Answer: Good question. The point is frequently misunderstood, because there were two sets of proposed regulations dealing with 414(m). The second set was withdrawn, but the first set wasn't.
The first set of proposed regulations was issued February 28, 1983. It's appropriate that we talk about them because they just celebrated their 18th birthday and are now old enough to vote, even though they are still only proposed.
Those regulations set forth the ground rules for dealing with traditional (A-Org and B-Org type) affiliated service groups. They give us the professional corporation exemption (it probably should be called the nonprofessional corporation exemption, because it says corporations that are not professional service corporations cannot be FSO's in applying the A-Org test). They also define when a substantial part of a B-Org's business is providing employee services to an FSO or its A-Orgs.
Although parts of those proposed regulations are now obsolete because of a subsequent change in the Code, they have languished, unchanged, for 18 years. They have not been withdrawn nor is there any likelihood of that happening. In addition, the preamble (pre-ramble? ) to the proposed regulations says: "Pending the adoption of final regulations, taxpayers may rely on the rules contained in this notice of proposed rulemaking and the Internal Revenue Service will issue determination, opinion, and ruling letters based on these rules. If any provisions of the final regulations are less favorable to taxpayers than these proposed rules, those provisions only will be effective for periods after adoption of the final regulations." Those, although the proposed regulations are not final, we can use them.
On August 26, 1987, the Treasury proposed regulations dealing with 414(m)(5), also known as management function groups. They also dealt with 414(n) (leased employees) and had a variety of proposals under 414(o). One of the first acts of the Clinton Treasury was to withdraw those proposed regulations, except for a portion dealing with leased owners, which is still proposed. Hence at present there are no regulations dealing directly with 414(m)(5). We were never promised reliance on the 1987 proposed regulations, and they have been off the table for nearly 8 years. Given that, it is absolutely amazing to see practitioners and well respected publications referring to them and in some cases trying to follow them!
What is left of the leased owner rules is discussed in Chapter 15 of my book, Who's the Employer?.