Fideicomiso private letter ruling offers some hope
The IRS has issued a Private Letter Ruling that says a fideicomiso is not a trust.
If that’s so, then you don’t have to file Form 3520 and Form 3520-A every year. Nor do you face the penalties for failing to do so.
This is an immensely sane step in the right direction. Fideicomisos are title-holding mechanisms required by the Mexican Constitution. A Mexican bank holds title to your real estate but otherwise takes no responsibility whatsoever for anything. Trustees are required to protect and preserve assets for the beneficiaries. A fideicomiso does not behave like a trust at all.
Go see John Strohmeyer’s blog, where he has written about the PLR. John’s a good guy. Too bad he’s in Texas and doesn’t want to move to California. :-)
(We are hiring. If you’re looking for an international tax lawyer job, give us a call.)
IRS on fideicomiso structures as “foreign trusts”?
One of the Eternal Mysteries of (Tax) Life: Is a fideicomiso a “foreign trust” for U.S. income tax purposes?
In an Information Letter from late 2010 and released in early summer this year (and published in Tax Notes Today in September, 2011), the IRS Chief Counsel’s office side-stepped the question. :-) (Sorry, Grace!)
Release Date: NOVEMBER 17, 2010
Published by Tax Analysts(R)
Release Date: 6/24/2011
Date: November 17, 2010
Refer Reply To: GENIN-141622-10 – CC:INTL:B01:* * *
Dear * * *:
This is in response to your request for general information regarding the infor-mation reporting obligations with respect to Mexican fideicomisos that own certain Mexican residential real property on behalf of U.S. persons who are not also Mexican citizens.
Under section 6048(a) and (c) of the Code,1 a U.S. person who makes a transfer to or receives a distribution from a foreign trust generally is required to report certain information on Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. Under section 6048(b) of the Code, a U.S. person who is treated as the owner of a foreign trust under the grantor trust rules (sections 671 through 679 of the Code) is required to complete Part II of Form 3520 and to ensure that the foreign trust files Form 3520-A, Annual Information Return of Foreign Trust with U.S. Owner. Section 6677 of the Code imposes significant penalties (up to 100 percent of the gross reportable amount) for failure to comply with section 6048.
The rules for determining whether an entity is classified as a trust for U.S. federal income tax purposes are found in section 301.7701-4 of the Procedure and Administration Regulations. The rules for determining whether an entity that is classified as a trust is a foreign trust are found in section 7701(a)(31)(B) of the Code and section 301.7701-7 of the Procedure and Administration Regulations. 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.
This letter provides general information only and does not constitute a ruling. See Rev. Proc. 2010-1, section 2.04, 2010-1 I.R.B. 7. 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 pursuant to the procedures set forth in section 7 of Rev. Proc. 2010-1.
We hope this information has been helpful to you. If you have any questions, please contact * * *, Identification Number * * *, at * * * (not a toll-free call).
M Grace Fleeman
Senior Technical Reviewer, Branch 1 (International)
What Ms. Fleeman is saying is:
“We’re not telling you that your particular fideicomiso is a trust and we’re not telling you your particular fideicomiso is NOT a trust. All we are saying is that if it IS a trust you have to file Form 3520.”
The question of whether a fideicomiso is a trust (or not) as the IRS defines a trust — this is a question on which reasonable minds differ.
- All references to sections of the Code are to sections of the Internal Revenue Code of 1986, as amended. [↩]
FAQ 17, FAQ 18 deadline is August 31, 2011
I just spent the weekend in Form 3520 hell, cleaning up a situation with a client and a fideicomiso. We did Form 3520′s and Form 3520-A’s for all of the years in question and will shoot them off to Ogden, Utah by August 31, 2011.
The IRS doesn’t really know what a fideicomiso is, and whether Form 3520 is really applicable. Or not. (I.e., is a fideicomiso REALLY a trust as defined in Treasury Regulations Section 301.7701-4(a)?). Well, they might know or have an opinion on this point, but they ain’t a-tellin’ us what the rules are.
But who wants to get sideswiped by the ex post facto bus? Not my clients.
So we (using the royal we) did Form 3520s for a bunch of open years, with a small book appended to the back of them explaining why this situation really doesn’t warrant Form 3520 filing, but we’re doing it anyway.
And of course the Mexican bank doesn’t generate Form 3520-A. So we (again, the royal we) did a bunch of companion Form 3520-A forms per the instructions to Form 3520.
There have to be a small army of Americans with fideicomiso structures. Buy Mexican real estate anywhere in Baja California and you have one of these things. You have a compliance nightmare ahead of you, Bucky. Did you see how the worm turned on you in FBAR land? In the old days (pre-2009) cleaning up late FBARs would work and work well. No penalties, and a taxpayer was fully within the system. But now? All of a sudden it’s “Off with their heads!” from the IRS and failure to file an FBAR.
So there is great comfort in getting your foot in the door before August 31 and fixing a Form 3520 problem guaranteed penalty-free. (Well as much as a guarantee from an organization which reneged on FAQ #35 in the 2009 Voluntary Disclosure Program, and unreliable once probably means unreliable again.) Even if the Form 3520 might or might not be required.
For all of you with ANY activity outside of the United States WHATSOEVER — check for late FBARs, check for late Form 5471, check for late Form 3520, etc. Form 8858 is another one. I’m just doing this off the top of my head.
Put together the paperwork and get it filed before August 31.
Look at FAQ #17 and FAQ #18 on the IRS website for the FAQ’s to the 2011 Offshore Voluntary Disclosure Initiative. Work like your life depends on it to get this done if it conceivably applies to you.
Fideicomiso question and Form 3520
An inquiry from a reader:
Mr. Hodgen, After the release of both IRS forms 3520 & 3520-A instructions, is there a conclusion that a grantor of a trust using their own property (fideicomiso) has to treat the uncompensated use of trust property as a loan/distribution? After reading both forms instructions there appeared to be a note excluding this??? I guess I just have a hard time reading there instructions and what they mean. Thank you for your time, I appreciate your blogs and all your input! Would you reply on your blog to this?
Yes it is a trust distribution. Dumb result, right? Use your own property and have a trust distribution?
The bank that runs your fideicomiso does nothing, accepts responsibility for nothing, etc. This should more properly be ignored or treated as a nominee arrangement.
The IRS will be coming out with a pronouncement specifically about this. It will be coming in the “real soon now” time frame. My guess is you aren’t going to like what the IRS says.
Clean up your 3520 and 3520-A problems now.
Oh. And greetings from Kayenta, AZ.