Who's the Employer?

Answer: Yes. A management function type of affiliated service group consists of a business that has the principal business purpose of managing 1 other business (or entities related to that business).

The question then is whether the three nursing homes are related. The definition of related parties for purposes of IRC 414(m)(5) is in IRC 267, which has its own set of attribution rules. Unlike the attribution rules under IRC 318 (which determine HCEs) and IRC 1563 (which determine controlled groups), under IRC 267 for related parties there is attribution between siblings and half siblings.

Accordingly, Betty is deemed to own, for purposes of IRC 267, all stock held by her brother and half-brother. So Betty is deemed to own all three nursing homes 100%. Not surprisingly, those three corporations all would be related parties.

Now Nursing Home Management has, as its sole business, the management of Betty's corporation and two other corporations that are each related to Betty's corporation. These four entities thus make a single management function group under IRC 414(m)(5). All employees of any of the four corporations are deemed to be employed by a single employer for a host of Internal Revenue Code purposes.

The related party rules are discussed in more detail in Chapter 17 of my book, Who's the Employer?. There also is a new appendix D in the second edition of my book, which compares the three sets of attribution rules and makes it much simpler to understand the differences between these systems.

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