Phillip

C. B., thank you very much for presenting Derrin's explanation and your comments. Being a both a leased employee and an independent contractor has spurred additional thoughts and is quite helpful. You wrote "Edit: HCE ownership does not apply for A-orgs". I did not understand this comment as the EOB states "The A-organization must have an ownership interest in the FSO." I saw no exception for HCE's. A law firm is used in the first example and says "Each corporation has a one-third partnership interest in the law firm". Thus the ownership interest is emphasized. I have ruled out them being in an A-Org or B-Org as there is no common ownership For a few years, I have been thinking each these CPA non-equity partners are leased employees from their own P.A. The only thing that has me doubting leased employee status is this from my original post: "Regarding a Leased Employee and the control test, the EOB states "On the other hand, professionals who regularly make use of their own judgment and discretion on matters of importance in the performance of their services and are guided by professional, legal or industry standards, generally do not satisfy this test." However, in my 3rd post I wrote "When they became non-equity partners, they became employees of their own P.A. Their roles largely stayed the same." I wrote, per EOB, they "are guided by professional, legal or industry standards, [means they ] generally do not satisfy this test" [of being a leased employee]. Since they are performing basically the same role as when they were a "common-law employee" when employed by the CPA firm, I don't see how being "guided by professional, legal or industry standards" now suddenly disqualifies them from being a leased employee. I think they are either "leased employees" or part of an ASG "management group". I am leaning toward thinking they are each a "leased employee".

Luke, all of these non-equity partner CPA's have formerly been senior employees of the CPA firm. When they became non-equity partners, they became employees of their own P.A. Their roles largely stayed the same. There are approximately 125 employees scattered largely across 5 states. There are 15 equity partners and 5 non-equity partners. Common sense would say they should be included with the CPA firm, because they were before they ceased being employees of the CPA firm. However, rules are rules, so common sense doesn't necessarily apply. I like what you said "Anyway, this is probably something on which reasonable minds could differ." We have been including them as part of the CPA firm and I guess we will continue to do so.

I thank everyone for their responses. Yes, ASG A and B types both require at least some common ownership. Type A requires "Any degree" of ownership. Type B requires at least 10% ownership of the B-organization by an HCE in the FSO or A-Organization. However, these non-equity partners receive no W-2 wages directly from the CPA firm. So they are not HCE's of the FSO along with no common ownership. Per EOB (downloaded by me on 1/17/2014), regarding Management Groups - A management group consists of a recipient organization and a management organization. To be an affiliated service group, the management organization's principal business must be the performance of management functions, on a regular and continuing basis, for the recipient organization. IRC §414(m)(5). 2. Management functions. The law does not provide a definition of management functions. The term should be interpreted under common business practices. Activities that involve daily business operations, hiring or firing personnel, business planning, setting employee compensation, and supervisory roles would be examples of management functions. 3. Principal business must be performance of management functions. The law does not provide any objective test in determining whether the management organization's principal business is performing management functions for the recipient organization. In normal usage, "principal" means the main function, suggesting a majority (more than 50%) of the organization's business. I am thinking now these non-equity partners CPA's are a part of a management group. They do plan out audit engagements and/or meet with clients to do their tax work and they also supervise employees of the CPA firm who do audit or tax work. The term "principal business" is a bit troubling. These CPA's probably review the work of other CPA's more than they actually perform the work. They probably are doing most of the same work as a partner, except for hiring and firing and setting wages.

A CPA firm has several non-equity (CPA) partners each of whom are paid from their own P.A. Neither do these CPAs, nor their own P.A.s, own any of the CPA firm and the CPA firm has no ownership in the non-equity partner's P.A.s Because there is no common ownership, I don't see this as an affiliated service group. But I am having trouble with classifying them leased employees. Regarding a Leased Employee and the control test, the EOB states "On the other hand, professionals who regularly make use of their own judgment and discretion on matters of importance in the performance of their services and are guided by professional, legal or industry standards, generally do not satisfy this test." Question: Are these CPAs who are employed by their P.A.s considered leased employees? part of an affiliated service group? Or are they their own separate employer tested as if an unrelated employer?