{"id":53,"date":"2009-11-08T19:54:24","date_gmt":"2009-11-09T02:54:24","guid":{"rendered":"http:\/\/fiduciarydutiesblog.com\/?p=53"},"modified":"2009-11-08T19:54:24","modified_gmt":"2009-11-09T02:54:24","slug":"mexican-land-trust","status":"publish","type":"post","link":"https:\/\/fresnolawyerblog.com\/?p=53","title":{"rendered":"Mexican Land Trust"},"content":{"rendered":"

The diverse use of trusts is represented in a recent case from the federal Fifth Circuit Court of Appeals.\u00a0 In Gale v. Carnrite<\/em>, 559 F.3d 359 (5th Cir. 2009), the dispute involved tax liabilities arising from the sale of membership interests in a Nevada limited liability company.\u00a0 The underlying facts were as follows:<\/p>\n

\"bajacaliforniasur\"In 1999, Gale expressed interest in purchasing a condominium unit located in San Jose Del Cabo, Baja California Sur, Mexico.\u00a0 The condominium was owned by Villa Rayos Del Sol, LLC, a Nevada limited liability company.<\/p>\n

After inquiring about the purchase, the Gales learned that legal restrictions affected the transaction.\u00a0 Specifically, as explained in the decision, \u201cunder Article 27 of the Constitution of Mexico, only Mexicans by birth or naturalization or Mexican companies may acquire direct ownership of lands or waters within the zone of 100 kilometers along the frontiers and 50 kilometers along the shores of the country.\u201d<\/p>\n

The condominium unit was located within such a restricted area.\u00a0 In order to proceed with the purchase, the Gales were informed that they could not acquire the condominium directly.\u00a0 Per the decision, \u201cInstead, they would be required to purchase the outstanding membership interests in the limited liability company (Villa Rayos), which was the beneficial owner of the leasehold interest in the condominium under a Mexican Bank Trust arrangement known as a \u201cfideicomiso<\/em>.\u201d<\/p>\n

The court explained that \u201ca fideicomiso <\/em>is a property-ownership arrangement complying with Article 27 of the Mexican Constitution under which a Mexican Bank Trust obtains legal title to a piece of real property within the prohibited zone, and a foreigner, as the beneficiary of the trust, enjoys the beneficial interest in the property, including all the usual rights of ownership.\u201d<\/p>\n

The limited liability company\u2019s sole asset was the beneficial interest in the condominium.\u00a0 The only purpose of the limited liability company was to serve as the beneficiary of the fideicomiso<\/em>.<\/p>\n

As to the history of the entity, \u201cVilla Rayos was formed in 1996.\u00a0 Its original members and owners were the Sonenshine Family Trust.\u00a0 [The Sonenshines] previously purchased the beneficial interest in the fideicomiso <\/em>from the condominium\u2019s developer in 1991 for $715,000, and subsequently transferred the beneficial interest [in the condominium to the limited liability company] in 1996.\u00a0 In February 1999, [defendant] Carnrite purchased all of the outstanding membership interest in [the limited liability company] for $1,725,000.\u201d<\/p>\n

In December 1999, the Gales purchased all of the membership interests in the limited liability company from defendant Carnrite.\u00a0 The purchase price was $2,125,000.\u00a0 The seller warranted that at the close of escrow, \u201cthe LLC has and will have no liabilities of the any nature, including without limitation tax liabilities due or to become come due.\u201d<\/p>\n

The sale closed in January 2000.\u00a0 \u201cNeither [the seller] nor anyone else reported the transaction to the Mexican government; no Mexican income or capital gains taxes were paid on the transfer.\u201d<\/p>\n

In September 2005, the Gales sold their interest in the limited liability company to a third party for $2,400,000.\u00a0 According to the case, \u201ca substantial Mexican capital gains tax liability resulted, determined by using the basis of the fideicomiso from 1991.\u201d<\/p>\n

The trial court found that the seller breached the warranty made to the Gales in 1999, on the grounds that \u201cat the time of closing, Villa Rayos had a built-in capital gains tax liability equal to the difference between the Gales\u2019 purchase price and the original adjusted basis.\u201d\u00a0 At trial, experts presented evidence regarding interpretation of the Mexican tax code.<\/p>\n

The court of appeal reversed the decision, holding in favor of the seller.\u00a0 The court assumed that (i) the 1999 transaction was a taxable event and (ii) \u201cany tax liability initially fell on [defendant] Carnrite.\u201d\u00a0 The question addressed by the court of appeal was \u201cwhether, under Mexican law, the LLC was obligated to pay taxes on the 1999 transaction.\u201d<\/p>\n

In holding for the defendant, the court held that \u201cthe Gales did not show that [the seller\u2019s] failure to pay such taxes resulted in a liability for [the limited liability company].\u201d<\/p>\n

The focus of the appellate decision was whether the individual defendant\u2019s \u201cfailure to report or pay taxes on the transfer created a tax liability for [the limited liability company].\u201d\u00a0 Explained the court, \u201cboth under [the experts\u2019] analysis and the language of the [contract] itself, the individual defendants\u2019 failure to pay resulted in a tax liability for the Gales (the buyer), not [the limited liability company].\u201d<\/p>\n

The court further explained that, \u201cthe warranty provision covered only the tax or other liabilities of the LLC.\u00a0 [However, limited liability company] was neither the buyer nor the seller in the transaction.\u00a0 The 1999 transaction altered the ownership of the membership interest of Villa Rayos, but there is no factual or legal basis shown by this record that [the limited liability company, i.e.,] Villa Rayos itself became liable for anything or that it would become liable at the default of others.\u201d<\/p>\n

The court added that, \u201cby contrast, in 2005 transfer, [the limited liability company] itself sold the beneficial interest in the fideicomiso to [the new purchaser.\u00a0 In the disputed transaction], Villa Rayos was the seller.\u201d<\/p>\n

The court concluded that, \u201cthe seller provided a warranty that the asset being transferred did not itself have any liabilities.\u00a0 If the act of transferring created liabilities or passed on a pre-existing liability of the seller, that risk was not covered by the warranty.<\/p>\n

“A warranty that the buyer was not getting any liabilities of any nature from any source would be a valuable one.\u00a0 We conclude, though, that this war they did not provides comprehensive protection.\u00a0 Because Carnrite\u2019s failure to pay taxes for 2000 is the only breach the Gales allege, Carnrite is entitled to judgment on the breach of contract claim.\u201d<\/p>\n

The decision seems to apply a narrow interpretation of contract law.\u00a0 However, it illustrates the thorny tax issues that can arise when trust assets are transferred.<\/p>\n","protected":false},"excerpt":{"rendered":"

The diverse use of trusts is represented in a recent case from the federal Fifth Circuit Court of Appeals.\u00a0 In Gale v. Carnrite, 559 F.3d 359 (5th Cir. 2009), the dispute involved tax liabilities arising from the sale of membership interests in a Nevada limited liability company.\u00a0 The underlying facts were as follows: In 1999, […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3,8],"tags":[],"class_list":["post-53","post","type-post","status-publish","format-standard","hentry","category-case-law","category-real-property"],"_links":{"self":[{"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=\/wp\/v2\/posts\/53"}],"collection":[{"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=53"}],"version-history":[{"count":0,"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=\/wp\/v2\/posts\/53\/revisions"}],"wp:attachment":[{"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=53"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=53"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=53"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}