Greetings all. I want to share a conversation that held on another blog “Surviving Yucatan”, before we head full swing into another tax filing season.
“Good Morning Mr. Dillinger,
Well said. All of it.
The bit about revenue generation came from a Notaria who interpreted renting the property, acting as a landlord, using the property as a hostelry, or collecting rent or lease payments, etc “additional activities” that disqualify the property from being exempt.
This interpretation made sense to my crude understandings.
Thank you for all the good inputs,
steve”
Tax Implications of Having a Fideicomiso 
Hello Steve,
Please excuse my tardy response to your response. Unfortunately, I recently received notice of the post.
First I want to state the following: Steve, If I previously struck a nerve, I apologize.
I think that you are doing a great job keeping the public informed on the situation.
My only issue is that I would have been even more impressed if you mentioned, as the AICPA did, that the Revenue Ruling only applies if “the Bank is not permitted to perform any activity beyond holding title”. However, the majority of professionals have also overlooked this sentence when discussing Revenue Ruling 2013-14.
My comments follow yours and are in (parenthesis)
As a US CPA in San Francisco, I suspect that you have limited experience working with Mexican Notarios or Mexican Attorneys on complex real estate law issues. Mexican law, especially in the area of real estate and tax status is very dense, and not easily understood by outsiders. If you ask 5 Mexican attorneys about even modestly complex real estate/tax-law issues, you generally get 5 different answers from licensed professionals.
(Actually, I have quite a bit of experience with Mexican Notarios and Mexican Attorneys. Most recently, I was in Merida and a Mexican Attorney was discussing Revenue Ruling 2013-14.
I asked him if he had read the ruling. He said that he had heard about it from a US client. I informed him that the ruling doesn’t apply if the bank is permitted to perform activities beyond holding title to the property.
The Attorney was shocked and said “then the ruling applies to nobody”.
However, I agree with you regarding asking 5 attorneys a question and getting five different answers. It’s the same in the US. Give 100 CPAs tax information and you’ll receive 100 different tax returns!)
From reading Mr. Zuniga’s personal web page, Zuninga has impressive US business law credentials, but one quick look at his resume and his titles reveal that he is missing both the “Lic.” and “CPA” qualifications (or US Tax Law certifications) after his name. The absence of the “Lic.” says that he has not qualified to practice law in Mexico. The absence of CPA and apparent absence of formal training in US Tax Law on foreign trusts also speaks volumes.
(Hmm, I don’t think that I follow your logic here. We are not questioning Mexican Tax Law.
What we are questioning is U.S. Tax Law. The only issue is whether or not a “Bank is permitted to perform any activity beyond holding title” to determine if a Fideicomiso is covered under Revenue Ruling 2013-14.
Typically an International Transactions Attorney with over 20-years of experience with both a Bachelors and J.D. from Harvard isn’t considered to be lacking in qualifications)
When someone without qualifications offers advice that is completely contrary to the expert opinions of Mexican Notarios and Mexican lawyers, and contrary to US tax experts, then each reader has a choice: Should they:
(Agreed, each reader has a choice! Unfortunately, it appears that most tax professionals who have posted on the internet, did not actually read the entire Revenue Ruling and simply stated that a Fideicomiso is no longer required to file Form 3520 or 3520-A.
As with all IRS code, regulations and rulings, one must read all the way to the bottom of the authority to see if the document actually applies to their situation.
In this case, the comment that “if the Bank is permitted or required to engage in any activity beyond holding legal title the revenue ruling does not apply”, causes great concern.
This statement could be a huge “gotcha”! How can anyone possibly tell if their Fideicomiso is covered under the Revenue Ruling if they do not have a translated copy? That is, unless they can read Spanish.
This is why the AICPA Trust Committee stated that they would continue to review trust agreements to evaluate whether they fall under the Revenue Ruling when they publicly thanked the IRS for the Ruling.
Additionally, each “vanilla” translated Fideicomiso Trust document that I reviewed contains clauses that cause concern. When I forwarded these comments to the AICPA Trust Committee, I was told that the clauses contain characteristics that potentially may viewed by the IRS as not within the scope of the Revenue Ruling, and that the beneficiary should request a Private Letter Ruling.
Therefore, in a situation that can result in such great penalties, I advise that nobody follow anybody.
Instead, one must wonder what would happen if they were audited by the IRS.
