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INFORMATION ON FIDEICOMISO tax in usa
Mexican Land Trusts used to avoid ownership restrictions are
by dean on Thu Jun 13, 2013 3:34 pm
06/13/2013 - Volume 59, No. 24
Mexican Land Trusts used to avoid ownership restrictions aren't trusts for tax purposes
Federal Taxes Weekly Alert,
Rev Rul 2013-14, 2013-26 IRB
In a Revenue Ruling, IRS has determined that described "Mexican Land Trust" arrangements (MLTs) with Mexican banks, which allow non-Mexican persons to hold residential real properties in certain areas of Mexico that they are legally prohibited from holding directly, don't qualify as trusts under Reg. §
301.7701-4(a). IRS found that the banks aren't acting in a true trustee capacity where their only function is to hold property. However, IRS noted that if the banks hold title to additional assets or have duties beyond merely holding legal title, then the tax classification of the MLT is determined under the regs.
Background. Under Reg. § 301.7701-1(a)(1), whether an organization is an entity separate from its owners for federal tax purposes is a matter of federal tax law and does not depend on whether the organization is recognized as an entity under local law. Reg. § 301.7701-2(a) defines a "business entity" as any entity recognized for federal tax purposes (including an entity with a single owner that may be disregarded as an entity separate from its owner under Reg. § 301.7701-3) that is not properly classified as a trust under Reg. § 301.7701-4 (see below) or otherwise subject to special treatment under the Code.
The term "trust" refers to an arrangement created by a will or by an inter vivos declaration where trustees take title to property for the purpose of protecting or conserving it for beneficiaries. Although the beneficiaries of a trust usually do no more than accept its benefits, the beneficiaries may be the persons who create it, and it will be recognized as a trust if it was created for the purpose of protecting and conserving the trust property for beneficiaries who stand in the same relation to the trust as they would if the trust had been created by others for them. An arrangement is generally treated as a trust if its purpose is to vest in trustees the responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility. However, if a trustee's only
responsibility is to hold and transfer property at the direction of a taxpayer, then the trustee is merely an agent and the taxpayer is treated as directly owning the property for tax purposes. (Rev Rul 92-105,
1992-2 CB 204)
Facts. The Mexican Federal Constitution prohibits non-Mexican persons from directly holding title to residential real property in areas of Mexico located within 100 kilometers of its inland borders or 50 kilometers of its coastline ("restricted zones"). Non-Mexican persons, however, may hold residential real property located in the restricted zones through a Mexican Land Trust (MLT, also called a "fideicomiso") with a Mexican bank after obtaining a permit from the Mexican Ministry of Foreign Affairs.
RIA observation: Apparently, MLTs are commonly used to allow non-Mexican persons to purchase homes in desirable vacation areas.
Earlier private ruling. In PLR 201245003, IRS ruled that an MLT arrangement between a domestic corporation wholly owned by two non-Mexican individuals and a Mexican bank involving a condominium within a restricted zone wasn't a trust for U.S. federal income tax purposes. The PLR found that, similar to Rev Rul 92-105, the sole purpose of the MLT was to satisfy legal requirements by vesting legal title to the property in the name of the trustee. The trustee had no duty or right to defend, maintain, or manage the property.
Three situations. Rev Rul 2013-14 provided three fact patterns to illustrate its holding:
... In Situation 1, a U.S. citizen is the sole owner of a domestic LLC that is a disregarded entity. In order to purchase a residential real property in a restricted zone, the LLC obtained a permit from the Mexican Ministry of Foreign Affairs and signed an MLT with a Mexican bank. The LLC did the negotiating and paid the seller directly. The MLT agreement gives the LLC the right to sell the property, and the LLC is responsible for paying all liabilities relating to the property. Any rental income from the property is received by the LLC and reported by the individual on his return. Legal title is held by the bank, which is identified as a fiduciary in the MLT agreement but which disclaimed all responsibility for the property.
... Situation 2 is identical to Situation 1, except that the entity involved is a corporation under Reg. §
301.7701-2(a). Any rental income is received by the corporation and reported on its return.
... Situation 3 is identical to Situation 1, except that the individual deals directly with the bank, obtains the requisite permit, signs the MLT agreement, and negotiates the purchase of the property. The provisions in the MLT agreement pertaining to the LLC in Situation 1 instead apply to the individual. Any rental income is received and reported by the individual. The LLC collects a nominal annual fee from the individual.
