Affiliation and Control of Related Businesses

The question of organizational affiliation is essentially a question of legal control: Do one or more employees of the first organization, in the course of their employment, direct the management and policies of the second organization? If "Yes," then the two organizations are legally affiliated. They are not legally affiliated if the answer is "No." (Note: affiliated organizations are not the same as "related parties" for accounting purposes.)

If the answer is uncertain, the following criteria may be helpful in arriving at an answer. (However, the criteria do not supersede the primary question.) To help determine the extent to which two organizations are affiliated, perform the following test. (Note: what follows is not a legally recognized test, but a rule of thumb for quick evaluation).

Evaluate Directors/trustees of the second organization:

If 20% are employees of the first organization, score 1 point

If 50% are employees of the first organization, score 2 points

If 100% are employees of the first organization, score 3 points

Evaluate Officers/Policy Managers of the second organization:

If 20% are employees of the first organization, score 1 point

If 50% are employees of the first organization, score 2 points

If 100% are employees of the first organization, score 3 points

Evaluate Employees of, and laborers loaned to, the second organization:

If 20% are employees of the first organization, score 1 point

If 50% are employees of the first organization, score 2 points

If 100% are employees of the first organization, score 3 points

Add the points scored for directors/trustees, officers/managers and employees/laborers. The highest possible score is 9. The affiliation of each organization may be graded as follows:

0 = No affiliation
1 = No affiliation
2 = No affiliation
3 = Of Interest
4 = Possible affiliate
5 = Probable affiliate
6 = Definite affiliate
7 = Definite affiliate
8 = Possible alter ego
9 = Probable alter ego

An organization which receives a score of 4 or 5, but which is controlled by persons who are not employees of the first organization will not be regarded as an affiliate, but "Of Interest." On the other hand, an organization with a score of 4 or 5 in which an employee of the first organization is the chief officer and a director, and a majority of the labor force is composed of employees of the first organization, will be regarded as a definite affiliate. An "alter ego" relationship suggests the organizations are so commingled in practice that any separate tax status or advantages they may enjoy are in jeopardy, and each is at risk of being held liable for the debts of the other.

The question of whether two organizations are "related parties" for accounting purposes (and therefore may need to file consolidated tax returns) will partly turn on the question of legal control, and partly depend on the extent of financial transactions between the organizations. A common consideration is the extent to which one organization depends upon another organization for its sources of revenue and support.

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