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Who's the Employer?

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

Regularly Providing Services as an A-Organization

(Posted September 10, 2002)

Question 231: Physician M owns 100% of a professional association ("P.A."). P.A. in turns owns 50% of a medical clinic that employs physicians and provides medical services to the public. M practices medicine through his professional association at a different location. P.A. does the billing for the medical clinic, for which P.A. recieves $500 per month. The medical clinic in turn provides administrative services for P.A., for which P.A. pays the medical clinic $1,500 a month. On occasion, M visits the medical clinic but does not provide medical services to the clinic. Under the A organization rules, what does it mean to "regularly perform services" or to be "regularly associated with the FSO" in performing services? Is the exchange of billing and administrative services enough to establish an A Organization relationship?

Answer: Goodness, I wish we had an answer to your question. But, from the proposed regulations, this is all the answer we have:

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.

So, that tells us that if the income is trivial, then it is likely not "regular," and vice versa. Nothing in the Code or the proposed regulations requires that the services in question be the professional services for which the organization was established.

Another point to consider: this might be a B-Org relationship. Each organization seems to be providing services historically performed by employees. If the billings for those services come to more than 10% of the organization's total billings, then you have a B-Org style of affiliated service group. Unless it is less than 5%, you might have a B-Org. I have long felt that if it is insignificant (less than 5%), you can make a reasonable argument that not only is it insufficient to create a B-Org, but it shouldn't be sufficient to create an A-Org.

With no hard and fast answers, this is a matter that should be reviewed by legal counsel or should be submitted to the IRS for a determination letter. Based on the facts you're presented, a determination letter request might well be warranted.

I discuss affiliated service groups in detail in Chapter 13 of my book, Who's the Employer. (The presale on the third edition of the book expires September 30.)

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.