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Answers are provided by S. Derrin Watson, JD, APM
Equipment Leases and Affiliated Service Groups
(Posted February 12, 2001)
Question 77: We have Corporation AB, which is owned 50% by A and 50% by B, who are two unrelated individuals. Corporation AB maintains a profit sharing plan. A and B wish to form Corporation ABC, which will be owned 40% by A, 39% by B and 21% by C. C is unrelated to A and B. Corporation ABC will lease equipment solely to Corporation AB (no other customers). Must Corporation ABC's employees be covered by Corporation AB's profit sharing plan? (If this is not a controlled group, is it an affiliated service group?)
Answer: True, they aren't a controlled group (assuming the absence of options to buy, rights of first refusal, and other issues that would give rise to attribution or exclusion); 79% is not 80%. 79.9995% is not 80%. Anything less than 80% is not enough to create a controlled group.
The first question to ask in dealing with affiliated service group questions is, What organizations can be service organizations? You haven't told us about Corporation AB, but Corporation ABC is not likely to be a service organization. If it's making serious money by leasing equipment, then capital is a material income-producing factor. If Corporation AB is not in the fields of health, law, engineering, accounting, etc., then it's not a service organization.
As such, ABC cannot be a First Service Organization or an A-Org. It could be a B-Org only if it provided significant employee services. It could be part of a management function group only if one business or the other had as its principal business purpose the provision of management functions to the other. Based on the limited facts in the question, you do not have an affiliated service group.
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