MLTs aren't trusts. IRS analyzed the facts and found that in Situation 1, the bank's only duties are to
hold and transfer legal title at the direction of the LLC, which has the rights to manage, control, and collect rent on the property, as well as the obligation to pay taxes and other liabilities due on it. Accordingly,
since the LLC is treated as a disregarded entity, the individual is treated as the owner of the property. In Situation 2, the analysis is identical except that, since the entity is treated as a corporation, it is treated as the owner. In Situation 3, these rights and obligations are held by the individual, who is treated as the owner.
Thus, IRS determined that, in all three situations, the MLT isn't a trust under Reg. § 301.7701-4(a). However, it noted that if, under an MLT agreement, a bank holds legal title to any assets other than the property or is permitted or required to engage in any activity beyond holding legal title to the property, then this ruling won't apply. In that case, the rules of Reg. § 301.7701-1 through Reg. § 301.7701-4 will determine the proper tax classification of the MLT.
RIA observation: Although the PLR described above wasn't mentioned in Rev
Rul 2013-14, both reached the same conclusion.
References: For the characteristics of a trust, see FTC 2d/FIN ¶ C-5000 et seq.; United States Tax
Reporter ¶ 77,014 et seq.; TaxDesk ¶ 651,025 et seq.; TG ¶ 2605 et seq.
for most cases more good news.
by dean on Thu Jun 06, 2013 3:59 pm
There is a new IRS revenue ruling that came out today regarding fideicomisos and
if filing form 3520 is necessary. Enjoy!
http://www.irs.gov/pub/irs-drop/rr-13-14.pdf
A fideicomiso
by dean on Tue Dec 25, 2012 7:30 am
http://yucalandia.com/2012/12/24/fideicomisos-and-fatca-us-mexico-agreement-on-fatca-reporting-requirements/
The parts of this recent US-Mexico agreement that affect FATCA reporting of Fideicomisos are spelled out in:
ANNEX II, NON-REPORTING MEXICAN FINANCIAL INSTITUTIONS AND PRODUCTS
" II. Deemed-Compliant Financial Institutions.
The following categories of institutions are Non-Reporting Mexican Financial Institutions that are treated as deemed-compliant FFIs for purposes of section 1471 of the U.S. Internal Revenue Code:
A. Any exempt organization resident of Mexico entitled to the benefits provided in Article 22 of the Convention between the Government of the United States of America and the Government of the United Mexican States for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and paragraph 17 of its Protocol.
B. Consistent with paragraph 3 of Article 5, a fideicomiso, to the extent that the fiduciaria of the fideicomiso is a Reporting Mexican Financial Institution and reports any information required to be obtained and exchanged pursuant to this Agreement with respect to any Controlling Person of the fideicomiso.
C. A fideicomiso that serves solely as escrow for a debt or purchase obligation of the settlor.
D. A fideicomiso the assets of which consist solely of real property. "
These decisions seem quite clear cut: Fideicomisos for property that serve solely as escrow for a debt or purchase obligation, (as are commonly used by gringos to buy real estate in Mexico's coastal and border zones), ARE EXEMPTED FROM REPORTING by MEXICAN FINANCIAL INSTITUTIONS.
Re: INFORMATION ON FIDEICOMISO tax in usa
by dean on Wed Nov 28, 2012 9:09 pm
this is from the IRS website..... quite clear to me a mexican fidi is not a trust by IRS defition.
http://www.irs.gov/pub/irs-wd/1245003.pdf
Number: 201245003
Index Number: 7701.00-00, 7701.03-08,
7701.31-00
----------------------, ID No. -----------------
CC:PSI:B01
PLR-104521-12
X = ------------------------------------------------------
A = ----------------------------
Bank = --------------------------
State = ------------
Date1 = -----------------------
Date2 = -----------------
Year = -------
Location = ---------------------------------------------------------------
$n = -----------
Dear -----------------:
This letter responds to a letter dated January 27, 2012, and subsequent
correspondence submitted on behalf of X by X’s authorized representative, seeking a PLR-104521-12 2
ruling that an arrangement is not a trust as defined by § 301.7701-4(a) of the Procedure
and Administration regulations.
X was incorporated in State on Date1. X is wholly owned by A and B, husband and
wife. In Year, A and B caused X to purchase a condominium in Location. X signed a
fideicomiso or Mexican Land Trust (“MLT”) agreement with Bank on Date2 and the
public deed to the condominium was recorded in the name of Bank.
The Mexican Federal Constitution prohibits non-Mexican citizens from owning real
property located within 100 kilometers of Mexico’s inland borders or within 50 kilometers
of its coastline. These areas are known as the “restricted zone” and only Mexican
citizens (or Mexican corporations whose bylaws forbid the ownership of stock by nonMexican citizens) are allowed to directly own real property within the restricted zone.
