Thought-provokinganalysis and opinion on federal tax issues

Mexican Land Trust Ruling A Curiousity

June 6, 2013

by Monte A. Jackel

In a very curious revenue ruling. Revenue Ruling 2013-14, issued on June 6, the IRS held that a Mexican Land Trust was, in effect, an agent of the taxpayer and not a trust or other type of tax entity. The issue arose because, under Mexican law, a nonresident cannot own residential real property in certain areas of Mexico. This revenue ruling describes the facts so as to unequivocally state that the trustee’s only responsibility was to hold and transfer title to property. Thus, under the authority of  Revenue Ruling 92-105, an Illinois land trust ruling that held that the Illinois land trust was not a trust but a mere agent of the taxpayers, it was held that the owner of the Mexican trust was its owner for U.S. tax purposes. Revenue Ruling 92-105 had stated: “Because Ts only responsibility was to hold and transfer title at the direction of A, a trust (as defined in section 301.7701-4(a) of the regulations) was not established. Moreover, there were no other agreements between A and T (or between A and any other person) that would cause the overall arrangement to be classified as a partnership (or any other type of entity) for federal income tax purposes. Cf . Rev. Rul. 64-220, 1964-2 C.B. 335. Instead, T was a mere agent for the holding and transfer of title to Blackacre, and A has retained direct ownership of Blackacre for federal income tax purposes.” In the ruling today, Rev. Rul. 2013-14, the IRS stated “Because B‟s only duties under the MLT agreement are to hold the legal title to Greenacre and transfer title at the direction of X, the MLT is not a trust.”

I find Revenue Ruling 2013-14 curious not for what it says, but for what it omits. In Rev. Rul. 2004-86, not cited in the ruling today,  the issue was whether a Delaware Statutory Trust was, first, a separate tax entity under the Internal Revenue Code and, if so, whether the separate tax entity was a trust and, if a trust, whether the trust was an investment trust or a regular grantor trust. The IRS stated in this 2004 ruling:

“Under Delaware law, DST is an entity that is recognized as separate from its owners. Creditors of the beneficial owners of DST may not assert claims directly against Blackacre. DST may sue or be sued, and the property of DST is subject to attachment and execution as if it were a corporation. The beneficial owners of DST are entitled to the same limitation on personal liability because of actions of DST that is extended to stockholders of Delaware corporations. DST may merge or consolidate with or into one or more statutory entities or other business entities. DST is formed for investment purposes. Thus, DST is an entity for federal tax purposes….Whether DST or its trustee is an agent of DST’s beneficial owners depends upon the arrangement between the parties. The beneficiaries of DST do not enter into an agency agreement with DST or its trustee. Further, neither DST nor its trustee acts as an agent for A, B, or C in dealings with third parties. Thus, neither DST nor its trustee is the agent of DST’s beneficial owners. Cf. Comm’r v. Bollinger, 485 U.S. 340 (1988)….This situation is distinguishable from Rev. Rul. 92-105. First, in Rev. Rul. 92-105, the beneficiary retained the direct obligation to pay liabilities and taxes relating to the property. DST, in contrast, assumed A’s obligations on the lease with Z and on the loan with BK, and Delaware law provides the beneficial owners of DST with the same limitation on personal liability extended to shareholders of Delaware corporations. Second, unlike A, the beneficiary in Rev. Rul. 92-105 retained the right to manage and control the trust property.”

It is curious to me why the IRS did not cite Rev. Rul. 2004-86 in Rev. Rul. 2013-14. I recall being involved in the drafting of Rev. Rul. 2004-86 at the IRS years ago and recall a concern that the holding in 2004-86 could be viewed as over-ruling Rev. Rul. 92-105. Although memories dim after several years, I believe that the reason why Rev. Rul. 2004-86 was not cited in Rev. Rul. 2013-14 is the same concern that led the IRS to be concerned in 2004 that Rev. Rul. 2004-86 could be viewed as over-ruling Rev. Rul. 92-105. And that reason is that Rev. Rul. 92-105 did not first analyze whether the Illinois Land Trust was a separate tax entity under federal tax law and then proceed to determining whether it was a trust. Rather, 92-105, as does 2013-14, proceeds directly to the question of whether the “trust” at issue was a trust or a nothing for tax purposes. Rev. Rul. 92-105, as well as Rev. Rul. 2013-14, assume away any other issue of the separate tax entity status of the “trust” by stating “There is no other agreement or arrangement between or among A ,X ,B, or a third party that would cause the overall relationship to be classified as a partnership (or any other type of entity) for U.S. federal income tax purposes.” There is no similar statement in Rev. Rul. 2004-86.

Perhaps what has happened is that a mistake was made in Rev. Rul. 92-105 in failing to analyze the nature of the statute under, in that case, Illinois land trust law, to determine whether it had the attributes of a separate tax entity for federal tax purposes. After all, although the check-the-box regulations were not in place in 1992 but were in place in 2004, the first inquiry in any event is whether there is a separate tax entity in existence for federal tax purposes. That analysis did not occur in 92-105 in testing whether the Illinois land trust was a separate tax entity and if so, whether it was a trust or an agency, and today that preliminary analysis has also not occurred in 2013-14 where there is absolutely no analysis of the legal rights and duties created under Mexican law with respect to the Mexican Land Trust.

If Rev. Rul. 92-105, as attempted to be distinguished in Rev. Rul. 2004-86, is not a correct statement of law, then 92-105 should be clarified, or perhaps revoked. On the other hand, if the approach in 2004-86 is viewed by the IRS today as wrong, the solution is not to avoid citing the ruling but to modify, distinguish or revoke it. Just ignoring a troublesome ruling is not good tax policy.