Affiliated Service Group

10 Docs own MD Practice, Inc.  Those same 10 Docs own "Surgery Center Holdings, Inc." which in turn owners 60% of "The Surgery Center, Inc.".  The other 40% is owned by an unrelated hospital. Each Doc owns 10% of MD Practice and Surgery Center Holdings.

Here is my question.  MD Practice Inc. would be the A-Org and The Surgery Center, Inc. would be the FSO.  Does the A-Org Satisfy the requirement that it have an ownership interest?  I presumed the answer would be yes and set out to find the justification but came up empty handed.

In order for a corporation itself to be treated as owning somenthing that is owned by a shareholder, that shareholder has to own at least 50% of the corporation.  So it seems to me MD Practice, Inc. is not treated as owning any part of Surgery Center Holdings, Inc. and tehrefore does not meet the requisite ownership interest.

Make no mistake, my question is "What am I missing?"  This has to be an ASG.

Are these S-corps or C-corps?

S or C corps?  That has not ever come up before.  They are C-Corps though.

I asked because the 50% threshold does not apply to S-corps.

Since they are C-corps, you might not actually have an ASG, even though it seems like it should be. Here is a section from Who's the Employer, example 14.14.2 seems to be on point:

Quote

Q 14:14 How does Code §318 attribute ownership interests held by C Corporation shareholders to the corporation? 

A C Corporation is deemed to own any interests its 50% shareholders hold or are deemed to hold. For this purpose, a 50% shareholder is anyone who owns, or is deemed to own at least 50% in value of the C Corporation’s stock. The 50% threshold for C Corporations can often prevent formation of an ASG. (Q 14:16 explains how this rule is modified to determine HCEs and key employees.)

Example 14.14.1 Bobby and Jack are brothers. Each is a lawyer and has his own law corporation. Bobby’s corporation regularly provides services to Jack’s corporation. If they have no living parents, there is no ASG. But suppose their mother, Rose, is living. Rose is deemed to own all of Jack’s stock. She is also deemed to own all of Bobby’s stock. Therefore, Bobby’s corporation is deemed to own all of the stock in Jack’s corporation, and the two corporations are an ASG. Bobby’s stock has been attributed once (Bobby to Rose), and Jack’s twice (Jack to Rose to Bobby’s corporation).

Example 14.14.2 Three doctors equally own ABC Corporation (a C Corporation). Each doctor also owns 5% of Monolith Medical, a C Corporation for which ABC regularly performs services. Since none of the three doctors owns at least 50% of either entity, neither corporation can be deemed to own its shareholders’ stock and therefore neither can be an A-Org.

This 50% threshold is an important planning tool. The author has prevented the formation of several ASGs simply by counseling the parties to establish C Corporations rather than partnerships.

Mind. Blown.