Issues Surrounding Distributions from Texas Family Limited Partnerships

The starting point in the division of a marital estate is the characterization of the parties' property as separate or community. Allen v. Allen, 704 S.W.2d 600, 603 (Tex. App. – Fort Worth 1986, no writ). Property acquires its characterization at the inception of title. Henry S. Miller Co. v. Evans, 452 S.W.2d 426, 430 (Tex. 1970). Property owned by a spouse before the marriage is separate property. Tex. Const. art. XVI, § 15; Tex. Fam. Code Ann. § 3.001(1) (West 2006). Property possessed by the spouses upon the dissolution of the marriage is presumed to be community property. Tex. Fam. Code Ann. § 3.003(a) (West 2006); Estate of Hanau v. Hanau, 730 S.W.2d 663, 667 (Tex. 1987). A party claiming property as separate has the burden to overcome that presumption by clear and convincing evidence. Tex. Fam. Code Ann. § 3.003(b); Harris v. Harris, 765 S.W.2d 798, 802 (Tex. App. – Houston [14th Dist.] 1989, writ denied). "Clear and convincing" evidence means the measure or degree of proof that will produce in the mind of the trier of fact a firm belief or conviction as to the truth of the allegations sought to be established. Tex. Fam. Code Ann. § 101.007(b); In re C.H., 89 S.W.3d 17, 25 (Tex. 2002).

To overcome the presumption of community, a spouse must trace and clearly identify the property claimed as separate. Hanau, 730 S.W.2d at 667; Cockerham v. Cockerham, 527 S.W.2d 162, 167 (Tex. 1975). If separate and community property have been so commingled as to defy segregation and identification, the statutory presumption prevails. Hanau, 730 S.W.2d at 667 (citing Tarver v. Tarver, 394 S.W.2d 780 (Tex. 1965)). When separate property has not been commingled or its identity can be traced, however, the statutory presumption is dispelled. Harris, 765 S.W.2d at 802.

With these principles in mind, we turn to the characterization of a spouse's partnership interest and the distributions made from a Texas Family Limited Partnership ("FLP"). The Supreme Court has determined that the only partnership–related property a trial court can award upon dissolution of a partner's marriage is the partnership interest, not the partnership property. McKnight v. McKnight, 543 S.W.2d 863, 867–68 (Tex. 1976). A partnership "interest" is a partner's right to receive his share of the profits and losses and to receive distributions. Tex. Bus. Orgs. Code Ann. §1.002(68) (West Pamph. 2009). "Partnership property" is not property of the individual partners; a partner's "interest" does include an ownership interest in partnership property. Id. §152.101 (West Pamph. 2009); Marshall v. Marshall, 735 S.W.2d 587, 594 (Tex. App. – Dallas 1987, writ ref'd n.r.e.). Nor does a partner retain an ownership interest in his capital contribution; rather, the contribution becomes partnership property. Lifshutz v. Lifshutz, 199 S.W.3d 9, 26 (Tex. App. – San Antonio 2006, pet. denied). Thus, a partner's right to receive his share of the profits is the only partnership right subject to characterization. Marshall, 735 S.W.2d at 594.

Partnership earnings are owned by the partnership prior to distribution to the partners and cannot be characterized as either separate or community property. Cleaver v. Cleaver, 935 S.W.2d 491, 494 (Tex. App. – Tyler 1996, no writ). "[A] partnership can be an effective means of preserving the separate property character of assets contributed to the partnership and the undistributed income thereon." Lifshutz, 199 S.W.3d at 26 (citation omitted) (emphasis added). The partner's spouse has no interest in the assets of a partnership until they are actually distributed. Id. The portion of partnership income retained in the capital account is therefore partnership property, and as such, is neither the separate nor community property of either party. See Cleaver, 935 S.W.2d at 494. In fact, even the increase in the partnership interest remains partnership property and would not constitute property acquired after marriage until distributed. See Lifshutz, 199 S.W.3d at 26; Cleaver, 935 S.W.2d at 494.

The Marshall case, Marshall v. Marshall, 735 S.W.2d 587 (Tex. App. – Dallas 1987, rehearing denied), remains the leading authority that the distributions from the limited partnership are community property. In Marshall, the husband owned a separate property interest in a partnership. The partnership engaged in oil and gas exploration and production. Id. at 594. The partnership acquired all of its oil and gas leases before the marriage. Id. The partnership disbursed $542,315.72 to the husband during the marriage. Id. The husband maintained that only the $22,400.00 paid as salary was community property. Id. The court rejected the husband's argument and held that the distributions of partnership income or profits were community property. Id. at 595. So, if the partner receives her share of the profits during marriage, those profits are also community property, regardless of whether the partner's interest in the partnership is separate or community in nature. Even if the distribution was of an asset or cash, and the distribution was from the capital account, Marshall states that the "mutation of a partner's separate contribution" does not apply and the distributions will be characterized as community property because the partnership becomes the owner of the capital contribution. As such, in this case, all of the partnership distributions that a spouse received during the marriage would be considered community property.

Partnership earnings are owned by the partnership prior to distribution to the partners and cannot be characterized as either separate or community property. Cleaver v. Cleaver, 935 S.W.2d 491, 494 (Tex. App. – Tyler 1996, no writ). "[A] partnership can be an effective means of preserving the separate property character of assets contributed to the partnership and the undistributed income thereon." Lifshutz, 199 S.W.3d at 26 (citation omitted) (emphasis added). The partner's spouse has no interest in the assets of a partnership until they are actually distributed. Id. The portion of partnership income retained in the capital account is therefore partnership property, and as such, is neither the separate nor community property of either party. See Cleaver, 935 S.W.2d at 494. In fact, even the increase in the partnership interest remains partnership property and would not constitute property acquired after marriage until distributed. See Lifshutz, 199 S.W.3d at 26; Cleaver, 935 S.W.2d at 494.

The Marshall case, Marshall v. Marshall, 735 S.W.2d 587 (Tex. App. – Dallas 1987, rehearing denied), remains the leading authority that the distributions from the limited partnership are community property. In Marshall, the husband owned a separate property interest in a partnership. The partnership engaged in oil and gas exploration and production. Id. at 594. The partnership acquired all of its oil and gas leases before the marriage. Id. The partnership disbursed $542,315.72 to the husband during the marriage. Id. The husband maintained that only the $22,400.00 paid as salary was community property. Id. The court rejected the husband's argument and held that the distributions of partnership income or profits were community property. Id. at 595. So, if the partner receives her share of the profits during marriage, those profits are also community property, regardless of whether the partner's interest in the partnership is separate or community in nature. Even if the distribution was of an asset or cash, and the distribution was from the capital account, Marshall states that the "mutation of a partner's separate contribution" does not apply and the distributions will be characterized as community property because the partnership becomes the owner of the capital contribution. As such, in this case, all of the partnership distributions that a spouse received during the marriage would be considered community property.

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