The Shape of Tax to Come

A Tax & Estate Planning blog for 21st-century Texans

Fideicomisos! A Private Letter Ruling for the Taxpayer

TL; DR. A soon-to-be released Private Letter Ruling holds that a fideicomiso is not a trust for federal tax purposes. As a result (though not stated in the PLR), the taxpayer does not need to file Forms 3520 and 3520-A to report his interest in the fideicomiso. Because this is a PLR, it may only be cited as precedent by the taxpayer who requested it. YMMV.

Each year, American taxpayers with assets held outside of the USA must file more and more forms with the IRS to disclose those assets. In many cases, these disclosures do not result in more tax, but will result in additional penalties if those forms are not filed. Given that the IRS wants to know everything about everyone, it was a bit surprising to see the IRS issue a Private Letter Ruling holding that a fideicomiso isn’t a trust.

Disclosures:

  • The IRS will publish this PLR sometime in November.
  • Amy Jetel was kind enough to let me help her write the request that resulted in this PLR.
  • Amy is writing a full article about fideicomisos for the November issue of Trusts & Estates.
  • I’m pretty proud that I was involved in this.

Problem: American taxpayers with assets held outside of the USA have a near-endless list of forms that need to be filed annually to stay in compliance with the changing tax laws. These forms don’t result in additional tax; taxpayers file them only to disclose ownership of those foreign assets. More specifically, taxpayers with foreign trusts have (at least) two forms to file annually: Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, and Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner. The failure to file either of these forms results in a minimum $10,000 fine.

Enter the Mexican fideicomiso.

Aside from being a foreign-tax nightmare, a fideicomiso is a way for non-Mexican citizens to own real estate in Mexico’s restricted zone. Why? The Mexican constitution prevents non-Mexican citizens from owning real property within 100 kilometers of an international border or 50 kilometers of Mexico’s coast. This created a problem for non-Mexicans who, quite sensibly, want to own waterfront property in Mexico.

To get around this restriction and to encourage foreign investment in Mexico, Mexican law allows non-Mexican citizens to purchase property in the restricted zone through a fideicomiso. The fideicomiso “owns” the property for the benefit of the non-Mexican. For a nominal annual fee (usually a few hundred dollars), a bank serves as trustee, which entails little more than transferring title to the property at the owner’s direction. Unlike a real trustee, the trustee of a fideicomiso has no rights to control the property, and is not responsible for the maintenance of the property. So, while a fideicomiso is a trust because it has a trustee, that trustee is not subject to the same fiduciary duties as a normal trustee.

This trust-but-not-really arrangement has confused rightly confused practitioners whether a fideicomiso should be reported. Either it’s a trust, and Forms 3520 and 3520-A must be filed annually, or it’s not a trust, and Forms 3520 and 3520-A don’t need to be filed. The IRS released an information letter about fideicomisos in 2010, and essentially punted on this question. Gee, thanks.

So, after years of wondering whether a fideicomiso should be reported, Amy found a client who was willing to ask the IRS (and pay for asking–IRS fees alone were $2,000). This fideicomiso was like most others, though the property owner owns the fideicomiso interest through a disregarded corporation.

In concluding that the fideicomiso isn’t a trust, the IRS relied upon Rev. Rul. 92-105, which held that an Illinois Land Trust was not a real trust for federal tax purposes. In that ruling, a taxpayer had transferred real property to a trustee subject to a land control agreement. That agreement granted total control over the transferred property back to the beneficiary of the trust. The beneficiary was also responsible for the management of the property and for filing all tax returns related to the property. Because the trustee had no responsibilities with respect to the property, no trust was formed.

The situation is nearly identical to most fideicomisos, except that instead of being located in Mexico, the Illinois land trust deals with land in Illinois. Because the trustee of a fideicomiso has no responsibilities with respect to the property, a fideicomiso is not a trust. And because a fideicomiso isn’t a trust, then Forms 3520 and 3520-A don’t need to be filed.

Now, before you run out and tell your advisors that you don’t need to file Forms 3520 and 3520-A to report your fideicomiso (or a similar structure), please remember that this guidance came in a PLR. As a result, only the client who requested it may rely on it. The benefit? It does indicate that the IRS does not see fideicomisos as a direct threat, at least for now.

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October 16, 2012 - Posted by | Uncategorized

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