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Question 216: What is a "management function" for purposes of Code Section 414(m)(5)? Specifically, if a leasing company derives 50% of its revenues from providing back room service staff (billing and accounting and other non-medical staff) to a medical practice, are these considered "management functions"? There is absolutely no common ownership between any of the entities.
Answer: Ah, life's great questions. Where did I come from? Why am I here? What happens after this life? What is a management function?
For the first three questions, you search your soul, or you study the Bible, or you read the words of philosophers and poets. And still the questions come.
For some reason, for the fourth question we go to the IRS and expect an answer. But answer came there none. The IRS once tried to define a management function. That definition went beyond the mark, and relied on authority from IRC 414(o) to validate it. The IRS withdrew the definition, and has not issued any guidance on the subject.
So, what is a management function? Look at the English meaning of the words. It's what a manager does. He or she hires, fires, supervises, sets policies, determines directions, gets stock options, and cooks the books (in some companies, at least).
Is performing the kind of back office ministerial functions that you describe considered "managing"? Not as far as I can see.
Incidentally, in a close case you can get a determination letter from the IRS on whether an affiliated service group (including a management function group) exists. You request it on a Form 5300. Apparently, the IRS is like the Supreme Court justice, who wrote that he didn't know what pornography was, but he knew it when he saw it (and as a member of the high court in the 60s and 70s, he saw a lot of it - "What did you do at work today, dear?" "Oh, just watched some more blue movies with 8 other old guys.") The IRS can't tell us what a management function is, but I guess they know it when they see it.
For more on management function groups, read Chapter 13 of my book, Who's the Employer. For more on life's other great questions, start with John 3:16 and go from there.
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