Affiliated Service Group - Lawyers

[MGOAdmin]

I have a potential client who is a 1/3 owner of a law practice in which he works part-time. He also is a sole proprietor and works on separate cases outside the firm. He recently won a large case (outside the firm) that was started 4 years ago (before he was a 1/3 owner in the firm).

Is he able to set up a plan just for himself, outside the firm, with the dollars earned from outside cases and not affect the plan inside the firm? Are there any affiliated service group issues?

[shERPA]

Maybe. Is this attorney an individual partner in the law firm, or does he have a professional corporation that is a partner in the firm and he's employed by his P.C.?

When did he become a partner in the firm?

[MGOAdmin]

He is an individual partner in the firm.

He became a parter, about 2 years ago. The settle he received was for a case that went back 4 years.

[shERPA]

Well, as an individual partner, he is considered an employee of the partnership under IRC 401©(4), not treated as a separate business organization. So there is no controlled group between the individual (as an employee) and his sole proprietorship.

There is clearly ownership between the individual as a sole prop and the individual as a partner in the firm that could make his sole prop and the firm an ASG if the two practices are "regularly associated" in providing services to clients or if there are services provided between the sole prop (not the individual employee partner) and firm.

So if comes down to facts and circumstances, as to what, if any relationship the individual (as a sole prop, not as an employee) and the firm have with each other. In theory, if they have absolutely nothing to do with each other, then they are not an ASG.

Note, some believe this is too fine a distinction to draw between the individual as an employee/partner of the firm vs the individual as a sole prop. I have read different opinions on the subject over the years, so the attorney should probably obtain legal advice on this, or point him to the issue and relevant code sections and let him make the determination for himself. The fact that they are both law practices, and that a lawyer pretty much works by name and reputation makes it a bit more cloudy. If his sole prop as an entirely different type of business it would be cleaner.