Service Organization

[Earl]

Would a Headhunter be considered a Service organization for Qualified Plan Affiliated Service Group rules?

Thanks

[Kimberly S]

It's a facts and circumstances test, and we don't have nearly enough facts in your post.

[J Simmons]

Earl,

IRC sec 414(m)(3) provides that "For purposes of [affiliated service groups], the term 'service organization' means an organization the principal business of which is the performance of services."

Treas Reg sec 1.414(m)-2(f)(1) provides "The principal business of an organization will be considered the performance of services if capital is not a material income-producing factor for the organization, even though the organization is not engaged in a field listed in subparagraph (2). Whether capital is a material income-producing factor must be determined by reference to all the facts and circumstances of each case. In general, capital is a material income-producing factor if a substantial portion of the gross income of the business is attributable to the employment of capital in the business, as reflected, for example, by a substantial investment in inventories, plant, machinery, or other equipment. Additionally, capital is a material income-producing factor for banks and similar institutions. However, capital is not a material income-producing factor if the gross income of the business consists principally of fees, commissions, or other compensation for personal services performed by an individual."

Treas Reg sec 1.414(m)-2(f)(2) provides a list of certain types of services to third parties that will render the company a 'service organization' even if capital is a material income-producing factor. Headhunting does not appear to be one, unless it falls under the aegis of 'consulting'.

If headhunting is not consulting, and capital is not a material income-producing factor for the headhunting business in question, then it ought not be a service organization. Treas Reg sec 1.414(m)-2(f)(3)

[jpod]

If capital is NOT a material income-producing factor, you are automatically a service org. (although I think there is something that kicks out corporations for purposes of the (A) test).

I can't imagine any facts that would suggest that capital IS a MIPF for a headhunting business.

[Earl]

a corporation that is not a professional service corporation under state law cannot be treated as an FSO with respect to any A-orgs. [Prop. Treas. Reg. § 1.414(m)-1©]

Thanks for your replies.