capitolkat
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IRS rules Fidecomiso is not a trust
The IRS has ruled that a fidecomiso is not a trust for purposes of reporting foreign trust interests. Google " IRS ruling Fidecomiso" and you will see
several articles on the subject that reference the IRS ruling. This is not a private taxpayer ruling and it affects all of us who have an interest in
property in Mexico through a fidecomiso.
Good news for all of us who have insisted the fidecomiso was not a trust for purposes of reporting a foreign trust.
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capitolkat
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correction
Further examination shows that the ruling referenced is a private letter ruling, but the ruling is very clear that a fidecomiso is not a trust for
purposes of reporting a foreign interest.
PLR 20125003 November 12,2012
[Edited on 1-13-2013 by capitolkat]
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capitolkat
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Ongoing analysis
I've now read 5 separate reviews of the PL ruling from US law firms, Lexis/Nexus, CPA firms, LinkedIN, and all consider the ruling definitive on the
issue--with certain caveats, the property must be a private residence, not rented or used for income purposes, the Mexican Land Trust( fidecomiso)
must be used because of the Mexican restrictions on foreign ownership, and while clear in it's expressions - it is a private ruling only applicable to
the party involved.
All that being said the advice I'm seeing is that the IRS is sending a message they are tired of reviewing countless filings for foreign trusts that
really aren't trusts, but merely escrow agreements for holding title due to Mexican land use restrictions on foreign owners.
This is consistant with the advice my CPA has given me for the last 7 years about filing the foreign trust docs.
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CortezBlue
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Told ya
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dtbushpilot
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"All that being said the advice I'm seeing is that the IRS is sending a message they are tired of reviewing countless filings for foreign trusts that
really aren't trusts, but merely escrow agreements for holding title due to Mexican land use restrictions on foreign owners."
You can read that between the lines if you want but it will only be "law" when they make that "message" official which won't be happening any time
soon.
When making your decision to file the forms or not keep in mind that our country's current financial situation demands that the IRS collect as much
revenue as possible. When there isn't any more income to go after the next best thing is penalties and interest. They can fine you any amount that
they want for failure to file a form on time and correctly, my fear is that this may become the new "low hanging fruit" for the IRS.
"Life is tough".....It's even tougher if you're stupid.....
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CortezBlue
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So here is the question
If I am a permanent Mexican resident and I sell my house, who is going to tax me? Mexico
So if I deposit the proceeds into a Mexico Bank and then wire the money to the Cayman Islands, do I have to tell the IRS? The money was not generated
in USA and taxes were paid in Mexico??
What do you think?
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monoloco
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| Quote: | Originally posted by CortezBlue
So here is the question
If I am a permanent Mexican resident and I sell my house, who is going to tax me? Mexico
So if I deposit the proceeds into a Mexico Bank and then wire the money to the Cayman Islands, do I have to tell the IRS? The money was not generated
in USA and taxes were paid in Mexico??
What do you think? |
I don't know what you'd be required to pay the IRS, but Mexico will get their pound of
flesh whether you are a resident or not, Mexico also has financial disclosure treaties with the US.
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dtbushpilot
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| Quote: | Originally posted by CortezBlue
So here is the question
If I am a permanent Mexican resident and I sell my house, who is going to tax me? Mexico
So if I deposit the proceeds into a Mexico Bank and then wire the money to the Cayman Islands, do I have to tell the IRS? The money was not generated
in USA and taxes were paid in Mexico??
What do you think? |
Are you a US citizen? Do you file a federal tax return? I think your question would be better answered by a US tax professional.
I believe that you pay capital gains tax in Mexico and if the amount that MX takes is less than what the US IRS would have taken they want the
difference. That is only my belief and not based on any first (or second) hand experience. Keep in mind that, as monoloco pointed out, MX and the US
share information. If you have a fide with a MX bank the IRS can be aware of it, whether or not they will get around to checking you out is anyone's
guess but if you become a "target" for some reason and you have any US assets to go after it could get ugly. Just my dos centavos, and probably worth
about that much....
"Life is tough".....It's even tougher if you're stupid.....
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Osprey
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The Personal Letter ruling for Jetel was for a RENTED CONDO.
