Question 330: A owns 100% of A, Inc., a dental practice which sponsors a 401(k) plan. B similarly owns 100% of B, Inc., another dental practice with its own plan. A and B want to buy 50/50 D, Inc., the practice of a deceased dentist in another city. The three practices would be totally separate, with no sharing of patients or employees (other than the dentists, A and B). Of course, there is the possibility of an occasional cross-referral or a patient who moves from one practice to another. Is this an ASG because D might be "regularly associated with" the other two businesses?
No, I don't think the movement of a patient or two is enough to make the businesses regularly associated.
One of the requirements for a business to be an A-Org to a first service organization is that the A-Org "Regularly performs services for the First Service Organization, or is regularly associated with the First Service Organization in performing services for third persons." In addition, both the FSO and the A-Org must be service organizations and the A-Org must own (or be deemed to own) some interest in the FSO.The proposed regulations add that:
The determination of whether a service organization regularly performs services for the First Service Organization or is regularly associated with the First Service Organization in performing services for third persons shall be made on the basis of the facts and circumstances. One factor that is relevant in making this determination is the amount of the earned income that the organization derives from performing services for the First Service Organization, or from performing services for third persons in association with the First Service Organization." [Prop. Treas. Reg. §1.414(m)-1(b)(2).]
The statement that revenue is relevant in establishing whether two businesses are "regularly associated" suggests that an occasional referral or mutual client is insufficient to make two entities regularly associated.
The proposed regulations provide two examples: (1) a corporate partner of a law firm is regularly associated with the firm; and (2) a separately incorporated office that is a partner in a law firm is regularly associate with the firm. Neither of these examples suggest the situation described in your question rises to the level of regularly associated with. My book, Who's the Employer, provides the following examples:
Example 13.6.3 Dr Ross owns 20% of the PQRST Clinic (a partnership) and 5% of Outpatient Surgery Center (an LLC taxed as a partnership). The Clinic regularly performs surgeries at the Center. Such surgeries account for at least 30% of Clinic's revenue. The Center and the Clinic bill patients separately for services rendered. The Clinic is deemed to own Dr. Ross's interest in the Center. Thus, the Clinic is deemed to be a partner in the Center. It appears, based on the facts given, that the Clinic and the Center are regularly associated in performing services for third parties. Both are service organizations. The Center is an FSO and the Clinic is an A-Org and the two entities are an affiliated service group. (Incidentally, since the Center is deemed to own the doctor's interest in the Clinic, you could regard the Clinic as an FSO and the Center as an A-Org and reach the same result.)
Example 13.6.4 Perry has a thriving criminal defense practice as a solo proprietor. The law firm of Billem & Gougem lists Perry as "of counsel." The firm does not have any criminal lawyers in the firm and refers all their criminal work to him. (Please, let's have no jokes about "criminal lawyer" being redundant.) He will advise the firm on criminal matters relating to their civil cases, for which the firm will bill their clients and pay Perry. Perry derives substantial revenues through his relationship with the firm. Perry does not own any part of the firm. Both Perry and the firm are service organizations. Perry regularly performs services for the firm and is regularly associated with it in performing services for third parties. However, Perry does not own any portion of the firm, nor does the firm own any portion of Perry's business. Hence, the two businesses are not an ASG.
Example 13.6.5 Assume the same facts as Example 13.6.4, except that Perry's father is a 2% partner in the law firm. Perry is deemed to own his father's interest in the firm. Hence, Perry is deemed to be a partner in the firm. The firm is an FSO and Perry's sole proprietorship is an A-Org. The two are an ASG.