“The IRS has observed a significant rise in entrepreneurial ventures whose activities consist of research and development in lengthy phases,” the agency said in a Sept. 25 statement announcing a study on this topic. “During these phases, the ventures often collect no income or negligible income but nonetheless incur significant financial expenditures and perform day-to-day operational and managerial functions that historically have evidenced an ‘active’ business.”
The IRS gave the example of a pharmaceutical or technology venture that performs research to develop new products with the purpose of earning income in the future from sales or licenses.
Current rules under tax code Section 355 say that businesses must meet several requirements to qualify for a tax-free spinoff, including that both the distributing corporation and the controlled corporation be engaged in an “active trade or business [ATB].” An ATB typically must include the collection of income and the payment of expenses.
Due to the emergence of the R&D ventures, the IRS and Treasury Department are considering guidance on whether “a business can qualify as an ATB if entrepreneurial activities, as opposed to investment or other non-business activities, take place with the purpose of earning income in the future, but no income has yet been collected,” the agency said.
The IRS requested comments and said pending completion of its study, it will entertain requests for private letter rulings related to this issue.
Read more in the IRS statement.
Selected information in the "Pharmaceutical Science Update" is compiled from summaries and articles from Bloomberg BNA.