Affilied Service Group question

[Lou S.]

We have a potential client if he is not an affiled service group.

He is a real estate broker who has Schedule C income.

He also owns about 30% of a real estate broker dealer ship.

About 90% of his Schedule C income is from deals run though the broker dealer he has ownership in.

To me this sounds like an ASG but I'm not sure because real-estate agents often fall under some strange employement relationship rules.

They clearly don't meet the controlled group ownership tests.

[Kimberly S]

What does their attorney say?

[Lou S.]

To ask their pension people. Their attorney isn't an ERISA guy.

Real Estate would appear apear to fall out side of the deliniated group of FSOs (Health, Law, Engineering, Architecture, Accounting, Actuarial Science, Performing Arts, Consulting and Insurance). I was just wondering if anyone else had something a bit clearer in this specific area without submitting a request to the IRS for determination.

[Guest Sieve]

The professions you list are automatically service organizations under the proposed ASG regs, but any organization where "capital is not a material income-producing factor for the organization" will be considered a service organization. The regs look to whether the income of the business is attributable to the "employment" of capital, and also say that "capital is not a material income-producing factor if the gross income of the business consists principally of fees, commissions, or other compensaton for personal services performed by an individual". (Prop. Treas. Reg. Section 1.414(m)-2(f).) I would say that a real estate sales company's fees are for personal services, and therefore it would be a service organization.

Because the brokerage is not a professional corporation, however, there is no A-org under the regs. And, there can be no B-org because the services provided by the agent are not "services of a type historically performed by employees" (since real estate agents are considered generally to be self-employed--hence the Schedule C). So, it looks like there is no ASG.

Anyone have another take on the analysis? Have I missed something?

[Lou S.]

Sieve, thanks for your insite.

I found a really interesting IRS piece doing a google search that has quite a few practical examples.

None fit my situation perfectly but a few were pretty close and in each case it would appear the BD is not considered a service organization and thus no ASG which agrees with your input.

Here is a link to the document for those who want a bit more detail than the regs provide on CGs and ASGs though I'm not sure the date of this publication as it is just Chapter 7 of a larger document and I have not found the full document.

http://www.irs.gov/pub/irs-tege/epchd704.pdf