What would happen If the IRS noticed their Fideicomiso and read Revenue Ruling 2013-14 and asked for proof that the Bank was not permitted or required to engage in any activity beyond holding legal tile?
How do you think the IRS Agent would respond to I don’t know it’s all in Spanish?
I think the IRS Agent would require a translation and that one had better hope that nothing in the Fideicomiso Trust Document even hints that the Bank is permitted to perform any activity beyond holding title.)
~ Follow the advice of someone with no formal qualifications in Mexican law, and zero published background on US tax law, an individual who has not passed even the lowest levels of official Mexican certification, who also offers ZERO legal references, and ZERO specific examples, and ZERO legal precedents or official decisions, and ZERO official IRS policies & decisions, to confirm his personal interpretation of Mexican law? Or
(Again, I’m a little confused here. A International Transactions Attorney with both a BA & JD from Harvard Law School, who creates Mexican Fideicomiso’s, has zero experience? Again, we are not discussing Mexican Tax Law. We simply need to know if the Bank is permitted to perform any activity beyond holding title)
~ Follow the advice of fully trained, well-experienced US and Mexican professionals, esp. US Tax experts well-experienced in IRS policies on Foreign Real Estate trusts?
(You are correct, the AICPA Trust Committee stated that they would continue to review trust agreements to evaluate whether they fall under the Revenue Ruling)
Each person can decide who they want to represent them on Mexican real estate matters and complex US/international tax matters on trusts: An American with a Harvard law degree, and no published Mexican law license and no published right to practice law in Mexico and no published expertise in US tax law, or to hire a licensed experienced US or Mexican professional. Most people would consider hiring a US Tax expert, who knows US tax laws on foreign trusts.
It is also worth noting that Mr Zuniga lists his best attributes and highest most important skill levels and experience as: “Commercial Transactions” and “Mergers and Acquisitions“. Do most readers believe that Harvard-trained US Merger and Acquisition specialists are the best choice, especially when the M&A guy is preaching things that are the exact opposite of what is reported in the Press, and the opposite of Mexican legal professional’s opinions, and is ironically the opposite of months of multiple IRS publications?
(Have you read any translated Fideicomiso documents?
I have, and all of them contain clauses that permit the Bank to perform activities beyond holding title. When I presented these clauses to the AICPA Trust Committee, I was told that these were not “vanilla trusts”.
Well, they were “vanilla trusts”. This is why I agree with Mr. Zuniga, it’s my experience that Fideicomiso trust documents contain comments that permit the Bank to perform activities beyond holding title.
While I cannot say all Fideicomiso Trust Documents contain such clauses, I can state that my experience reading the documents concur with Mr. Zuniga’s statement that there are protective mechanisms built in to each trust which could be deemed to be beyond merely holding title.
As a result, I believe it is dangerous for anyone to act as if Revenue Ruling 2013-14 pertains to them unless they have a trust document that they are able to both read and understand.
Additionally, if any comments suggest the Bank is permitted to perform an activities beyond holding title they should request a Private Letter Ruling or obtain a ruling from a tax professional with good Professional Liability Insurance.)
Now, to return to practical real-world examples of Fideicomisos that are KNOWN to not qualify, consider Americans who have Fideicomisos that allow them to rent their properties, and to generate revenues: This class of revenue generating Fideicomisos have been described as being required to file annually with the IRS. Do good experts miss or forget to mention actual areas where the IRS has said that Mexican Fideicomiso holders must file?
(I’m not sure where you received this information regarding revenue generation?
If you read the Revenue Ruling, Situation 1 discusses a property that is occasionally leased and that the owner reports the income on their US federal income tax return.
The holding is that under Situation 1, they do not have to file as a foreign trust unless the bank is permitted or required to engage in any activity beyond holding title. The receipt of occasional rental income is not an issue. However, the Revenue Ruling does not address the factor of regular rental income.
The Revenue ruling does not state that revenue generating Fideicomiso’s must file From 3520/3520-A. However, the beneficiary does need to report the income on either Schedule C or E.)
Saludos!
John Dillinger, CPA, CGMA, PFS, MS.tax
F. 415.524.7571
Dillinger Carter & Associates, Inc.
400 Oyster Point Blvd., Suite 114|South San Francisco, CA 94080|T. 415.524.7572
http://www.dcataxservice.com|
jdillinger@dcataxservice.com
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