Question 108: Suppose you have a doctor who owns 100% of a professional corporation and 50% of a partnership. He as an individual provides management and medical services to the partnership. There is no cash flowing between the partnership and the professional corporation. The two entities are totally separate in every way-- clients, employees, business names, etc. I know they are not a traditional affiliated service group, but could they be a management function group under IRC 414(m)(5)?
Answer: This question is really a continuation of Q&A 107, and requires somewhat the same response.

The key player in a management function group is the mangement organization, which is defined in section 414(m)(5) as "an organization the principal business of which is performing, on a regular and continuing basis, management functions for 1 organization (or for 1 organization and other organizations related to such 1 organization)." To be a management organization, you must have an organization, just as you must have an organization in order to have a service organization. The doctor's corporation isn't managing the partnership. The doctor is doing the managing, in his capacity as a partner. That is not a separate organization, and so a management function group does not exist, as I see it, under IRC 414(m).

But what if the doctor is a separate "organization"? He manages two businesses, the professional corporation and a partnership. Would that make a management function group out of all three? No.
Providing management functions would need to be the doctor's principal business purpose. Generally, the management functions doctors provide are incidental to their main function: practicing medicine. Unless providing management functions is his principal business purpose, the doctor won't be a management organization. Under proposed 414(m)(5) regulations, the performance of any management service would make everything treated as management. However, those proposals were never in effect and were withdrawn 8 years ago. The statute, quoted above, is not nearly as expansive as those regulations.

The partnership and the corporation are not related parties under the affiliated service group rules. They would be if the doctor owned 51% of the partnership, but he doesn't. So only one of the two could be his principal business.
Therefore, any way you look at it, it just doesn't fly.

These management function group rules are discussed in more detail in Chapter 13 of my book, Who's the Employer?. The related party rules are discussed in Chapter 17.

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