March 25, 2004 LATEST DEVELOPMENT IN FAMILY LIMITED PARTNERSHIPS   Please note: Articles on taxation matters are, by their very nature, general in the comments they make. No action should be taken, based on these articles, without the benefit of specific advice. The Family Limited Partnership (FLP) has become extremely popular because it gives people the opportunity of giving away their property at a low valuation and retaining control over it. However, there are tax risks. The IRS has attacked FLP's over the years for many different reasons. Generally, in most cases, the IRS has lost. Last year the IRS successfully attacked an FLP. The name of the case is Estate of Strangi v. Commissioner. The Tax Court held that the existence of the FLP should be disregarded and all of the partnership's assets were to be included in the decedent's estate. Most commentators have concluded that the IRS won because the taxpayer's facts were bad. The taxpayer contributed approximately $10 million dollars (98% of his wealth) to his FLP when he was terminally ill and continued using these assets as his own. He even contributed his personal residence to the FLP and continued to live in it rent-free until his death, two months after the formation of the FLP. In order to prevent your FLP from being disregarded by the IRS, try to satisfy as many of the following factors as possible:   Operate it like a separate business - it should have its own bank account.   Establish the FLP early - you should live at least a few years after its formation.   Distribute income in regular intervals, for example quarterly.   Distribute income pro rata among the partners based on their percentages of ownership.   Avoid contributing personal assets, such as the residence you live in, to the FLP.   Avoid being the only contributor to the FLP. The other partners should also contribute to the FLP.   Avoid exercising sole control of the FLP. Consider putting a family friend, your accountant or your attorney in control.   The taxpayer in the Strangi case recently has appealed the case back to the Fifth Circuit Court of Appeals. For more detailed information, please contact: Shelly Reitman Shepard Schwartz & Harris LLP Chicago, Illinois, U.S.A. tel: +1(312) 726 8353 e-mail: sreitman@ssh-cpa.com