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Attribution to Entities
(Posted June 11, 2001)
Question 110: Lawyer A owns 1/3 of two entities: a corporation and an LLP taxed as a partnership. Both entities practice law. The LLP is regularly associated with the corporation in providing services for third parties. Other than Lawyer A’s common ownership, there is no overlapping or cross ownership between the two entities. Are the LLP and corporation an affiliated service group?
Answer: Yes, because of the attribution rules of IRC 318.
Section 414(m)(2) sets forth the ground rules. In order to have an "A-Org" type of affiliated service group, you must have two service organizations. One of them (the A-Org) must be an owner or shareholder in the other (the first service organization, or "FSO") and must either regularly provide services to the FSO or regularly be associated with it in providing services to third parties. If the FSO is incorporated, it must be a professional service corporation.
In this case, all of the elements are present. Organizations that practice law are automatically considered to be service organizations. The corporation is a professional service corporation and is the FSO in this case. You’ve stipulated that the two organizations are regularly associated in providing services.
The only issue that remains is ownership. The LLP must own shares in the corporation. Under IRC 318, the LLP is deemed to own ownership interests held by its owners. Thus, the LLP is deemed to own the 1/3 of the corporation that Lawyer A owns. This means the LLP is deemed to be a shareholder in the corporation.
The ASG attribution rules are discussed in more detail in Chapter 14 of my book, Who's the Employer?.
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