Purpose: To establish the fair market value of non-controlling interests in Family Limited Partnerships (FLPs) and Limited Liability Corporations (LLCs) that are gifted or sold to family members or entities created on their behalf.

An FLP is a limited partnership among family members that is used for various business and estate planning purposes. The FLP is a popular tax-planning vehicle for several reasons:

• FLPs provide for centralized management and creditor protection for family assets.
• FLPs can hold diverse assets (operating businesses, real estate, oil and gas investments, marketable securities).
• The senior generation has the ability to transfer partnership interests to family members without losing management control over the entity and its assets.
• The senior generation controls the reinvestment or distribution of cash flows generated by the partnership.
• Transfers of limited partnership interests can be made at substantial discounts from the corresponding pro rata of the value of the partnership.
• Restrictions may be imposed upon the transfer of partnership interests.

LLCs have similar characteristics/benefits, but are owned by “members” rather than partners. LLCs are managed by either 1) the members themselves, 2) by one or more managers chosen by the members, or 3) by the members in conjunction with managers.

FLPs and LLCs have increasingly been used following the 1993 IRS decision to issue Rev. Rul. 93-12, in which the Service announced that it would no longer follow its prior position of aggregating family ownership interests for valuation purposes. This provided taxpayers and their advisors with the assurance that minority and lack of marketability discounts would be allowable when properly documented.