Volume 11 No 1    /    Read Article

By Stanley C. Ruchelman

Many U.S. investors and business owners are familiar with the tax exemption provided to U.S. individuals recognizing gains from the sale of certain U.S. stock, defined as qualified small business stock (“Q.S.B.S.”). The Q.S.B.S. exemption plays an important role in the growth of hi-tech industry, which is dependent on investments by U.S. persons. It typically benefits U.S. individuals who invest in start-up software companies. However, the Q.S.B.S. exemption is not available for investment gains related to corporations engaged in the provision of nonqualified services, such as health care, brokerage, law, engineering, architecture, and accounting. However, a business that develops software that is used in those may qualify in certain circumstances, but not qualify in others. The key is whether the software is a tool for a person performing the nonqualified business or the software supplants the individual in performing the business. In this article, Stanley C. Ruchelman addresses two I.R.S. rulings illustrating the facts that distinguish a computer program that is a tool for service providers from facts that cause a program to be treated as a robot service provider.   See more →