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Is 267 or 318 Attribution Used for Affiliated Service Groups?
(Posted March 24, 2002)
Question 146: The proposed 414(m) regulations say that you use the attribution rules of Code Section 267(c) in determining whether an ASG exists. But Code Section 414(m) refers to the attribution rules of Code Section 318(a). Which is right? Why is there a difference?
Answer: The first question is easy. Given a choice between the Code and the Regulations, you are almost always right in choosing the Code, and you are certainly right to do so here. The ASG rules do use the attribution system of Section 318.
Then why do the proposed regs refer to 267(c), a very different attribution system? Take a close look at the date of the proposed regulations. They celebrated their 19th birthday last month. They're old enough to vote -- and then some.
The ASG rules were adopted in late 1980. When they were adopted, they referred to the 267(c) system. So, when the Treasury wrote the proposed regulations, they were absolutely correct to refer to 267(c). However, the Code has undergone numerous changes in the last 19 years, while the proposed regs have remained in their pristine, unissued, unchanged, and increasingly unreliable state. After the proposed regs were issued, Code Section 414(m) was changed so that traditional ASGs are determined by reference to the 318 attribution rules. (Interestingly, management function groups are still governed by the 267 rules.)
There are several such issues on which the proposed regs are now quite obsolete. There are many other issues on which they are still accurate and on which taxpayers can rely. The real problem is, how do you differentiate between the two?
One solution, of course, is to read Chapter 13 of my book, Who's the Employer?, where I discuss things in detail and explain why the regulations are wrong.
However, if you'd like to go to the source, I've posted a copy of the regulations with my annotations pointing out where they are no longer reliable. I've also posted a copy of Code Section 414(m) itself, pointing out where it has changed over the last 21+ years. By referring to that, you can see at a glance where the regulations are still reliable and where they are obsolete.
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