Location is within the restricted zone. X, A, and B are not Mexican citizens and are thus
prohibited from directly owning the condominium. Accordingly, in order for X to acquire
the condominium, X was required to obtain a permit from the Mexican Ministry of
Foreign Affairs and to purchase the beneficial interests in the MLT under which legal
title to the condominium was held by Bank, a Mexican bank.
A and B represent that they negotiated directly with the seller of the condominium
regarding the terms of the sale, paid the seller directly, and had no interactions with
Bank. X has the unrestricted right to sell or mortgage the condominium and does not
require the permission of Bank to do either. X is directly responsible for all tax
obligations and is required to pay any taxes due directly to the Mexican taxing authority.
A and B, through X, have the exclusive right to possess the condominium and to make
any desired modifications, limited only by the need to obtain the proper licenses and
permits. If the condominium is leased, X directly receives the rental income and must
pay taxes on the income. X represents that the condominium is not ordinarily leased
and if it is leased in the future, the income will be reported on the appropriate U.S.
federal income tax return. Bank collects an annual fee of $n and disclaims all
responsibility for the condominium, including obtaining clear title, and has no duty to
defend or maintain the condominium. As part of the arrangement, Bank holds only legal
title to the condominium. Accordingly, Bank does not hold or accept cash or any other
property under the MLT arrangement other than legal title to the condominium.
X seeks a ruling that its MLT agreement with Bank is not a trust for U.S. federal income
LAW & ANALYSISPLR-104521-12 3
Section 301.7701-1(a)(1) provides that whether an organization is an entity separate
from its owners for federal tax purposes is a matter of federal tax law and does not
depend on whether the organization is recognized as an entity under local law.
Section 301.7701-4(a) provides that the term “trust” refers to an arrangement created by
a will or by an inter vivos declaration whereby trustees take title to property for the
purpose of protecting or conserving it for the beneficiaries under the ordinary rules
applied in chancery or probate courts. Usually the beneficiaries of such a trust do no
more than accept the benefits thereof and are not the voluntary planners or creators of
the trust arrangement. However, the beneficiaries of a trust may be the persons who
create it if the trust was created for the purpose of protecting or conserving trust for
beneficiaries who stand in the same relation to the trust as they would if the trust had
been created by others for them. Generally, an arrangement is treated as a trust if it
can be shown that the purpose of the arrangement is to vest in trustees responsibility
for the protection and conservation of property for beneficiaries who cannot share in the
discharge of this responsibility.
Rev. Rul. 92-105, 1992-2 C.B. 204, addresses the transfer of a taxpayer’s interest in an
Illinois land trust under § 1031. Under the facts of the ruling, a single taxpayer created
an Illinois land trust and named a domestic corporation as trustee. Under the deed of
trust, the taxpayer transferred legal and equitable title to real property to the trust,
subject to the provisions of an accompanying land trust agreement. The land trust
agreement provided that the taxpayer retained exclusive control of the management,
operation, renting, and selling of the real property, together with an exclusive right to the
earnings and proceeds from the real property. Under the agreement, the taxpayer was
required to file as tax returns, pay all taxes, and satisfy any other liabilities with respect
to the real property. Rev. Rul. 92-105 concludes that, because the trustee’s only
responsibility was to hold and transfer title at the direction of the taxpayer, a trust, as
defined in § 301.7701-4(a), was not established. Instead, the trustee was a mere agent
for the holding and transfer of title to real property, and the taxpayer retained direct
ownership of the real property for federal income tax purposes.
The MLT described here is similar to an Illinois Land Trust. The sole purpose of the
MLT is to satisfy the Mexican Federal Constitution by vesting legal title to the property in
the name of the trustee. The trustee’s sole responsibility for the property is to hold and
transfer title at the exclusive direction of the taxpayer. The trustee has no duty and no
right to defend, maintain, or manage the property. Taxpayer retains sole authority to
manage and control the property, the direct right to collect any rents or proceeds
generated by the property, and the direct obligation to pay all taxes and liabilities related
to the property. We also note that there is no arrangement between Bank, X, A, B or
any other person to utilize the condominium in an activity for profit, such that ownership
of the condominium could be classified as a business entity.
CONCLUSIONPLR-104521-12 4
Based solely on the information submitted and the representations made, we conclude
that the MLT described herein is not a trust within the meaning of § 301.7701-4(a) and
that X is treated as the owner of the condominium for federal income tax purposes.
Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
The ruling contained in this letter is based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.
