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Who's the Employer?

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

Look Both Ways When Crossing Railroad Tracks or When Analyzing Affiliated Service Groups

(Posted January 3, 2001)

Question 72: C is an accounting corporation; P is a partnership that does recruiting. Capital is not a material income producing factor for P. Both businesses are regularly associated in providing services to third parties. C owns 50% of P. Neither P nor the other partner in P owns any interest in C.

It seems clear to me that C is a First Service Organization ("FSO") and that P is a possible "A-Org" within the meaning of Code section 414(m). Does P meet the A-Org requirement that "it must own or be deemed to own some interest in the FSO?"

Answer: No because, P does not own an interest in C. It's the other way around. None of the attribution rules would make P an owner in C (it would be deemed to own what C owned, but not deemed to own C itself).

However, that is not the end of the analysis. One of the most important habits to make in analyzing affiliated service groups is to look at every possible combination. You've established that P isn't an A-Org relative to C, but let's reverse it. Let's see if C is an A-Org relative to P.

Can P be an FSO? Sure it can. P isn't a corporation, so the professional service corporation exemption doesn't apply. The only other statutory requirement in the FSO definition is that it must be a service organization, and P is.

Is C an A-Org? Yep. It is a service organization. It is regularly associated with P in providing services to third parties. It is an owner of P. All the requirements are met.

Thus, they are an affiliated service group, but only when you line up the parties the right way.

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.