Management Group 414(m)(5)

Question regarding the management group analysis under 414(m)(5).  I have four entities which none qualify as parent/sub or brother/sister controlled group members amongst each other.  One of the entities definitely provides management functions for the other three, but none of the three recipient organizations provide more than 50% of the gross receipts to the potential management organization.  

I know that organizations related to the recipient organization are included as part of the entire group, but I believe that analysis is scrutinized after the determination of whether a management group even exists.  In other words, if I am incorrect and  the three recipient entities above were combined prior to the management group analysis is performed, then the combined gross receipts of all of these companies would be above 50% and thus constitute a principal business.  I don't think that is the case, but I wanted to hear from others.

I wouldn't venture this far into the ASG waters without sending the client to legal counsel.

I read it as any controlled group or affiliated service group relationships are combined before applying the principal business test.  So if A, B, or C recipient organizations would combine in any fashion, that combined entity would then be subject to the 50% test.  And keep in mind, the 50% test is on a two-year average, not the average of two years.  So you need to keep a rolling record year after year to ensure continued clearance. 

I agree that you would look for any affiliation among the three recipient organizations first. Note that this determination is based on a separate set of affiliation/attribution rules (under Sections 267 and 707(b)) not used elsewhere in the controlled group/ASG rules. If any recipient organizations are affiliated, you would look at the combined management services performed for all the affiliated organizations. If, as the original post notes, there is no affiliation among the three recipient organizations, and the services to each are split roughly evenly, there should be no problem. 

Also, the two-year 50% test Nate mentions was part of the proposed regulations, which I don't believe ever offered reliance and were withdrawn entirely in 1993. It's probably still a good rule of thumb, but I don't think you're necessarily bound by the two-year 50% average. 

That said, in the end, Bill Presson's advice is the best you'll get. 

You all bring up valid points.  The interesting side note is that when determining related persons under section 144(a)(3), the controlled group rules substitute "more than 50%" for "at least 80%"  described in section 1563(a).  This would cause more organizations to be included with the recipient organization when combining the gross receipts.

In any case, just wondering if I was missing any old regs or case law that spoke to this process.

CNB Consulting, your point regarding 144(a)(3) is a good one. I would also note that the rolling 2-year 50% test mentioned above in a few comments was in regs that were proposed 35 years ago and withdrawn 29 years ago. The statute just says "principal business," so that (whatever it means) is the law, although it's possible the withdrawn proposed regs would be persuasive with IRS. Also, what is still only proposed (from 35 years ago), but not withdrawn, and with a stated retroactive effective date, is the "leased owner" rule in proposed 1.414(o)-1. If the individual who works for the potential management organization is, directly or indirectly, a five-percent owner of any of the recipients, then you would need to at least consider the leased owner issue. However, since leased owner would be under regs authorized under 414(o), but is not itself spelled out in 414(o), the rule is not in effect, although again in theory the regs could be adopted with retroactive effect. The statutory 414(m)(5) rule (which has no regs, even proposed) is in effect without them.

CNB Consulting: Please note that the American Jobs Creation Act of 2004, which amended Code Section 1563(a)(2) in thie way you describe also added a paragraph (5) to Section 1563(f). The change essentially means that for purposes of any provision of law (other than the part relating to consolidated returns), including for qualified plan purposes, the two-part test (i.e., at least 80% and more than 50%) for purposes of determining a brother-sister controlled group is retained.

3 hours ago, rocknrolls2 said:

CNB Consulting: Please note that the American Jobs Creation Act of 2004, which amended Code Section 1563(a)(2) in thie way you describe also added a paragraph (5) to Section 1563(f). The change essentially means that for purposes of any provision of law (other than the part relating to consolidated returns), including for qualified plan purposes, the two-part test (i.e., at least 80% and more than 50%) for purposes of determining a brother-sister controlled group is retained.

rocknrolls2, 1563(f)(5) takes you back to the old 80/50 test for brother sister controlled groups under 414(b) and (c), but what CNB Consulting was pointing out is that 414(m)(5)(B) says that for "related person" under 414(m) you use 144(a)(3), which is at just 50% for both parent-sub and brother-sister. The "related to" concept in 414(m)(5) is not just the straight-up 414(b) and (c)/1563(f)(5) "controlled group" rule.

The biggest issue I have with the ASG "rules" (as opposed to the CG regs or the very obvious 2 practices owning a 3rd one ASG) is that they are almost always snapshots and subject to very subtle shifts that can change quickly OR slowly over time. So even if one gets a legal opinion that today, the arrangement is an ASG, that could easily change in the future without anyone doing very much.

Too much liability for me to take on.

15 hours ago, Bill Presson said:

The biggest issue I have with the ASG "rules" (as opposed to the CG regs or the very obvious 2 practices owning a 3rd one ASG) is that they are almost always snapshots and subject to very subtle shifts that can change quickly OR slowly over time. So even if one gets a legal opinion that today, the arrangement is an ASG, that could easily change in the future without anyone doing very much.

Too much liability for me to take on.

Good point, Bill. Whenever I have written a memorandum or letter to a client reaching a conclusion about CG or ASG status, I include a paragraph stating that it is based on a "snapshot" as you describe and that any change in ownership percentages, family relationships, or business relationships, even if seemingly small, could change the outcome.