This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.
In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.
Last edited by dean on Mon Jan 28, 2013 11:03 pm; edited 1 time in total
redacted copy of the ruling
by dean on Tue Aug 14, 2012 9:29 pm
ADVANCE RELEASE Documents,IRS Information Letter 20110052,(Apr. 26, 2012)
2012ARD 084-102
Internal Revenue Service: Information letter: INFO 2011-0052: Information reporting: Mexican residential real property: Mexican fideicomisos
Number: 2011-0052
GENIN -141622-10
CC:INTL:B01:
This is in response to your request for general information regarding the information reporting obligations with respect to Mexican fideicomisos that own certain Mexican residential real property on behalf of U.S. persons who are not also Mexican citizens.
Under section 6048(a) and (c) of the Code, 1 a U.S. person who makes a transfer to or receives a distribution from a foreign trust generally is required to report certain information on Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. Under section 6048(b) of the Code, a U.S. person who is treated as the owner of a foreign trust under the grantor trust rules (sections 671 through 679 of the Code) is required to complete Part II of Form 3520 and to ensure that the foreign trust files Form 3520-A, Annual Information Return of Foreign Trust with U.S. Owner. Section 6677 of the Code imposes significant penalties (up to 100 percent of the gross reportable amount) for failure to comply with section 6048.
This letter provides general information only and does not constitute a ruling. See Rev. Proc. 2010-1, §2.04, 2010-1 I.R.B. 7. If you would like a definitive determination as to whether a particular fideicomiso is classified as a foreign trust for U.S. federal income tax purposes, you must request a private letter ruling pursuant to the procedures set forth in section 7 of Rev. Proc. 2010-1.
We hope this information has been helpful to you. If you have any questions, please contact *****, Identification Number *****, at ***** (not a toll-free call).
M Grace Fleeman
Senior Technical Reviewer, Branch 1
link to IRS ruling on a fido
by Admin on Wed Aug 08, 2012 9:50 am
here is a link to the individuals ruling that a fido is not the type of trust they need reported.
http://f1.grp.yahoofs.com/v1/AI0iUFbjkqNUccA--WRDHQ7RT63wBJUCtvGiPkXnKM6GB2P4MZic5h0ARykHT_QkeTawEg-CouTau6HkvpbYNYeqEMnE35Q/Redacted%20PLR%20Fideicomiso.pdf
Treasury ruling on fideicomisos and Forms 3520/3520A
by dean on Tue Jul 10, 2012 8:25 am
2a. Treasury ruling on fideicomisos and Forms 3520/3520A
Posted by: "john_g_brant" john_g_brant@yahoo.com john_g_brant
Date: Mon Jul 9, 2012 8:38 pm ((PDT))
Early this spring, Amy Jetel, a partner with the Morgan Adler Buxton Jetel law firm in Austin, Texas, requested a ruling from the Dept. of the Treasury that a fideicomiso is not a foreign trust that requires a taxpayer to file forms 3520 and 3520A. The Treasury advised Amy last week that it intends to rule in her favor. Amy expects to receive the written ruling by the end of the month. It may be a month or more after that before personal information is redacted and the ruling published.
If the ruling is published as a Private Letter Ruling, as is more likely, it only binds the IRS with respect to the taxpayer who obtained the ruling. If published as a Revenue Ruling, it binds the IRS with respect to all taxpayers. As a practical matter, it is unlikely that the IRS will take an adverse position to a Private Letter Ruling issued by the Treasury.
If you want your own ruling, you can reach Amy at 512-370-2750. The process is not inexpensive.
by dean on Sun Apr 08, 2012 8:17 am
I think this definitively concludes the debate about reporting a fideicomiso.
http://www.irs.gov/businesses/article/0,,id=255986,00.html
how about property??? and fbar IRS site
by dean on Wed Aug 17, 2011 9:03 am
In answer to the second question, if the assets produced income subject to U.S. tax during 2003-2010 which was not reported, the assets will be included in the penalty computation regardless of the source of the funds used to acquire the assets. If the foreign assets were held in the name of an entity such as a trust or corporation, there would also have been an information return filing obligation that may need to be disclosed. See FAQ 5. .
