Not an ASG, but what is it?

Company A is owned 50/50 by John and Jim, who are unrelated to each other.  It is a manufacturing firm and John and Jim are also the primary salesmen for the company, they also generate sales thru a couple of independent manufacturers reps who are paid strictly on commission.  Company A employs about 50 people.

Suppose John and Jim decide to set up a separate company B to be another manufacturers rep.  Company B will be owned 100% by John, so it is not a CG with company B.  The only two employees of Company B are John and Jim.  Company A pays  Company B, which then pays John and Jim and generous commission for the sales they generate.  

Company A and B are both incorporated.  John and Jim manage company A and continue to draw a salary from A for their employment there. A, as a manufacturer, is clearly not a service organization.  Company B is in sales, not typically considered a service org and clearly not a professional corp.   So no A-Org ASG is possible.  No B-Org ASG without a service org.  Principal business of B is sales, not management of A, so no management services ASG.

John and Jim set up a cash balance plan in company B that covers the two of them.

Seems too easy, but absent some required aggregation of A and B, it seems to work.  What am I missing?

I believe that Prop Reg § 1.414(o)-1(b), regarding "leased owners," would, if someday finalized, treat B, with respect to John and Jim, as if it were a member of an affiliated service group. Prop Reg § 1.414(o)-1(b) was proposed in 1987, if I remember correctly, pursuant to the broad grant of authority in IRC sec. 414(o) and, as proposed, would be retroactively effective to 1984 if finalized. It was the only part of the 414(m) and (o) proposed regs that was not withdrawn in 1993, perhaps because the IRS saw the same "too easy" potential that you seem to sense, shERPA.

Perhaps without the reg the IRS could also attack on the basis of substance over form or business purpose. Might depend on the business purpose of organizing the work this way, as well as what protections Jim may have, if any, regarding the arrangement that places him under John's control with respect to Corp B. It's a gray area.

Interesting Luke, thanks.  I'd kind of forgotten about those proposed regs, I'll go have a look.  WRT business purpose, I imagine it would help if independent manufacturers reps were customary in the industry. 

Yes, that would help, Sh-ERPA.