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International Inheritance Estate Tax. Civil Law Trusts May not Be Trusts for U.S. Tax Law

I have received many calls from Americans asking about the  international inheritance estate tax foreign trusts law.  The issue is that some foreign trusts are not trusts for American tax law.    

A foundation or a trust in a non-common law country (such as Panama) is classified as a “civil law trust.”   The tax law assumes that the trust is a common law trust. 

A civil law trust may be either a foreign corporation or if you are lucky, an alter ego

The inheritance of a foreign corporation causes unexpected and undesired income taxes.  Yes, the problem is income tax.    Extremely different income tax laws apply to a distribution from a corporation versus a trust.  You can learn about saving taxes with a trust on this link.

Under international inheritance estate tax law, these civil trusts were not trusts for U.S. tax law.

Many Americans owned property along the beautiful Baja California, Mexico, Pacific Coast.   Mexico has an anti-immigrant law that prohibits foreigners from owning property near the ocean. Instead, a Mexican trust with a fixed period of 30 years owns the property.   

If the Mexican trusts was a trust, then Form 3520-A and  Form 3520 must be filed.  The penalty for late filing is five percent per year of the gross value of the trust’s assets. 

The IRS does great work.  It knows that just because an entity is called a “trust”, the name means nothing.   This 2013-14 revenue ruling is a great educational tool. Knowing the definitions is necessary for tax planning. The tax laws for trusts are unique.  

The IRS ruling is below in blue. The concept applies to all civil law trusts.  The U.S. has common law trusts (as well as the UK and its territories, Canada, Australia and  New Zealand).   You can learn about trust estate tax planning for common law countries on this link.

If you would like help with your tax planning, then please contact me,  Brian Dooley CPA,MBT,  at [email protected]  

At the end of this blog is the IRS warning that International Inheritance Estate Tax  Civil Law Trusts Are Not Trusts for U.S. Tax Law.Part I    Section 7701 — Definitions  26 CFR 301.7701-4: Trusts

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 the 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 on 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.

 Also, X has the obligation to pay directly any taxes and other liabilities due on 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 an 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.

The IRS’ Warning: International Inheritance Estate Tax. Civil Law Trusts Are Not Trusts for U.S. Tax Law

Note that a fideicomiso (Mexican Land Trust) that is described in Rev. Rul. 2013-14, 2013-26 I.R.B. 1267, is not a trust for U.S. tax purposes, Thus, the U.S. owner of the fideicomiso is not required to file a Form 3520 or a Form 3520A.   In this case, it helped the taxpayer because  it was an alter ego. 

The IRS warning that International Inheritance Estate Tax. Civil Law Trusts Are Not Trusts for U.S. Tax Law has a more deadly result if the entity is a corporation.   Distributions from corporations are usually taxed as a “non-qualified dividend”.    These dividends are taxable at the highest rate.  

Provocative International Tax Planning News for Small Business

A new U.S. Senate study reported that business with International Tax Planning are taxed at only 14%. The report explains why small businesses pay more than the legal share.  Here is why you will always pay too much in taxes.    This is the report that your international tax accountant needs to help you save taxes. 

International tax planning and strategy

Applying for an IRS ruling on your international tax planning will save you taxes in the long run.

Fantastic IRS International Gift Tax Plan

This IRS internal letter on this link. Fantastic legal tax avoidance for the foreign person with family in the U.S. is explained in this letter.

Amazing IRS Avoidance of  state income taxes  with this new IRS  designer  Nevada trust.  IRS tells how to use a Nevada trust to avoid state income taxes. Here’s what’s happeningon this link.   

New- Department of the Treasury letter to the U.K. tax authorities on U.S.  tax planning for UK and EU companies.  Here is the letter from the U.S. to the U.K. 

Be an IRS tax planning wizard with our new custom Google search, on this link.  This custom search reads 300,000 pages deep inside the IRS’s website and the tax court’s website.  It is free!.  Find the answers to your tax question quickly and accurately.

