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Who's the Employer?

Answers are provided by S. Derrin Watson, JD, APM

Partner as Affiliated Service Group Entity

(Posted May 29, 2001)

Question 107: A medical doctor practices two separate specialities (general surgery and family practice). He is a 50% partner in a two-person PLLC (which only performs general surgery). He also practices family medicine as a sole proprietor one day at week in the same town. The PLLC and the sole proprietorship are not related in any way (regarding patients, services, billing, shared expenses/employees or location, etc.). Is this an affiliated service group?

Answer: Although we don't have a clear answer from the IRS, I believe the answer is no, based on my reading of IRC 414(m).

The key word of section 414(m) in this situation is "organization." An FSO or an A-Org must be an organization. Organizations include sole proprietorships, partnerships, trusts, corporations, etc. In this case, I think we must distinguish between the doctor's services as a partner in the partnership, and his separate sole proprietorship. That sole proprietorship is not performing services for the partnership. Rather, the doctor himself is, in his capacity as a partner. He receives a Schedule K-1 for his services, not a Form 1099. Partners and employees, in my view, are not separate organizations but are part of the partnership or corporation for which they provide services.

If the doctor as a partner is not an "organization," then he as a partner cannot be an FSO, an A-Org or a B-Org. His sole proprietorship is an organization but it does not perform services for the partnership and hence is neither an A-Org nor a B-Org.

As I say, we have nothing definitive from the IRS, but I believe this conclusion makes sense and is a reasonable interpretation of the statute.

The affiliated service group rules are discussed in more detail in Chapter 13 of my book, Who's the Employer?.

Important notice:

Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.

The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.