On June 6, 2013, the Internal Revenue Service issued Revenue Ruling 2013-14, which concludes that a Fideicomiso or a Mexican Land Trust (MLT) is not taxed as a “trust” for U.S. income tax purposes. While most practitioners have operated on that assumption, it is helpful to have official confirmation from the IRS.
Non-Mexican persons are prohibited from directly holding title to Mexican residential real property in restricted zones (so-called “Greenacre” in the Revenue Ruling). But non-Mexican persons, after obtaining the required permit, may hold such property through an MLT Agreement with a Mexican bank.
The Revenue Ruling examines three factual scenarios regarding MLTs:
In situation one, a U.S. limited liability company solely owned by a U.S. citizen purchases Greenacre through an MLT.
In situation two, a corporation organized under the laws of a state in the United States purchases Greenacre through an MLT.
In situation three, a U.S. citizen directly purchases the property pursuant to a MLT, without any intervening entity.
In all situations, while legal title to the property is transferred from the seller to a Mexican bank subject to the MLT Agreement, the U.S. owner may sell the property without the bank’s approval and may direct the bank to grant a security interest to a third party, such as a mortgage lender. The U.S. owner must pay all property expenses, including any Mexican taxes on Greenacre, and will receive directly any rental income from the property. Even though the Mexican bank is a fiduciary under the MLT Agreement and collects an annual fee from the U.S. owner, the bank has no duty to defend or maintain the Greenacre. There is no property except Greenacre held under the MLT.
In all three factual scenarios, the IRS concluded that the MLT is not a “trust” under the Treasury Regulations. In situations one and three, the individual U.S. citizen is considered to be the owner of Greenacre. In situation two, the U.S. corporation is the owner of Greenacre.
This Revenue Ruling will be a relief to taxpayers who were concerned that MLTs, if classified as “trusts,” would trigger foreign trust information return filing requirements, such as Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, and Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner.
This Revenue Ruling does not apply if, under an MLT Agreement, a Mexican bank holds legal title to any assets other than Greenacre or if the bank has authority to perform activity beyond holding legal title to Greenacre. Thus, it is important that the terms of Mexican Land Trust Agreements are reviewed to ensure that such arrangements conform to this Revenue Ruling and are not “trusts” for federal income tax purposes.