18th Century Supreme Court case destroys IRS tax penalty law. Using this case, the Tax Court gave the IRS a significant defeat.  Here is what happen.   The Supreme Court is the “Law of the Land.”  It rules over the IRS and Congress.   

It works both ways.  The blog on this link explains the  Supreme Court Doctrine used by the IRS to blow up an offshore life insurance plan.

offshore trust, foreign trust, nevada trust, estate planning trust, esbt,

Since the Middle Ages, the wealthy have capitalized on trusts to avoid paying taxes. During the Great Crusades, upon the death of a knight, his entire estate went to the king.    Nine hundred years later, things have not changed much except the ‘King” takes only half.

Trusts are the most efficient tax tool. International tax planning should start with a Nevada trust to own a  foreign company.  Learn trust tax planning and asset protection in this easy to read blog post.    It has the blueprint for successful trust tax planning.   Get the IRS memo on asset protection and tax planning with an offshore trust on this blog post.

internet tax planning, saving taxes, cloud tax planning

Saving taxes with the offshore cloud computer. 

Cloud tax planning. Learn how businesses are using the cloud to avoid taxes on this link. 

E-commerce companies are avoiding state income taxes and in some cases deferring U.S. taxes.

Here is how it works.  A computer service that can provide a service (such as a tax research program) or a product (such as music, e-books, video) has special sourcing rules.  The income can be foreign source income when the computer server in a foreign country. 

Is the U.S. a tax haven for citizens of the UK, Sweden, Belgium, Canada, Luxembourg, and Austria?  Yes, says the IRS in its Publication.  Learn the magic Tax Treaty words for these lucky citizens of The UK, Sweden, Belgium, Canada, Luxembourg, Austria on this link.

Why You Will Always Pay too Much in Taxes

Nothing is more complex than income tax. Yet, most small business owners meet with their CPA at year end with the fantasy that this will save taxes. At best, it reduces this year's taxes by increasing next year's taxes.

Einstein stated that “The hardest thing to understand in the World is the income tax.”  Yet, most small business owners meet with their CPA at year end with the fantasy that this will save taxes. At best, it reduces this year’s taxes by increasing next year’s taxes.

  Think of 1,000,000 pages written over 100 years by different people with different agendas.  Big Business exploits this complexity by hiring the best international tax accountants. 

However, small business sees the international  tax accountant as an unwanted expense. 

The complexity is caused by the process. Great Depression tax laws apply to international businesses.  World War II tax laws apply to small (and big) business.

Starting  50 years ago (1967), our Government began using  “patches” to get the Tax Code to make social changes (this is known as socialism).  The current tax reform is more than 400 pages of patches. 

Now, don’t blame anyone party.  Both sides jumped on patch bandwagon.  The result is 1,000,000 of pages of conflicting laws.

Most small business owners budget an hour or so of their CPA’s time for “year-end” tax planning.   Meanwhile, the news reports that firms like General Electric have 2.3% tax rate over the last decade.     GE’s tax department is larger than all of the IRS’s international tax department.

Great firms invest in their tax structure.   Business tax planning fees are tax deductible. Here, in my lovely state of California, $10,000 in tax planning fees is only $4,700 of after-tax dollars (our marginal highest tax rate is  53%).

While the conflicting laws are very complex, they create 1,000s of international tax accounting strategies.   Here are a few:
1.  Cash advance payments can be tax-free for decades (more on this link).
2.  Small business owners over age 57 have huge tax savings with private pension plans
3.  Importers can use the Bush administration contract manufacturing laws to avoid taxes (more on this link) legitimately.
4. The IRS has designed a new type of trust to help you avoid state income taxes and protect your assets (more on this link).
5.  President Reagan’s privately owned insurance company tax law allow you to have your insurance company.  You can self-insure and pay your domestic insurance corporation up to $1.2 million a year tax-free.  This is known as a captive insurance company (more on this link).
6.  Defer taxes (like Disneyland) with gift cards and other private money (more on this link).  Use an offshore corporation as the “maker” of the gift cards. 

