rr-13-14.pdf

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Part I

Section 7701—Definitions

26 CFR 301.7701-4: Trusts

Rev. Rul. 2013-14

ISSUE
Is the fideicomiso or Mexican Land Trust arrangement (“MLT”), described below,
a trust under Treasury Regulation § 301.7701-4(a)?
FACTS
The Mexican Federal Constitution prohibits non-Mexican persons from directly
holding title to residential real property in certain areas of Mexico (“restricted zones”).
Non-Mexican persons, however, may hold residential real property located in the
restricted zones through an MLT with a Mexican bank after obtaining a permit from the
Mexican Ministry of Foreign Affairs.
Situation 1
A
, a U.S. citizen, is the sole owner of X, a limited liability company organized
under the laws of state Z
in the United States. X is disregarded as an entity separate

from its owner under § 301.7701-2(a) (a disregarded entity). A, through X, wanted to
purchase Greenacre. Greenacre is Mexican residential real property located in a
restricted zone. Neither A
nor X may hold title directly to Greenacre under Mexican law.
X
obtained a permit from the Mexican Ministry of Foreign Affairs and signed an
MLT agreement with B, a Mexican bank. X negotiated the purchase of Greenacre
directly with the seller of the property and paid the seller directly. The seller had no
interactions with B with respect to the sale. At settlement, legal title to Greenacre was
transferred from the seller to B
, subject to the MLT agreement, as of the date of sale.
No property other than Greenacre is subject to the MLT agreement.
Under the terms of the MLT agreement, X has the right to sell Greenacre without
permission from B. Further, B must grant a security interest in Greenacre to a third
party, such as a mortgage lender, if X
so requests. X is directly responsible for the
payment of all liabilities relating to Greenacre. X must pay any taxes due in Mexico with
respect to Greenacre directly to the Mexican taxing authority. X
has the exclusive right
to possess Greenacre and to make any desired modifications, limited only by the need
to obtain the proper licenses and permits in Mexico. If Greenacre is occasionally
leased, X
directly receives the rental income and A, as the owner of X, reports the
income on A
’s U.S. federal income tax return.
Although B
is identified as a fiduciary in the MLT agreement, it disclaims all
responsibility for Greenacre, including obtaining clear title. B has no duty to defend or
maintain Greenacre. B
collects a nominal annual fee from X. 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.
Situation 2
The facts are the same as in Situation 1 except that X is a corporation organized
under the laws of State Z in the United States. X is treated as a corporation under §
301.7701-2(a). If Greenacre is occasionally leased, X directly receives the rental
income and reports the income on its U.S. federal income tax return.
Situation 3
The facts are the same as in Situation 1 except that A
deals directly with B
without interposing X or any other entity. A obtained the permit from the Mexican
Ministry of Foreign Affairs, signed the MLT agreement with B, and negotiated the
purchase of Greenacre. Additionally, the provisions of the MLT agreement that apply to
X
in Situation 1 instead apply to A. If Greenacre is occasionally leased, A directly
receives the rental income and reports the income on A
’s U.S. federal income tax
return. B collects a nominal annual fee from A. There is no other agreement or
arrangement between or among A
, 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.
LAW AND ANALYSIS
Section 301.7701-1(a)(1) provides that whether an organization is an entity
separate from its owners for federal tax purposes is a matter of federal tax law and does
not depend on whether the organization is recognized as an entity under local law.

Section 301.7701-2(a) defines a “business entity” as any entity recognized for
federal tax purposes (including an entity with a single owner that may be disregarded as
an entity separate from its owner under § 301.7701-3) that is not properly classified as a
trust under § 301.7701-4 or otherwise subject to special treatment under the Code. If a
business entity with only one owner is disregarded as separate from its owner, its
activities generally are treated in the same manner as a sole proprietorship, branch, or
division of the owner.
Section 301.7701-4(a) provides that the term “trust” refers to an arrangement
created by a will or by an inter vivos declaration whereby trustees take title to property
for the purpose of protecting or conserving it for the beneficiaries. Usually the
beneficiaries of such a trust do no more than accept the benefits thereof and are not the
voluntary planners or creators of the trust arrangement. However, the beneficiaries of a
trust may be the persons who create it, and it will be recognized as a trust if it was
created for the purpose of protecting and conserving the trust property for beneficiaries
who stand in the same relation to the trust as they would if the trust had been created
by others for them. Generally, an arrangement is treated as a trust if it can be shown
that the purpose of the arrangement is to vest in trustees the responsibility for the
protection and conservation of property for beneficiaries who cannot share in the
discharge of this responsibility.
Rev. Rul. 92-105, 1992-2 C.B. 204, addresses the transfer of a taxpayer’s
interest in an Illinois land trust under § 1031. Under the facts of the ruling, an individual
taxpayer created an Illinois land trust and named a domestic corporation as trustee.

Under the deed of trust, the taxpayer transferred legal and equitable title to the real
property to the trust, subject to the provisions of an accompanying land trust agreement.
The land trust agreement provided that the taxpayer retained exclusive control of the
management, operation, renting, and selling of the real property, together with an
exclusive right to the earnings and proceeds from the real property. Under the
agreement, the taxpayer was required to file all tax returns, pay all taxes, and satisfy
any other liabilities with respect to the real property. Rev. Rul. 92-105 concludes that,
because the trustee’s only responsibility was to hold and transfer title at the direction of
the taxpayer, a trust, as defined in § 301.7701-4(a), was not established. The ruling
holds that, on the facts described in the ruling, the trustee was a mere agent for the
holding and transfer of title to the real property, and the taxpayer retained direct
ownership of the real property for federal income tax purposes.
Situation 1
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. X retains the
right to manage and control Greenacre. X
has the right to collect any rent on
Greenacre. In addition, X
has the obligation to pay directly any taxes and other
liabilities due with respect to Greenacre. Accordingly, because X
is treated as a
disregarded entity under § 301.7701-2, A
is treated as the owner of Greenacre.

Situation 2
The MLT is not a trust, and the analysis is the same as in Situation 1 except that,
because X
is treated as a corporation under § 301.7701-2(a), X is treated as the owner
of Greenacre.
Situation 3
Because B
‘s only duties under the MLT agreement are to hold the legal title to
Greenacre and transfer title at the direction of A, the MLT is not a trust. A retains the
right to manage and control Greenacre. A
has the right to collect any rent on
Greenacre. In addition, A has the obligation to pay directly any taxes and other
liabilities due with respect to Greenacre. Accordingly, A is treated as the owner of
Greenacre.
HOLDING(S)
In all three situations described above, the MLT is not a trust within the meaning
of § 301.7701-4(a). If, under the MLT agreement, B
holds legal title to any assets other
than Greenacre or is permitted or required to engage in any activity beyond holding
legal title to Greenacre, the holding of this revenue ruling does not apply and the rules
of §§ 301.7701-1 through 301.7701-4 will determine the federal tax classification of the
MLT.
DRAFTING INFORMATION
The principal author of this revenue ruling is Wendy L. Kribell of the Office of
Associate Chief Counsel (Passthroughs & Special Industries). For further information
regarding this revenue ruling, contact Ms. Kribell at (202) 622-3050 (not a toll-free call).