Mexican Land Trust is Not a Trust U.S. Federal Income Tax Purposes

Mexican Land Trust is Not a Trust U.S. Federal Income Tax Purposes
by Mark Muntean

It is not uncommon for Californians to own vacation property in Mexico.  The Mexican Constitution prohibits non-citizens of Mexico from owning property within 100 kilometers of the border or fifty kilometers of the coast.

  

To acquire property in Mexico and comply with Mexico’s laws, property is placed in a “bank trust” in Mexico, or more often a “Mexican Land Trust” (a “fideicomiso”).  The Internal revenue Service (“IRS” or “Service”) compared a Mexican Land Trust to an Illinois Land Trust, as described in IRS Rev. Rul.  92‑105, and found both trust to be similar.  See PLR 201245003 (discussed below).  The bank trust or Mexican Land Trust provides that all taxes, insurance, and other expenses related to the property are the responsibility of the individual beneficiary (the “California Owner”), and the bank charges an annual fee to hold title in its name.

Recently a U.S. taxpayer asked the IRS to issue a ruling on whether the Mexican Land Trust was a “trust” for U.S. federal income tax purposes as defined in Treasury Regulations Section 301.7701-4(a).  If the Mexican Land Trust is treated as a true trust for U.S. federal income tax purposes, additional tax filings with the Service would be required (for example IRS Form 3520).  See IRC Section 6038.  The penalty for failing to file the IRS Form 3520 upon transfer of assets to the trust are set at the higher of $10,000 or 35 percent of the value of the property transferred.   IRC Section 6677.  Additionally, an argument might be made that the use of the property in Mexico is a taxable distribution from the Mexican Land Trust to the beneficiary (the California Owner).

With respect to the Illinois Land Trust, the IRS had previously held that because the trustee’s sole duty was to hold and transfer title at the direction of the beneficiary, the Illinois Land Trust was an agent for the holding the title to the property, and for federal income tax purposes the property is treated as being held directly by the beneficiary of the trust.  Rev. Rul. 92-105.   Accordingly, the Illinois Land Trust was not a trust for federal income tax purposes. 

For the same reasons the IRS ruled that the Mexican Land Trust only holds the title to the property and transfers that title at the direction of the beneficiary, and as such is also not a trust for federal income tax purposes.  Accordingly, in response to the taxpayer’s requested for a private letter ruling (“PLR”) the Service held that a Mexican Land Trust is not a “trust” for U.S. Federal income tax purposes.  PLR 201245003 (November 9, 2012)

While the Service’s private letter ruling is address only to the particular taxpayer that requested the ruling, and it therefore cannot be cited as authority, PLR 201245003 does provide an indication as to the Service’s position on the matter.  Thus, this ruling can be viewed as good news for a number of taxpayers.