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Multiple A-Orgs in an Affiliated Service Group
(Posted March 21, 2001)
Question 87: A is an accounting corporation; B is an S Corporation that does recruiting; C is an LLC that also does recruiting. Capital is not a material income-producing factor in any of the businesses. A and B are both regularly associated with C in performing services for third parties. A and B each own 50% of C. It appears obvious to me that C is a First Service Organization (FSO) and A and B are each A-Organizations, within the meaning of Code section 414(m). Does that necessarily mean that all three entities are members of one affiliated service group? What factors should be considered to determine if A and B are part of the same affiliated service group?
Answer: I agree with your conclusion that A and B are both A-Orgs to C. (If they wanted to prevent that particular result, it would be a fairly simple matter: incorporate C. Then the professional corporation exemption would apply because C is not a professional service business. However, because C is not incorporated (and presumably is not even taxed as a corporation), the professional service corporation exemption does not apply, so C is an FSO.
The question is, whether we technically have two ASGs -- one consisting of A and C, and one consisting of B and C -- or whether we have one ASG consisting of all three businesses.
Fortunately, the Code is fairly clear on this point. It says that an ASG consists of an FSO and "one or more" A-Orgs or B-Orgs. The proposed regulations, on which taxpayers may rely, are more explicit: "If an organization is a First Service Organization with respect to two or more A Organizations or two or more B Organizations, or both, all of the organizations shall be considered to constitute a single affiliated service group." (Prop. Treas. Reg. 1.414(m)-2(g)(2).)
I discuss this in more detail in Chapter 13 of my book, Who's the Employer?.
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