Fifth Circuit Affirms Tax Court's Ruling That MoneyGram Is Not a Bank

(Parker Tax Publishing June 2021)

The Fifth Circuit affirmed a Tax Court ruling that a corporation that provides consumers and financial institutions with payment services was not a bank under Code Sec. 581 and therefore could not deduct its losses on securities against its ordinary income. The Fifth Circuit found that the company did not take deposits, which is an essential function of a bank, because its customers did not place funds with it for safekeeping. MoneyGram International, Inc. v. Comm'r, 2021 PTC 148 (5th Cir. 2021).

Background

MoneyGram International, Inc., offers various money transfer services to individuals and financial institutions. One such service is the sale of money orders through agents like WalMart or convenience stores. To purchase a money order, a customer gives the agent cash in exchange for a blank money order. The total cost for the money order is the amount of the money order plus a fee. The customer fills in his or her name, the name of the recipient, and signs the money order. Most recipients present and redeem the money order within ten days of its purchase.

MoneyGram also offers payment processing services to financial institutions, including the processing of "official checks." Official checks include cashier's checks and bank checks. Compared to personal checks, which may bounce, these checks assure payment. Financial institutions both provide these checks to their customers (for example, to close on a home) and use them to pay the institution's own obligations. While the financial institution issues the official checks, MoneyGram processes them. At the end of each business day, the financial institution reports the dollar amount of official checks it issued that day and then transfers that amount to MoneyGram, usually the following morning. When the payee later presents the check for payment, the funds held at MoneyGram are drawn down. In other words, the financial institution has an account with MoneyGram that depletes and replenishes in a daily cycle based on how many official checks the financial institution issued the day before. Before the first day the financial institution issues official checks, it gives MoneyGram funds equal to its anticipated average daily volume of official checks, to cover any checks presented for payment before the first daily transfer.

MoneyGram is registered with the Department of the Treasury as a "money services business." On its annual SEC filings, MoneyGram has described itself as a "global payment services company," and its financial statements do not list any bank deposits as liabilities or any loans as assets. MoneyGram classified itself on its tax returns as a "nondepository credit intermediation" business. From 2005 to 2007, MoneyGram's tax returns further described its business as "payment services/credit agency" and listed its service as "money/wire transfers."

In 2008, despite no meaningful changes in its business, MoneyGram described its activities to the IRS as "banking" and called its products "financial services." MoneyGram had never done so since its formation in 1940. MoneyGram's newly-claimed bank status allowed it to reap a significant tax benefit. In the years leading up to the Great Recession, MoneyGram had invested over four billion dollars in asset-backed securities, including mortgage-backed securities. When the financial crisis hit, MoneyGram had to recapitalize its assets to maintain operation. That resulted in hundreds of millions of dollars in losses on the securities in 2007 and 2008. Claiming "bank" status on its tax returns, MoneyGram deducted the losses against ordinary income under Code Sec. 582(a). Under Code Sec. 165(g)(1) and (2)(C), nonbanks are only able to deduct losses on securities to the extent they offset capital gains, which MoneyGram did not have during the relevant years.

The IRS disagreed with the deductions, determining that MoneyGram was not a bank and assessing tax deficiencies of tens of millions of dollars. MoneyGram unsuccessfully challenged the IRS's decision in the Tax Court. In MoneyGram's first appeal, the Fifth Circuit rejected aspects of the Tax Court's definitions of two key terms: "deposit" and "loan." On remand, the Tax Court again concluded that MoneyGram was not a bank. The Tax Court determined that MoneyGram did not accept deposits because "[n]either the financial institutions that purchase MoneyGram's official check services nor the consumers who purchase its money orders transfer funds to MoneyGram for the purpose of safekeeping." It also held that MoneyGram did not make loans. MoneyGram again appealed to the Fifth Circuit.

The definition of a bank in Code Sec. 581 contains three requirements: (1) that the entity be a bank within the common understanding of the term; (2) that a substantial part of the entity's business consist of deposits, loans, and discounts; and (3) that the entity be subject to state or federal regulation. In MoneyGram International, Inc. v. Comm'r, 2016 PTC 473 (5th Cir. 2016), the Fifth Circuit held that the "bare requisites" of a traditional bank are: (1) the receipt of deposits from the general public, which are placed for the purpose of safekeeping and are repayable on demand or at a fixed time; (2) use of deposit funds for secured loans; and (3) the relationship of debtor and creditor between the bank and the depositor.

MoneyGram argued that it was a bank under Code Sec. 581 because both its money-order customers and its official-check customers gave it funds for safekeeping. MoneyGram contended that when a customer buys a money order, the customer is placing funds with MoneyGram for safekeeping, at least until such time as the recipient of the money order presents it for payment. Thus, according to MoneyGram, its money orders were similar to personal checks. Likewise, MoneyGram compared the "account" of a financial institution using MoneyGram to process official checks to a personal checking account and emphasized the security of the transaction.

Analysis

The Fifth Circuit affirmed the Tax Court's ruling that MoneyGram was not a bank after concluding that, since customers do not give MoneyGram money for safekeeping, the most basic feature of a bank was missing.

The Fifth Circuit agreed with the Tax Court that the purchase of a money order is more like buying a gift card than making a deposit in a bank account. The court found that, in fact, a money order customer is never keeping its funds with MoneyGram at all. The court explained that when a customer buys a $100 money order that will be used to pay a utility bill, the customer hands over the $100 plus the fee and, in exchange, MoneyGram gives the customer a blank money order. At this point, the customer's $100 belongs to MoneyGram. But unlike a bank, MoneyGram owes the $100 not to the money order purchaser but to the person or business listed on the payee line. As a result, the court said, the purchaser of a money order is not keeping its money with MoneyGram. The court rejected MoneyGram's analogy to a personal check, reasoning that the checking account, not the checks themselves, serve the purpose of safekeeping, and a money order purchaser does not have an account with MoneyGram.

The Fifth Circuit also found that the financial institutions that use MoneyGram to process official checks are not doing so for the purpose of safekeeping. Rather, the court found that financial institutions leave the first day settlement funds with MoneyGram to fulfill a contractual requirement of using the check processing service. The Fifth Circuit agreed with the Tax Court that the obligatory nature of the first-day settlement makes it more like a tenant's security deposit or an attorney's retainer. The court saw no reason why the financial institutions would be leaving the funds with MoneyGram for safekeeping, given that they presumably have ample means of keeping their cash safe. The court further found that the obligatory nature of the first-day settlement meant that another feature of deposits was missing: the depositor's ability to demand repayment of funds. The court noted that, unlike the depositor of a bank, who can remove the deposit on demand or on a date certain, as long as a financial institution continues to use MoneyGram's check processing service it cannot get its money (i.e., the first-day settlement) back. Examining the substance of MoneyGram's business confirmed, in the view of the Fifth Circuit, how the company had long described itself on its tax returns: as a nondepository institution. Without deposits, the court concluded, MoneyGram could not be a bank.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com

We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!

Sincerely,

James Levey

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com