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capitolkat
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Not a rental
I don't know who Jetel is but in the ruling I referenced the fact was cited that the condo was "NOT" currently rented and did note that if it was
rented in the future the funds would not go through the trust but would instead go directly to the owner of the property.
This ruling sets up a pattern of rulings that the fidecomiso is not a trust and a very viable argument under the equal protection clause of the
Constitution that the IRS can't pick and choose who to penalize and who to give a favorable ruling on their fidecomiso.
This has been my position for over 6 years and my CPA, a pretty smart guy , has agreed and now the IRS has issued several private letter rulings
stating the fidecomiso is not a foreign trust for reporting purposes.
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Osprey
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Kat, Amy Jetel was the first Private Letter ruling posted on this board. Of course the rental money would not go the trust bank, they only hold the
deed and I think most people on the board know that. You're giving us old news but a whole lot of homeowners down Baja way have been told to file, to
report and they did. They don't like the odds. The issue is not closed. Your CPA smarter than all their CPA's?
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capitolkat
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Not old news
The ruling I cited above by number is within the last 60 days, and as I said I reviewed the responses from numerous CPA firms, law firms that
specialize in International and tax law. The ruling that I refer to is not Jetel, but is consistant with previous written rulings tht I've seen.
This one was a little different in that it cites to existing Federal statutes to clarify the analysis and also referred to previous IRS rulings
regarding trusts-not the generic review previously provided. I think that's the reason so may legal commentators have picked up on this private
ruling, it was thorough and came from a chief counsel at the IRS in Washington, DC and not a regional office.
As far as how smart my CPA is - well he's pretty smart, former IRS agent , attorney , teaches tax law at the local law school, been doing my return
for about 30 years...Not taking new clients.
Everyone has to do what makes them comfortable- if filing forms makes them comfortable--file away.
[Edited on 1-14-2013 by capitolkat]
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capitolkat
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Rental income
Osprey-- the relvance of the ruling's mention of future rental income going directly to the property owner is that in a true trust the trustee owns
the right to proceeds of the trust and distributes those proceeds pursuant to the trust document.
IN a fidecomiso the trustee (the Mexican bank) cannot rent the property, doesn't receive payments from any rentals, doesn't owe or pay taxes and the
IRS found all these factors definitive that a fidecomiso was only a legal fiction serving as an escrow agent to hold title due to the peculularities
of Mexican law. Thus, the IRS concluded that a fidecomiso was not a trust. Ergo, the fidecomiso does not trigger the requirement to file a report of
foreign trust--because it's not a trust.
In a regular trust the trustee has the duty to preserve the trust, manage the trust, arrange for and receive any incomes, pay taxes and distribute the
income pursuant to the trust agreement. Because a fidecomiso doesn't do any of these--like the IRS said-- It's not a trust.
[Edited on 1-14-2013 by capitolkat]
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The Sculpin
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Next time get the cite right.........
PLR 201245003 - Section 7701 - Definitions
Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 201245003
Release Date: 11/9/2012
Index Number: 7701.00-00, 7701.03-08, 7701.31-00
Third Party Communication:
Date of Communication:
Person To Contact:
Telephone Number:
Refer Reply To: CC SI:B01
PLR-104521-12
Date: July 30, 2012
Legend
X =
A =
B =
Bank =
State =
Date1 =
Date2 =
Year =
Location =
$n =
Dear [redacted data]:
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 ruling that an arrangement is not a trust as defined by § 301.7701-4(a) of the Procedure and Administration regulations.
FACTS
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 non-Mexican 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 tax purposes.
LAW & ANALYSIS
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.
CONCLUSION
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 this letter.
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.
Sincerely,
Faith P. Colson
Senior Counsel, Branch 1
(Passthroughs & Special Industries)
Enclosures (2)
Copy of this letter
Copy for § 6110 purposes
Whoa there, Cowboy - pull back on those reins!
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john68
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that is the ruling that Amy Jetel obtained for her client in July.
It was discussed extensively by The Sculpin and others on the Baja Nomad board last summer. See that thread for more information.
Took the Treasury several months to publish it.
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capitolkat
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Thanks John-- Now that the ruling has been published lots of people that make a living giving advice have opined on the contents of the ruling. Since
attorney Jetel is not mentioned in the letter by name- I couldn't connect her to this ruling.
Thanks again. This may be as clear as the IRS wants to be.
Life is too short to drink bad wine
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