Tax Planning Time !
Yucalandia reader “John” offered a very helpful comment in our FBAR’s and Fideicomisos: To File or Not to File, That is the Question article.
2013 UPDATE on Fideicomisos
New Developments in International Taxation: Possible Fideicomiso Exemptions
In June, 2013 the IRS made a FINAL RULING that Mexican Land Trust (MLT) Fideicomisos now NO LONGER need to file at foreign trusts (3520/3520A) AS LONG AS your Fideicomiso specifies that your real estate trust (fideicomiso) holds just one property and only allows just ONE activity: “holding title to the property” to maintain the exempt Mexican Land Trust status. Mexican Land Trust Not Considered a Foreign Trust (Rev. Rule 2013 – 14) (PDF)
“[An] MLT [Mexican Land Trust, or fideicomiso] is not a trust within the meaning of § 301.7701-4(a). [However] If, under the MLT agreement, B [“B” in the holding refers to your bank] holds legal title to any assets other than Greenacre or is permitted or required [by the terms of the fideicomiso] to engage in any activity beyond holding legal title to Greenacre, the holding of this revenue ruling does not apply… ”
So, the Fideicomiso must hold only one asset (one property), but it does allow renting.
IRS Bulletin No. 2013-26, June 24, 2013, has the IRS’s detailed set of analyses and detailed descriptions of Rev. Rul. 2013-14. http://www.irs.gov/pub/irs-irbs/irb13-26.pdf
In “Situation 1” on p 1267 the IRS clearly describes the exempt type of Mexican Land Trusts (fideicomisos) and on page 1268, the IRS describes under “Situation 1”:
“X (the American taxpayer) retains the right to manage and control Greenacre. X has the right to collect any rent on Greenacre. In addition, X has the obligation to pay directly any taxes and other liabilities due with respect to Greenacre. Accordingly, because X is treated as a disregarded entity under § 301.7701–2, A is treated as the owner of Greenacre. ”
This one IRS publication clearly identifies an American taxpayer who has a fideicomiso as an exempt Mexican Land Trust, is not a foreign trust for tax purposes, and does not have to file the 3520/3520A forms – and DOES have the right to collect rents.
For those who have not read the individual ruling ( http://www.irs.gov/pub/irs-wd/1245003.pdf ) that John cited: There are various discussions going on local and national expat websites where some individuals say that this letter exempts them from reporting their Fideicomisos. Unfortunately, there are also current reports by at least 2 individuals who are currently being forced to pay $10,000 and $25,000 USD fines for not filing.
The interpretations that advise US expats to not report their Fideicomisos, unfortunately ignore one clause on the last page of this IRS individual agent’s personal ruling:
“… 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. ”
This seems to clearly put the issue to bed.
Happy Holidays ! steve
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For readers with US Tax obligations: Yucalandia has a growing body of US IRS information in several articles:
~ Capital Gains Taxes on Mexican Properties
~ Income Tax Liabilities in Mexico
~ Fideicomisos and FATCA: US – Mexico Agreement on FATCA Reporting Requirements
~ IRS Reporting Requirements for Mexico: Fideicomisos / Mexican Land trusts
~ FBAR’s and Fideicomisos: To File or Not to File, That is the Question ,
~ US Income Tax Filing Information for Ex-Pats
~ Tax Issues for Americans and Other Expats Living in Mexico
~ Updated 2011 IRS Requirements: Foreign Account Tax Compliance Act (FATCA)
~ Comparing Tax Rates and Tax Policies for US Earned Income and Mexican Earned Income
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Feel free to copy while giving proper attribution: YucaLandia/Surviving Yucatan.
© Steven M. Fry
Read on, MacDuff.
Dear Steve, Thanks for all your efforts to help with issues of living and working in this beautiful country. Happy Holidays,Sara Date: Fri, 14 Dec 2012 13:41:06 +0000 To: email@example.com
The IRS hit us with $10,000 penalty last month for a missing page of a 3520 for 2010. The requested forms had been sent to them 3 times in fact. We have no phone service here in remote Baja Sur and luckily SKYPE worked most of the time because we were on the phone several hours trying to find someone who knew something about this issue. FYI if you ever need to contact them about filing the forms for your fide, you want the “International Business” division of the IRS.
Also, don’t give them your SS# for ID, use the EIN number you use for filing the docs for them to look up your info.
We still had difficulty finding someone who knew anything about Fidei’s and 3520’s etc. I emailed Amy Jetel in Austin because I thought we were going to need assistance dealing with them and she responded very promptly and said she could help. I wasn’t excited to pay her fee since we HAD submitted all the forms to the IRS several times, but it’s really hard to deal with them from Mex and her fee was better than $10K fine.
Luckily on one of the calls to the IRS I spoke with a lady who said “you’re lucky, I’m one of the few agents who has been trained on the 3520 filings so i know what you’re talking about”. She looked up our file and noted that I had submitted the forms several times and said “ok, you’re all clear and I’ll call off the dogs” or something to that effect. I’m still waiting for the official letter from the IRS stating we’re all clear, but we haven’t had gotten any more impending penalty letters since then.
Amy Jetel also mentioned that for approx $1900 she could write a letter to the IRS and could submit it with our next 3520 filings which explained that “a fidei is not a trust etc, and that we would no longer be filing the forms annually”. She said this letter would relieve us from any future filings of the forms. Hmmm, sounds tempting. Filing and trying to get the 30+ pages of forms for our 2 fides in the mail to the US every year is a pain in the wazoo but we’ll have to see if it’s worth the $.
There is more to it than just filing a letter that says “my fideicomiso is not a foreign trust”. You have to formally ask them to grant you this waiver, as described in the pdf link shown above in the comments. You still must file the forms in the meantime, until your waiver/exemption is approved by your regional IRS office.
That’s what I found interesting about attorney Ms Jetel’s offer to “write a letter to the IRS for us that would be submitted with our next year’s 3520’s etc and would state that these would be our final filings”. I didn’t ask for further info about the wording of the letter or why she thought it would get us off the hook for future fideicomiso/IRS filings. But she is the one who obtained the PLR that’s been mentioned on several Mexico forums, and she successfully represented my neighbor during his IRS/fideio reporting problems and it sounds like she knows what she’s doing. It would be interesting to hear from someone who tried this tactic and was successful. The annual forms are pain, but $1900..? hmmm
I find filing the FBARs, 3520s, 3520a’s, etc. easier than dealing with the ambiguities you have to live with when you don’t. Once you get the forms done correctly the first time, subsequent filings are pretty quick and easy.
As for the lawyer, I’d be tempted to ask them what the limits of their professional liability policy was!
Great point. With simple non-compliance (non-filing) fines starting at $10,000 USD and quickly progressing to $25,000 and $50,000, and ultimately landing with as much as an additional 40% of the asset value, your advice is spot-on.
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Steve, it’s now been quite a while since Revenue Ruling 2013-14 came out and there must now be many who decided to file a “final” Form 3520 in reliance on that ruling. I would certainly like to know what has happened, and I’m sure others would, too.
Do you know anyone who filed a final based on that ruling, or have you heard of anyone doing it? With what consequences, so far?
One friend here filed it (them) on his 3 properties, and he reported that it’s all gone fine.
He had previous audit problems (in the years immediately prior to this filing) with the IRS, so his returns are under scrutiny – so, No news is good news.
Thanks, Steve, for the update. Let us know if you hear anything further.