FBAR scare
by dean on Wed Aug 17, 2011 9:00 am
see number 17 from the site, from what I read as long as you did report any gains including interest there is absolutely no penalty of any kind. who doesn't declare all money from banks?
they say no reporting is needed
by dean on Fri Jun 24, 2011 10:50 pm
http://yucalandia.wordpress.com/living-in-yucatan-mexico/fbars-and-fideicomisos-to-file-or-not-to-file-that-is-the-question/
by dean on Mon Feb 07, 2011 8:14 am
here is a good discusion of it. Several people have advice from their accountants that say it does not need to be reported. And state they never did. and they are not in jail yet and still to this day have never heard of a single real person that is verified to say they had any penalty.
http://groups.yahoo.com/group/lapazgringos/message/7742
by dean on Fri Apr 11, 2008 9:27 pm
remember this is just one accounts way he handles the situation. I have fired and or not hired many accountants before because they did not know how to do things other accountants did to save me major money. I personally have been autied by the IRS 3 times (before coming to Mexico) and represented myself without even the advice of a accountant, and in 2 of the three the years I received a refund because I am a sandbagger, i did not take the deductions for home use till they audited me. and in the third audit they just agreed how I filed it and no taxes were due or refunded.
again my strong point is the below is just how this accountant handles it. And as I noted in other threads look how others have handled it and they have not to this day had an issue.
OWNING REAL PROPERTY IN MEXICO REQUIRES SPECIAL IRS FORMS IF YOUR PROPERTY IS A RESIDENCE OR IN FEDERAL RESTRICTED ZONE
(This is also true if you are beneficiary or creator of any foreign trust including a fideicomiso)
By Don D. Nelson, CPA, Attorney, CPA
If you, as non citizen of Mexico, own a home or other residential real property located in the "restricted zone" close to the coast in Mexico, the Mexican constitution has been construed to require that you own it in a bank trust called a "fideicomiso." The Mexican bank acts as trustee and you as the equitable owner of the real property are the beneficiary. The trust has a term of 50 years and can be renewed thereafter.
Under US tax law the fideicomiso meets the definition of a "foreign trust." That means you are required to file Form 3520 when you initially establish the fideicomiso or foreign trust and the trustee is to file Form 3520A for each year thereafter. The Form 3520
must be filed with your tax return, while the Form 3520A is due on March 15 of each year, though you can apply for an extension of time using Form 2758. These forms must be filed for any foreign trust controlled by a US citizen or those of which a US citizen are the beneficiaries. This includes "asset protection trusts" in many situations.
Some international tax professionals have argued that the fideicomiso is not really a trust but is an agent for holding title to real property in Mexico. Recent discussions with an IRS International Division Counsel has reaffirmed that the IRS considers Section 6048(a) to apply to fideicomisos as used in Mexico and Form 3520 and 3520A should be filed. They have indicated they have no current plans to issue any future rulings on this subject.
Items that are required to be included in the 6 page Form 3520 include:
§ The name and address of the trustee and all beneficiaries
§ The value of the property and money transferred to the trust
§ Distributions from the trust
§ Copies of Trust documents
§ The name of any US agent appointed for the trust, etc.
If you fail to file Form 3520, there is a penalty charged equal to 35% of the value of the property transferred to the trust, or of any unreported distribution. This penalty can be waived by the IRS for reasonable cause (which has not been clearly defined). The IRS has issued no guidance with respect to what is considered reasonable cause for failure to file Form 3520 and 3520A for a Mexican fideicomiso. Therefore any taxpayer that has failed to file this form and continues to not file this form is at great risk of potential past, present and future penalties.
The Form 3520A reports each year's income and expenses for the trust. It includes a year end balance sheet for the trust and information on distributions made to beneficiaries. The US owners or beneficiaries of the trust are subject to a penalty of 5% of the trust's gross asset value for failing to file this form. Penalties can be waived for "reasonable cause" but as stated above, what that reasonable cause is has not been defined by the IRS.
If you purchase property in Mexico outside of the "restricted zone" you probably have title in your name and are no required to file these forms. The same holds trust if you purchased commercial property using a Mexican or foreign corporation. However, you should be aware that as a US Citizen, you are required to file Form 5471 each year with your tax return if you hold a 10% or more interest in a foreign corporation any where in the world.
If you need advice or information on the U.S. tax aspects of purchasing, selling, or owning real estate in Mexico, please contact us. We can help you with general information also. If you need specific help in Mexico we can refer you to one of the most experienced, knowledgeable, Mexican real estate attorneys in Mexico who is also a U.S. Citizen for help on your specific Mexican legal issues. David Connell has practiced real estate and business law in Mexico for many years and can be reached at dconnell@mexicolaw.com.mx .
INFORMATION ON FIDEICOMISO BANK FEES AND EJIDO PROPERTY PURCHASES IN MEXICO
Last edited by dean on Wed Aug 17, 2011 9:37 am; edited 3 times in total
» thanks for all your information today at Sandown