Thousands of International Tax Strategies used by the best International Tax Accountants

International tax accountants do not have a book of these.  Your CPA must spend time with you and learn the details of your business.  Your tax loophole maybe your inventory method, your e-commerce website, your multi-state transactions, your business insurance (or the items that you are not insuring) and the list goes on.

Domestic Tax Planning collaborates International Tax Planning

For example, Bob has a successful web based business.   He has a few part-time employees and independent contractors assisting him.   He wants to be a tax haven. Yes, Bob, himself wants to be a tax haven.  He learned about the new solo 401-K tax law.  Bob can be the sole trustee, sign on the bank account, buy real estate that is financed, buy stocks, bonds, and stock funds.   Like former Presidential candidate Mitt Romney, he uses the solo 401K plan to own tax haven offshore corporations (more on this link). 

He started the fund in November.  By January he placed more than $100,000 tax deductible dollars into the plan.  This saved him $50,000 in taxes.  Of course, the investment profits will be tax-free.  He hired a law firm to establish the plan and maintain the plan.  The cost over two years is $10,000 deductible dollars (so after tax $5,000).    $5,000  saves $50,000.

Bob also used a 1954 tax law on medical reimbursement plan.   He paid $15,000 to his attorney to draft the plan.  This plan does not have to file a tax return, so there is no annual cost.  The plan pays for all the supplements required by his doctor, his co-pay, and therapies not covered by insurance.   He saves $10,000 a year in taxes for a $5,000 one-time deductible ($2,500 after-tax) cost.  $2,500 saves $10,000 year after year.

If you would like to discuss your tax concerns, ,then email me, Brian Dooley, CPA, MBT, at [email protected].

Amazon International Tax Planning Book by Brian Dooley, CPA, MBT

Our most popular and best value book is International Taxation in America for the Entrepreneur.  This is the best International Tax Planning Book for small business. 

An easy two hour read that will teach you tried and true tax saving plans. You can buy it now for $9.50 at Amazon on this link (return it in seven days if you do not like the book).

Each of our International Tax Planning Books include links to hundreds of additional offshore tax planning strategies.  You will learn how small business are saving taxes with properly planning their international businesses. 

International Tax Planning Book for the attorney and CPA

For the CPA and attorney, the book on this link provides an indepth explanation of international income tax and international estate and gift taxes.  It includes a free PDF version that is used for tax research.  The Adobe Reader find function quickly locates the most complex tax issue.

If you would like to explore your international tax questions, then please contact me,  Brian Dooley CPA, at [email protected]

European Court Allows Google Ireland Billions in French Tax Avoidance

European Court allows Google billions in legitimate French tax avoidance.

European Court allows Google Ireland billions in legitimate French tax avoidance. Learn how this applies to your U.S. state income tax planning. 

The concepts in tax treaties are ancient and provide tremendous tax savings for internet businesses.  International  E-commerce businesses can follow this Google model and avoid taxes.

Additionally, this Google model works in avoiding state income taxes in the United States.

Today’s tax treaties are based on the ides of business from the days of hard assets businesses (factories, warehouses, office buildings).   By keeping these ancient concepts, tax treaties make legal tax avoidance is easy for an internet business and an e-commerce business. 

In the summer of 2017, the Paris Administrative Tribunal, the Court found that France could not charge Google Ireland $1.4 billion in taxes.   Google France had assisted Google Ireland in its advertising business.  However, Google Ireland’s advertising computers were in Ireland, and none were in France.

The Google victory was ruled on Ireland-France Tax Treaty (1968).  The victory reflects the flaw of the ancient permanent establishment concept found in the 2014 European Model Treaty and the American model treaty. 

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