Affiliated Service Group?

[Dawn Hafner]

I have two entities that provide services to another entity and am trying to figure out of an ASG exists.

I know that all three are service organizations, but it does not appear that I have an FSO. The regs state that if the FSO is a corporation, it must be a professional service corporation. Treas. Reg 1.414(m)-1© defines professional service corporation to be "a corporation organized under state law for the principal purpose of providing professional services...." "Professional services means services preformed by certified or other public accountants, actuaries, architects, attorneys, chiropodists, chiropractors, medical doctors, dentist, professional engineers, optometrists, osteopaths, podiatrits, psychologists, and veternarians."

Insurance is not listed. Does this mean that unless my "FSO" is an entity form other than a corporation, that I really do not have an "FSO"? If I do not have an FSO then I do not have an ASG, outside of the Management Organization Test, which does not apply to this situation.

Here are my facts:

Entity 1 - owned 100% by Owner A, sole prop

Entity 2 - owned 100% by Owner B, corporation

Entity 3 - owned 50% by Owner A, 50% by Owner B, corporation

All three entiteis in business of insurance. Entity 1 and Entity 2 provide services to Entity 3. The service receipts for these services to Entity 3 exceed 10% of the total service receipts for both Entity 1 and Entity 2. I am looking at the B-org test. I don't think the A-org test applies here since none of the entities are shareholders of the other entities directly. If Entity 3 is not an FSO due to being a corporation, and insurance not being listed in the regs, I don't see how we can have an ASG.

Any other analysis? Thanks.

[jaemmons]

I believe you do have an ASG under the "B-Org" group rules under IRC 414(m)(2)(B). Since Entity 3 is incorporated and does not qualify as a professional service corporation, there cannot be an "A-Org" group ASG, since they do not qualify as an FSO under these rules.

However, an insurance corporation is considered a "designated service field" under the Proposed Regs of 1.414(m)-2(f)(2). Since an FSO under the "B-Org" rules that is a corporation does not have to be a PC, they would qualify as an FSO. In addition, Entity 1 and 2 look like they meet both the ownership and service receipts tests to qualify as a "B-Org". Therefore, from the facts given, I believe you do have an ASG.

[Dawn Hafner]

Where are you reading that a different FSO definition applies for the A org test vs. the B org test? I am not seeing that. I do agree that Insurance is listed in 1.414(m)-2, and is considered a "service organization", but I don't see that Insurance would meet the definition of a "FSO". See 1.414(m)-1©, which reads

"c) Aggregation not required. Pursuant to the authority contained in section 414(m)(1), a corporation, other than a professional service corporation, shall not be treated as a First Service Organization (see §1.414(m)-2) for purposes of section 414(m)(2)(A)."

[both the A org test and the B org test are subsections of 414(m)(2)(A)]

(reg cont.)"Also, a special rule is provided in §1.414(m)-2©(4) for determining ownership under section 414(m)(2)(B). For purposes of this paragraph, a professional service corporation is a corporation that is organized under state law for the principal purpose of providing professional services and has at least one shareholder who is licensed or otherwise legally authorized to render the type of services for which the corporation is organized. "Professional services" means the services performed by certified or other public accountants, actuaries, architects, attorneys, chiropodists, chiropractors, medical doctors, dentists, professional engineers, optometrists, osteopaths, podiatrists, psychologists, and veterinarians. The Commissioner may expand the list of services in the preceding sentence. However, no such expansion will be effective with respect to any organization until the first day of the first plan year beginning at least 180 days after the publication of such change. [Reg. §1.414(m)-1.]

Am I missing some other definition of a FSO for B orgs that is different than this? I am not seeing insurance in this lising, so if I don't have an FSO, I can't have met either the A org or B org test.

Isn't this game fun! Who writes this stuff?

[Dawn Hafner]

I re-read them, and you are correct. The FSO exception only applies to the A org rules. Thanks!