Thank you to everyone involved with obtaining a Revenue Ruling that states that a Fideicomiso is not a trust for IRS tax reporting purposes (http://www.irs.gov/pub/irs-drop/rr-13-14.pdf).
This victory goes to those who wrote and assisted with the ruling and especially to those who bombarded the IRS with 3520′s and 3520-A’s. Those who filed the Forms, that the IRS previously indicated were required, had an effect akin to that of protesters in regards to obtaining the ruling from the IRS.
Recall that only a few years ago, one used to be able to call the IRS and obtain an unlimited amount of tax ID’s for a foreign entity. Then the IRS got fed up and limited it to 5 ID’s per person per day. Afterwards, the IRS updated the IRM (Internal Revenue Manual) to state that a Fideicomiso is a Foreign Trust that is not required to file Form 1041. That action was followed by adding a special category when requesting a tax ID for a Fideicomiso. The IRS continued to be bombarded with tax ID requests and now the IRS only allows one foreign tax ID per phone number per day.
My sources say that the continued limitations on obtaining foreign tax ID’s was a result of the IRS being bombarded by those with a Fideicomiso requesting a tax ID.
In a previous post, I mentioned that the ruling was decided on unrelated tax law. The IRS ruling was baffling! Therefore, my sources and I believe the motivation behind the ruling was because of the sheer numbers of 3520 and 3520-A Forms being filed with the IRS. Accordingly, everyone with a Fideicomiso owes those who filed a pat-on-the back!
Ok, a 100% guarantee from the IRS is rare. However, I believe that the possibility of a person being audited and then having the agent decide that the ruling was based on unrelated regulations not improbable. Moreover, if you rely on a ruling as your reason for not filing, you would have a reasonable cause for not filing and would be safe from penalties.
However, I have a concern. The ruling does not apply: “if the trustee is permitted to perform any activity besides hold title.”
So, what in the world does “permitted to perform any activity besides hold title mean?”
Well, because I was privileged to receive a redacted copy of the Private Letter Ruling request that determined that a particular Fideicomiso was not required to file Form 3520 or 3520-A, which has much more detail that the published version of the Private Letter Ruling.
And, because the Private Letter Ruling request included a copy of the Fideicomiso Deed in both Spanish and English. The Ruling request pointed out that the Owners had the power to instruct the trustee to transfer ownership, direct the trustee to mortgage the property, and amend the Fideicomiso document. If the owners died before designating a substitute beneficiary, the trustee could transfer the rights to the Owner’s heirs.
The above paragraph implies that if the Trustee is only permitted to perform activities related to holding title then this would be the same as only being permitted to hold title and there would be no Form 3520 or 3520-A filing requirement.
Unfortunately, many people with a Fideicomiso did not have their Fideicomiso Documents translated and have no idea what the English Translation may say about what the Trustee is permitted to do or not do in regards to their Fideicomiso.
All Fideicomiso Documents are not the same. Some documents may include wording that indicate that the Trustee is permitted to perform in an activity beyond holding title, such as the following:
- “The fiduciary has the ability to administer, control, improve and repair, the property entrusted.”
- “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.”
- “In the case of an emergency, the fiduciary may discreetly carry out essential actions required to defend the validity of the trust.”
Do you think that the above activities are beyond the mere holding of title?
Knowing that the Revenue Ruling states that “if the Trustee is permitted to perform any activity beyond holding title” and not confirming this information by translating and reading your Fideicomiso Document could be considered willful blindness (a conscious effort to avoid learning about reporting requirements) by the IRS. That is, if it’s somehow determined during an audit that the Trustee is permitted to perform activities besides holding title.
In other words, it’s a good idea to have a translated copy of your Fideicomiso Document, especially if you cannot read legal Spanish. By having your Fideicomiso document translated will enable you to determine if the Trustee is permitted to perform an activity beyond holding title. Moreover, it is not a bad idea to have a translated copy even if it wasn’t for the IRS.
The American Institute of CPA’s (AICPA) issued a Letter to the IRS thanking them for the Revenue Ruling, as they have been requesting one since 2007: The letter contains the following paragraph:
“We realize that the ruling does not apply if the MLT owns any other property or is permitted or required to engage in any activity beyond holding legal title to the Mexican real property. Therefore, we will continue to review trust agreements to evaluate these points.”
Those who helped obtain the Revenue Ruling by bombarding the IRS 3520′s and 3520-A’s are probably wondering what to do next. Should you continue to file, should you file a final return or should you stop filing?
If you already filed Form 3520 & 3520-A for 2012 and you believe that the Trustee is not permitted to perform any activity beyond holding title you may want to Amend the Form 3520 by checking the Box in Part A for Final Return and Amended Return and include a statement regarding IRS Revenue Ruling 2013-14 and state that the Trustee is not permitted to perform any activity beyond holding title.
For Form 3520-A, do the same and check the boxes at the top of the Form where it states “check appropriate boxes”
If you extended Form 3520 & Form 3520-A for 2012, you can either file the Final Forms with the above explanation or wait for a letter from the IRS requesting the returns and providing your explanation.
If you don’t know whether or not the Trustee is permitted to perform any activity beyond holding title you either need to find out by reviewing a translated copy of the Fideicomiso Document or continue filing Form 3520 & 3520-A.
Remember, by not filing Form 3520 or 3520-A you are affirmatively stating that your Trustee is not permitted to perform any activity beyond holding title for the Revenue Ruling to apply to you.
Also, note that in the future Mexico may reform Article 27 of the Mexican Constitution to allow foreigners to directly own property in the restricted zone.
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
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