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October 24, 2023

IRS rules data migration and management services company is not engaged in consulting for IRC Section 1202 gain exclusion purposes

  • The IRS ruling is the only ruling to address the definition of a "consulting" trade or business under IRC Section 1202.
  • The facts in the ruling should be helpful in determining what can be considered consulting services and are especially favorable to technology development companies that offer strategic advice in conjunction with an integrated technology-based product offering.
  • The determination is important for whether a taxpayer can exclude gain on the sale of qualified small business stock.

In PLR 202342013, the IRS ruled that a company providing data migration and management services to businesses is not engaged in a trade or business providing consulting services under IRC Section 1202(e)(3)(A). As a result, assuming all other requirements were met, the taxpayer would be eligible for the applicable exclusion under IRC Section 1202 upon selling the company's stock.


Company was formed as a C corporation.1 Taxpayer was one of Company's shareholders. Taxpayer subsequently sold all of its shares in Company.

Company offers clients data migration and management services but does not sell software or technical equipment. Company creates a transformation assessment plan for its clients; its service delivery teams then determine an optimized cloud and data transformation roadmap. Company members often integrate into a client's team on a full-time basis to implement the data migration and provide limited advice and counsel. After the migration, Company provides the client with managed technical services, including monitoring and resolving incidents. Company invoices clients for implementation services and embedded advice. Company does not separately bill clients for advice and counsel.

Taxpayer represents that more than 80% of Company's assets are used in its data migration and management business.

Law and analysis

Under IRC Section 1202(a), gross income does not include a certain percentage of any gain from the sale or exchange of qualified small business stock held for more than five years. The amount of the gain exclusion varies depending on when the stock was acquired, ranging from 100% if acquired after September 27, 2010, to 50% if acquired on or before February 17, 2009.

IRC Section 1202(c)(2) and (d)(1) only treats stock as qualified small business stock if, during substantially all of the taxpayer's holding period, the corporation meets the active business requirements of IRC Section 1202(e) and the corporation is a domestic C corporation.

The active business requirement is met under IRC Section 1202(e) if the corporation uses at least 80% of its assets (by value) in the active conduct of a qualified trade or business.

Under IRC Section 1202(e)(3), a qualified trade or business is any trade or business except those listed under that section. Consulting services are listed in IRC Section 1202(e)(3)(A), so they are not considered a qualified trade or business.

The IRS concluded that Company is not engaged in a trade or business performing services in the field of consulting for the purposes of IRC Section 1202(e)(3)(A). Thus, Taxpayer may exclude the applicable percentage of gain from its sale of Company's stock (e.g., 100%) after taking into account other relevant requirements. In support of its conclusion, the IRS said the advice and counsel that Company employees provide as part of the process of determining a client's data management needs "is ancillary to and supports the sale of the implementation work Company's employees perform." In addition, Company does not separately bill for advice and counsel, but only for its final product of implementing data management solutions.


The IRS has provided limited interpretation of the definitions of the disqualified fields listed in IRC Section 1202(e)(3) in the 30 years since IRC Section 1202 was enacted. While several rulings have addressed the disqualified fields of "health" and "brokerage," this is the first to focus on the field of "consulting."

For purposes of the personal service corporation rules of IRC Section 448, the applicable regulations define the field of consulting as "the provision of advice and counsel." Those regulations further refine the definition via several examples, which conclude that taxpayers are not in the business of consulting when they provide advice and counsel as part of their business but are compensated only upon "the consummation of the transaction the services were intended to effect."

In this ruling, the IRS appears to apply a similar approach to defining the field of consulting for purposes of IRC Section 1202 by limiting the term to taxpayers that provide only advice and counsel and are compensated in exchange for that advice and counsel. To the contrary, taxpayers are not considered to be in the field of consulting if they provide advice and counsel as a means of engaging customers or clients in a more expansive transaction, as was the case in this ruling, and are paid only upon completing the more expansive transaction. The ruling's proposition that advice and counsel ancillary to and supportive of a broader business offering is not disqualifying under IRC Section 1202(e)(3)(A) is favorable to technology development companies that offer strategic advice in conjunction with an integrated technology-based product offering.

Looking at the specific facts, it is possible the IRS could have determined that Company was in the field of consulting if Company had merely evaluated the client's data migration and management needs, made a recommendation and been compensated solely for that recommendation (e.g., at an hourly rate). However, because Company subsequently integrated into the customer's team to orchestrate, implement and troubleshoot the data migration — and was compensated only after those duties were complete — a distinction can be drawn because Company's advice and counsel were not the final services offered to its customers but were intended to affect the consummation of a broader transaction. As a result, Company was not in engaged in the disqualified field of "consulting."


Contact Information
For additional information concerning this Alert, please contact:
Private Client Services
   • Anthony Nitti (

Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor



1 The ruling explains Company later elected to be classified as an S corporation but had more than one class of stock. Taxpayer represented that the S corporation election was therefore immediately invalid and, thus, the Company still satisfied the domestic C corporation requirement under IRC Sections 1202(c)(2) and (d)(1). The IRS noted in its conclusion that the ruling is conditioned upon Taxpayer's representation that Company's S corporation election was invalid.