Subscribe Now!
Free Daily News, Jobs, Webcasts, Discussions
Post and Distribute
Your Jobs
ARPA Webcasts

Featured Jobs

Plan Document Specialist

Jocelyn Pension Consulting
(Telecommute / Boulder CO / San Rafael CA)

Jocelyn Pension Consulting logo

DB Retirement Plan Administrator

The Nolan Company
(Telecommute / Overland Park KS)

The Nolan Company logo

Retirement Plan Consultant / Relationship Manager

Associated Pension Consultants
(Chico CA / Sacramento CA)

Associated Pension Consultants logo

Retirement Plan Administrator

Bates & Company
(Telecommute / Winter Park FL)

Bates & Company logo

Retirement Plan Administrator

RSW & Associates
(CT / NJ / NY)

RSW & Associates logo

Director of 401(k) Implementation, Core

Human Interest
(Telecommute / Mill Valley CA)

Human Interest logo

Retirement Plan Administrator (Account Manager)

Kushner & Company
(Telecommute / Portage MI)

Kushner & Company logo

Product Support Consultant part of Wolters Kluwer Legal & Regulatory
(Telecommute) part of Wolters Kluwer Legal & Regulatory logo

DC Retirement Plan Administrator

The Nolan Company
(Telecommute / Overland Park KS)

The Nolan Company logo

Retirement Plan Administrator

My Benefits, LLC
(Telecommute / Daphne AL / Atlantic Beach FL)

My Benefits, LLC logo

401(k) Implementation Manager

Human Interest
(Telecommute / San Francisco CA)

Human Interest logo

Employee Benefits/Health and Welfare Attorney

Miller Johnson
(Telecommute / Grand Rapids MI / Kalamazoo MI / Detroit MI)

Miller Johnson logo

Director of Finance

NYCDC of Carpenters Benefit Funds
(New York NY)

401(k) Consultant

TPS Group
(Telecommute / North Haven CT)

TPS Group logo

DC or DB Administrator

Farmer & Betts, Inc.
(Telecommute / Tacoma WA / Tualatin OR / Littleton CO)

Farmer & Betts, Inc. logo

DB/DC Administrator

Primark Benefits
(Telecommute / Burlingame CA)

Primark Benefits logo

Free Newsletters

“BenefitsLink continues to be the most valuable resource we have at the firm.”

-- An attorney subscriber

Mobile App image LinkedIn icon
Twitter icon
Facebook icon

BenefitsLink > Q&A Columns >

Who's the Employer?

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

Disregarded FSO

(Posted December 1, 2004)

Question 272: We have a situation that appears to be a ASG. My question concerns the FSO, which is an LLC (a title company) wholly owned by another LLC (a home builder) in which capital is a material income-producing factor. For tax purposes, the FSO is treated as a "disregarded entity"; its operations are included in the tax return of the parent.

Because the FSO is treated like a division of the parent for tax purposes, can we so treat it in determining ASG status? If this service organization actually were a division of a manufacturing or other unincorporated company where capital is a major income-producing factor, should we look at that division on its own to determine whether we have an ASG (or can we assume we don't since it is just a small part of the parent's operations)?

Answer: The second paragraph of your question makes your point eloquently. I concur. Let me elaborate with references to my book, Who's the Employer?. (Subscribers can click to view online the text of references to sections in the book.)

LLCs and similar entities are treated for tax purposes in one of 3 ways. The LLC can choose to be taxed as a corporation. If it does not, then it is taxed as a partnership if it has more than one member/owner. If it does not elect to be taxed as a corporation and it has just one owner, then it is disregarded. (See WTE 1:07.) If the sole owner is an individual, then the LLC is a Schedule C sole proprietorship. If the sole owner is a business, then the LLC is taxed as a division of the business.

This status applies for all purposes, including qualified plans. For an in-depth discussion of this issue, see Q&A 154.

With that background, let's turn to the affiliated service group rules and the definition of a First Service Organization (FSO). An FSO is a service organization. (See WTE 13:07.) IRC 414(m)(3) defines a service organization as an organization that primarily performs services. Isn't it wonderful to have such helpful definitions? Fortunately, the proposed regulations are more detailed. (See WTE 13:05.) Those proposed regulations state: "The term 'organization' includes a sole proprietorship, partnership, corporation, or any other type of entity, regardless of its ownership format."

So an organization must be an "entity." But, going back to the facts at hand, the LLC has the tax status of being "disregarded as an entity separate from its owner." Reg. 301.7701-3(b)(1)(ii). If it isn't an entity, it isn't an organization, a service organization, or an FSO.

The potential FSO in this case is the home builder, which is not a service organization. Accordingly it cannot be an FSO. In a traditional ASG, the only possible status for an entity that is not a service organization is as a B-Org. See WTE 13:30.)

As you point out, if this logic were untrue, then all the builder would need to do to avoid having the LLC treated as an FSO is to dissolve the LLC and take the assets into its own business. That event would not change any tax attributes. So it would be senseless to treat the disregarded LLC as a separate entity for ASG purposes but disregard it for all other purposes.

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.

Copyright 1999-2017 S. Derrin Watson
Related links:

(restricted access)

(restricted access)

© 2021, Inc.