Mexican Land Trusts
If you’re not a Mexican national you can’t hold land in restricted areas unless you couple up with a bank, set up a land trust, and put up for a permit from the Mexican Ministry of Foreign Affairs. As a taxpayer to the United States, if you do all of that, is your arrangement a trust as far as the IRS is concerned? Not necessarily.
A new Revenue Ruling (2013-14 citing 92-105) on Treasury Regulation §301.7701-4(a) speaking to Mexican Land Trusts (MLT or fideicomiso) was just released. The facts addressed were as follows.
An MLT agreement with a Mexican bank was executed. Negotiation for and purchase of the property was managed by the taxpayer directly. The seller had no interactions with the bank, but at settlement legal title to the property was transferred to it subject to the MLT. This property was the only one subject to the MLT.
Under the terms of the MLT, the taxpayer had the right to sell the property without permission from the bank. Furthermore, the bank had to grant a security interest in the property to a third-party if the taxpayer requested. The taxpayer was directly responsible for the payment of all liabilities relating to the property, including any taxes due in Mexico. The taxpayer had the exclusive right to possess the property and to make any desired modifications. If the property were leased, the taxpayer would receive the rental income directly.
The bank was identified as a fiduciary in the MLT, but it disclaimed all responsibility for the property, including clear title and any duty to defend or maintain the property. The bank merely collected a nominal annual fee from the taxpayer. There was no other agreement to trigger a partnership-type relationship.
The new ruling restates and applies the 92-105 ruling, which held that where a land trust agreement provides that a taxpayer will retain exclusive control of the management, operation, renting, and selling of real property, together with an exclusive right to the earnings and proceeds from it, and where under such agreement the taxpayer is required to file all returns, pay all taxes, and satisfy any other liabilities with respect to the property, because the trustee’s only responsibility is to hold and transfer title at the direction of the taxpayer, a trust is not established. In such cases, the trustee is a mere agent for the holding and transfer of title to the property, and the taxpayer retains direct ownership of it for federal income tax purposes.
This is the case whether the taxpayer is an individual, or whether an individual taxpayer operates through a disregarded entity, or whether the taxpayer is a corporation.