Alimony
Prior to the 2017 Tax Reduction and Employment Act (“TCJA”), the payer refused alimony or separate maintenance under certain conditions:
- Payment must be specified in the divorce or separation agreement
- A divorce or separation contract cannot designate a payment as a payment that is NOT included in the recipient’s gross income or that the payer cannot refuse
- The payer and the payee cannot live together when the payment is made; i
- Payments must end with the death of the payee’s spouse without any liability for substitute payments after death
Although TCJA repealed this provision, payments made under a divorce or separation agreement in force before January 1, 2019 (and not amended to apply to TCJA after that date) continue to be denied. Which brings us to the case of Dr. Ibrahim.
He and his wife, each previously married, decided to try again. And this marriage is over. The divorce agreement states that ”
In court, Dr. Ibrahim argued that, regardless of the explicit language of the agreement, payments should be considered alimony under Missouri law. The tax court was not convinced, relying on the fact that the language in the Agreement was clear and explicit. Since neither side was required to pay alimony, Dr. Ibrahim’s payments failed elsewhere on the claim list. The fact that the Missouri state court did not determine in the divorce proceedings that his wife meets the conditions for support did not help his argument. And, since he could not show a reasonable reason or that he acted in good faith, he was also punished for precision.
Count on Friedman
Like many opinions of the Summary of Tax Courts, this one begins with the words: “this opinion will not be treated as a precedent for any other case.” This does not mean that the case study is not applicable. Tax breaks exist by statutory grace. They have no right. So, to benefit from them, follow the rules. Your Friedman LLP Advisor can help you stay inside the fence.
