The origin of Family Limited Partnerships (FLPs)
The original idea of Family Partnerships was essential to divide income among family members. With the recent reduction in marginal tax rates, the emphasis has shifted for exploiting the Family Partnership to reduce estate and gift tax.
One of the earliest, and most cited, Supreme Court cases is Lucas vs. Earl, 281 U.S. 111 (1930). The question presented to the court was whether Mr. Earl could effectively assign half of his compensation from practicing law between 1921 and 1922 by contract to his wife. The validity of the contract was not questioned. However, the Court held that the “fruits cannot be attributed to a different tree from that on which they grew.” This came to be known as the “Fruit of the Tree Doctrine” and has since found application in many areas.
Subsequent taxpayers attempted to use the partnership provisions in place of a bare contract to attempt to divert income to family members and others. If successful, this stratagem would not only reduce income and employment taxes, it would completely circumvent transfer taxes. With the decline in income tax rates, the principal focus in this area has become transfer tax avoidance.
Family Limited Partnerships