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Who's the Employer?

Question 112: M company, as its sole business, provides management services to eight different entities, each of which has somewhat different ownership, but all of which are owned in significant measure by family members. The ownership arrangements are extremely complex; the chart showing how the entities are related takes 20 pages! Is this an management function style affiliated service group under IRC 414(m)(5)? M wants to have a plan but does not want to consider employees in the other businesses. Answer: Maybe so, maybe no. It's impossible to tell without going into the nitty gritty of ownership. A management function group exists when you have a business which, as its principle business purpose, provides management functions to either: One other business, or One other business and entities "related" to that one other business. This of course, requires us to examine the related party rules, which are summarized in in Chapter 17 of my book, Who's the Employer?. Generally speaking, two C corporations are related if there is "effective control" between them. Any other combination of corporations or partnerships are related if the same people own, or are deemed to own, more than 50% of each. The related party rules contain the most bizarre set of attribution rules in the Code. For example, there is attribution between siblings, even though there is no attribution between siblings under the normal affiliated service group or controlled group rules. In addition, a partner is deemed to own his partner's stock in a different corporation. My suggestion is that you have an attorney go through the ownership arrangements, with that 20 page chart in one hand and the Code (or my book) in the other (probably using his toes to input the information into a computer), in order to get to the bottom of this. Until you know what parties are related, you cannot know whether you have a management function group issue. Without knowing whether you have a management function group, you cannot know whether M's plan will satisfy Internal Revenue Code section 410(b).

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