While a step in the right direction, the new PLR regarding a Fideicomiso may create more harm than good!
FAQs regarding the recent Fideicomiso Private Letter Ruling
Does the letter ruling mean that the IRS doesn’t require Form 3520/3520-A for a Fideicomiso anymore?
www.irs.gov/pub/irs-wd/1245003.pdf
Unfortunately, the answer to that question is NO. The only person with a Fideicomiso that is not required to file Form 3520 & 3520-A is the person who requested the Private Letter Ruling (PLR). Think of a PLR as a “get out of jail free card” in the game of Monopoly.
The only person who can use the card to “get out of the jail free” is the person with the card. The same thing applies to a PLR. It only relates to the person who requested it. Additionally, the PLR only helps the person who requested it if it included all relevant information necessary for the IRS Counsel to make a correct determination.
The PLR states that the ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the IRS Tax Code provides that it may not be used or cited as precedent.
Tax professionals look to PLRs to see how the IRS is leaning toward an issue. This is helpful if the IRS has not provided previous clues regarding how the IRS might rule on an issue.
However, on June 24, 2011 the IRS released a General Information Letter stating that “Any U.S. person who transfers property to or has an interest in a Mexican Fideicomiso that is classified as a foreign trust must comply with section 6048 (File Forms 3520/3520-A).” and “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.”
www.irs.gov/pub/irs-wd/11-0052.pdf
For a PLR to be valid it must contain full and accurate information. Unfortunately, after reading the PLR, I wonder if all important information about the Fideicomiso was disclosed. If not, the PLR may not be a valid “get out of jail free” card for the taxpayer who requested the PLR.
“A PLR is issued in response to a written request submitted by a taxpayer and is binding on the IRS if the taxpayer fully and accurately described the proposed transaction in the request and carries out the transaction as described.”
http://www.taxalmanac.org/index.php/Private_Letter_Rulings
Since the PLR says that the person doesn’t have to file Form 3520/3520-A, doesn’t that mean the IRS would say the same thing if they found out about my Fideicomiso?
Forrest Gump said, “Life is like a box of chocolates. You never know what you are going to get”. The statement holds true for the IRS.
As mentioned, the recent PLR that decided that the particular Fideicomiso was not a foreign trust could have been based on incomplete information.
The IRS Counsel reasoned that the Fideicomiso was not required to file Form 3520 or Form 3520-A because the sole purpose of the Fideicomiso was to satisfy the Mexican Federal Constitution Article 27 by vesting legal title to the property in the name of the trustee. As sole means one and only, there is not much grey area to wiggle around in regarding the definition.
While the sole reason of using the Fideicomiso to purchase property may have been to hold title that does not mean that the Fideicomiso only has one purpose!
Most likely, there are multiple purposes for your Fideicomiso. Have you read your trust document? They are not all the same.
Here are a few excerpts from translated Fideicomiso Agreements that we’ve read or that our bilingual Enrolled Agent & CPA candidate translated: Note that they definitely suggest the fiduciary is responsible for more than simply holding the title. Remember, not all Fideicomiso Agreements are the same.
“Fiduciary obtains permit from the Department of Foreign Affairs which authorizes the Fiduciary to purchase the real estate.”
“The beneficiaries shall periodically notify the fiduciary as to the amount of construction or improvements carried out and their progress, so that the fiduciary in turn may modify the assets of the trust and carry out the accounting computations required.
“The fiduciary has the ability to administer, control, improve and repair, the property entrusted.”
“The Fiduciary, as the proprietor of the patrimony in Trust, upon administering it, will have all the rights and actions required to fulfill it … having all kinds of powers as owner, including, in a declaratory and non-restrictive way, all powers for litigation and collections related to administration and dominion that may require a specific clause as well as powers to acquire and mortgage in any ways, or to collect any payments and issue receipts, to endorse titles of credit, to grant legal powers and to waive protection lawsuits.”
“The fiduciary shall present a report on the trust with fiduciary substitution to the Department of Foreign Affairs annually and provide a description of any substitute beneficiaries.”
“When the duration period of the trust runs out the beneficiaries must request that the fiduciary extend the contract or the fiduciary will proceed to sell the property. The proceeds of the sale will be invested and maintained by the fiduciary for the trust beneficiaries. The fiduciary shall manage such account as long as the beneficiaries don’t claim it.”
“The beneficiaries are considered legally as the depositaries of the property and must inform the fiduciary of any problem or irregular situation related to the property so it can carry out any necessary actions or procedures.”
“In the case of an emergency, the fiduciary may discreetly carry out essential actions required to defend the validity of the trust.”
We know that it’s tempting to believe what you want to hear. However, think about it. You know that you used a Fideicomiso to get around the law prohibiting foreigners from purchasing property in the restricted zone. Also, remember what’s too good to be true is often too good to be true.
