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.