Moreover, a Private Letter Ruling is not valid unless the information is fully and accurately described. Therefore, it is important that all relevant information be provided to the IRS when requesting a PLR and a statement stating that the sole purpose of the Fideicomiso is to hold title, is actually correct.
There are additional benefits to having property held in a Fideicomiso. See the following excerpts found by doing a simple Google Search.
“The bank handles all of the paperwork including filing for all of the necessary permits with the Ministries of the Interior and Foreign Affairs. In general, the bank has the responsibility to the government to ensure precise fulfillment of the Trust agreement, assuming full technical, legal, and administrative supervision in protecting the interests of the beneficiary (purchaser).
Since by law Mexican banks enjoy government protection against bankruptcy, the Trust is indirectly guaranteed by the government. As a practical matter, even in unrestricted zones many foreigners prefer to hold their property in Trust.”
http://caborealty.com/Nav.aspx/Page=%2FPageManager%2FDefault.aspx%2FPageID%3D990064
The following is from BBVA Bancomer’s Preferred Customer webpage:
“The Fiduciario: A Mexican bank, in this case BBVA Bancomer, which holds the title of the property for up to 50 years, and acts on behalf of the non-Mexican beneficiary in all transactions related to the property held in trust.
http://www.bancomer.com/pcu/pcu.asp?mainf=pcu_banfi_decri.html
Additional excerpts follow. Note that the excerpts contradict the statement in the PLR that the bank disclaims all responsibility for the condominium, including obtaining clear title, and has no duty to defend or maintain the condominium.
“The bank has the authority to determine what fees will be charged for any other types of activities they have to be involved in, such as reviewing documents, authorizing federal zone permits, authorizing mortgages, etc. Do not give this power to the bank. Set a fixed price for reviewing and signing documents other than powers of attorney or the sale of the property.”
http://www.mexicolaw.com.mx/taking-control-of-trust-fees/
“The trustee is responsible to the buyer/beneficiary to ensure precise fulfillment of the trust, according to Mexican law, assuming full technical, legal and administrative supervision in order to protect the interests of the buyer/beneficiary.
For practical purposes, even in unrestricted zones many foreigners and Mexican Nationals, for that matter, prefer to hold their property under a Fideicomiso.”
http://bestonproperties.com/real-estate-info/foreign-ownership/foreign-ownership/
“If you are familiar with Bank Trusts or Family Trusts in the United States then you will find Bank Trusts in Mexico to be very similar.
“Bank trusts or “Fideicomiso’s” are not just for foreigners. Throughout Mexico many Nationals with money use this instrument as an Estate Planning tool for the ease of passing property to individuals who are not direct family and saving on Capital Gains taxes.
http://www.paradiseproperty.com/FAQs__BUYERS/page_2398091.html#3
“The Trustee is liable for loss or damage suffered by the Beneficiary as a result of the Trustee’s negligence.”
http://www.siestarealty.com/legal.php
“Although the formation process for a land trust may seem relatively easy, and one where little effort is needed, it is advised that beneficiaries negotiate as much freedom and flexibility relative to the assets in trust, and that such terms be clear in the trust itself. Otherwise, the involvement of the trustee will be required, and it is well known that banks can be slow and bureaucratic. Generally speaking, beneficiaries will have the ability to use, and enjoy the property.
However when it comes to renting, managing or making improvements, securing permits, federal zone concessions, and the like, or other more specific actions, unless its negotiated and included in the trust, beneficiaries may find out that they require the participation of the trustee.
Trustees usually grant powers of attorney to beneficiaries to perform such actions, but the granting process takes time, and money, although bank fees are mostly reasonable. Some banks are more flexible than others when it comes to granting powers of attorney and their overall response time, so it’s important to choose wisely who the trustee will be when the trust is set up.”
www.mdtlaw.com/…/The%20Mexican%20Trust%20Fideicomiso.pdf
“Both foreigners and nationals may establish a Fideicomiso (an Irrevocable Bank Trust). This trust is created with a Mexican bank. The bank accepts the fiduciary responsibilities of a Trustee. The Fideicomiso allows you to purchase anywhere in Mexico including the restricted zone.
The Notario requests that a bank of your choice act as a trustee on your behalf. The bank then will receive a permit to acquire the chosen property in trust. The trust is irrevocable and is established for a maximum of 50 years then it may be renewed for another 50 years. You are the beneficiary of the trust and have all the benefits of direct ownership. This includes the option to sell, remodel, lease, mortgage, or transfer the rights to a pre-appointed heir or another third party. The trust may also include language to bypass the probate court with joint ownership to transfer with the rights of survivorship. You do have the absolute right to transfer the title to another party at any time.”
“The bank has a fiduciary responsibility to represent your interest in the property”. Advantages of the Fideicomiso:
If the title papers, property dimensions and corresponding documentation are not perfect, the bank will not issue the Fideicomiso.”
http://www.costamayaliving.com/HowToBuyPropertyInCostaMaya.html
As you can see your fees to set up and service your Fideicomiso might pay for a bit more than for the bank to simply hold and transfer title.
Anyone at the IRS could also conduct a minimal amount of research on the internet and suspect that holding title might not be the “sole purpose” of a Fideicomiso and that the Trustee has more responsibilities than simply holding and transferring title. Another PLR request or an audit situation could prove disastrous if you rely strictly on the recent PLR without reviewing your Fideicomiso Agreement.
In fact many tourist areas in Mexico have free Real Estate Guides. (IRS Agents do take vacations). On Thanksgiving, I looked at the “Vallarta Real Estate Guide” and read an article on Buying Real Estate in Mexico, it stated:
“The trustee is responsible to the buyer/beneficiary to ensure precise fulfillment of the trust, according to Mexican law, assuming full technical, legal and administrative supervision in order to protect the interests of the buyer/beneficiary.
Even if the result of the PLR was based on complete information, the PLR applies to a husband and spouse that own a corporation that created the Fideicomiso. Additionally, the PLR states that there is no arrangement to utilize the property in an activity for profit.
Therefore, the specifics of the PLR might not apply to those who rent the property or to multiple owners that are not married to each other.
To summarize: The PLR was decided regarding a specific agreement and may not have contained complete information. The missing information may have resulted in an misleading Private Letter Ruling.
As a result, people with a Fideicomiso could be lulled into a false complacency and later subject to huge penalties, because they did not take advantage of the current IRS Offshore Voluntary Disclosure Program.
What should I do – request a PLR, file Form 3520/3520-A or do nothing?
If you want a “get out of jail card” like the person who requested the PLR, you’ll need to follow the IRS General Information Letter and PLR and request your own PLR.
Unfortunately, the IRS recently raised the minimum fee for a PLR from $625 to $2,000 (the fee is more if your income is greater than $250,000). For a valid ruling, you’ll need to provide complete information.
(We have been successful with PLRs. However, we value our ability to practice before the IRS too much to knowingly submit a PLR that states that the trustee’s sole responsibility is to hold and transfer title.)
If you have not yet filed Form 3520 & 3520-A, the IRS Offshore Voluntary Disclosure Program (OVDP) is currently available. The program provides a guarantee of no penalties if you previously reported all foreign income on your tax returns. This program is unusual as there is no end date. However, the IRS can close the program at any time. Therefore, it is advisable to address this issue as soon as possible.
If you have been filing Forms 3520 & 3520-A, continue to timely file the forms.
Do nothing and be possibly subject to huge penalties: 35% of the fair market value in the year of purchase and additional contributions, and 5% of the fair market value of your property each year. Don’t forget the $10,000 penalty for not filing Form 8938.
A tax professional who helped write the PLR stated the following:
“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.”
http://johnthelawyer.wordpress.com/2012/10/16/fideicomisos-a-private-letter-ruling-for-the-taxpayer/
Note that he ended with “at least for now”. Unfortunately, if you want a guarantee of no late filing penalties you need to deal with this before the IRS decides to terminate the current Offshore Voluntary Disclosure Program.
Additionally, the author of the PLR stated in a nonpublic article that the PLR can’t be cited as precedent, but it’s a good indication of how the IRS will view similar arrangements. In any case, the PLR doesn’t need to be cited at all if you can apply Treas. Regs. Section 301-7701-4(a) and Rev. Rul. 92-105 to your clients facts and come to the same result.
Unfortunately, the only way that you can apply the above mentioned Treas. Reg. & Rev. Rul. is to state that you are not aware of the entire responsibilities and duties required by the trustee of the Fideicomiso. Either that or find a tax professional that is willing to risk their ability to practice before the IRS under Circular 230 and draft an incomplete and possibly misleading PLR or advise you that you don’t need to file the foreign reporting forms.
Currently, outside of the three choices previously mentioned. The best thing that you can do to fight the Foreign Trust filing requirements for your Fideicomiso is to contact your congressperson. Maybe this is something that we can get congress to agree on!
Let us know if you need any help with your IRS Foreign Reporting Requirements
John Dillinger, CPA, CGMA, PFS, MS.tax
“Nationally recognized expert in International Taxation”
http://www.knowledgecongress.org/event_2010_Form_5471.html
Dillinger Carter & Associates, Inc.
400 Oyster Point Blvd., Suite 114
South San Francisco, CA 94080
T: 415-524-7572
F: 415-524-7571
jdillinger@dcataxservice.com
www.dcataxservice.com
IRS Circular 230: This message (including any attachments) contains confidential information intended for a specific individual and purpose, and is protected by law. If you are not the intended recipient, you should delete this message. Any disclosure, copying, or distribution of this message, or the taking of any action based on it, is strictly prohibited.
Any tax advice included in this communication was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding any penalties that may be imposed on the taxpayer by any governmental taxing authority or agency.
