Court Considers Whether Moneygram is a Bank that Makes Loans

There are tax laws that provide significant tax advantages to banks. One of these laws allows banks to deduct capital losses against ordinary income. This allows banks to deduct losses immediately when others might have to carryover the loss to other tax years. There are other tax laws that are specific to banks. These laws raise the question as to what business can be considered as banks for Federal income tax purposes. The Fifth Circuit Court of Appeals addressed this in Monegram International, Inc. v. Commissioner, No. 15-60527 (2016).

Facts and Procedural History

Moneygram is in the money transfer industry. It took the position that it was a bank on its 2007 and 2008 tax returns, by deducting its capital losses against its ordinary income. The IRS did not agree that Monegram was a bank. The U.S. Tax Court agreed with the IRS. Moneygram appealed the decision to the Fifth Circuit.

What is a Bank?

State laws define what businesses are considered to be banks and the states set various requirements to be a bank. This state classification does not dictate whether a bank is considered to be a bank for Federal income tax law. The Tax Code imposes additional requirements; however, the language in the Tax Code is not entirely clear. This language was what was in dispute in Monegram.

To be considered a bank for Federal income tax purposes, the taxpayer must not only be a bank under state law, its banking activities must be a substantial part of its business. The U.S. Tax Court and the Fifth Circuit agreed on this point.

The courts also agreed that taxpayer must engage in these activities to be a bank:

  • the receipt of deposits from the general public, repayable to the depositors on demand or at a fixed time,
  • the use of deposit funds for secured loans, and
  • the relationship of debtor and creditor between the bank and the depositor.

What are Deposits?

The dispute in Moneygram focused on the definition of the term “deposits.” The U.S. Tax Court concluded that the term means “funds that customers place in a bank for the purpose of safekeeping” that are “repayable to the depositor on demand or at a fixed time” and which are held “for extended periods of time.” The Fifth Circuit agreed with all but the last clause of this definition. According to the Fifth Circuit, deposits did not have to be held for extended periods of time. This is obviously not something that Monegram does given that it is in the money transfer business.

What are Loans?

The dispute in Moneygram also focused on the definition of the term “loan.” The U.S. Tax Court concluded that the term means a memorialized instrument that is repayable with interest, and that “generally has a fixed (and often lengthy) repayment period.” The U.S. Tax Court focused on the fact that the instrument used to memorialize this agreement is facially a trust agreement and not a loan agreement and it emphasized that no interest was charged.

The Fifth Circuit did not agree with this definition. It looked to the well established definition of a loan, which sets out eight factors that are to be considered in determining whether a transaction is a bona fide loan. According to the Fifth Circuit, the U.S. Tax Court erred by not using this definition. The Fifth Circuit also noted that interest is not required.

The Fifth Circuit remanded the case to the U.S. Tax Court. So the U.S. Tax Court will decide whether a Moneygram is a loan, which is an interesting issue in and of itself.

What are the Consequences?

If a Moneygram is a bank that makes loans, it would be able to take advantage of the tax laws that favor being a bank. This raises questions as to whether other taxpayers who have taken the position that they are banks are actually banks for Federal income tax purposes. It also raises questions as to whether different businesses like Moneygram could qualify as being a bank or what this means other parties to the loans made by Moneygram.

Call Now, We Can Help!

 

(713) 909-4906

Do you have a tax dispute, under audit by the IRS or state tax authorities, or just have a tax question? We want to hear from you. Call today for a free, confidential, consultation. If you are pressed for time, you can also use the contact form below to reach out to us.

Our Recent Reviews

Grga Brolih
Grga Brolih
09:20 24 Apr 17
I was a bit hesitant at first because I had not really done any research, just my friend told me about Houston Tax Attorney. Anyway i decided to give them a try and I was really impressed and pleased with the outcome of my experience. They were always very pleasant and professional and made me feel free from my tax issues. Good job!
Brown Jones
Brown Jones
08:54 10 Jun 17
Houston Tax Attorney has given me my life back. I was unable to pay my payroll taxes and in combination with the penalties attached to those taxes, my debt had begun to snowball. Houston Tax Attorney genuinely cares about their clients; they helped me throughout the process. I am extremely grateful to them.
Sandra Camacho
Sandra Camacho
03:47 27 May 17
I had a tax problem and needed help, so I went to Houston Tax Attorney. Love the team, they were so organized and communicated. Good work was done!
Turman Villanueva
Turman Villanueva
12:20 21 Apr 17
Dealing with Houston Tax Attorney was simple from the beginning to the end. Every person I spoke to was knowledgeable and helpful. I was guided in all aspects of the process and given the best advice regarding my tax condition. I have been given a second chance with the IRS. Thank you.
Bill Moore
Bill Moore
07:05 02 Jun 17
I want to Thank Houston Tax Attorney team. They took care of my IRS issues with great professionalism. No more sleepless nights. Thank you Guys!
Sharon G. Velasco
Sharon G. Velasco
08:31 24 Jun 17
I had some big tax issues and I was unable to handle it alone. Houston Tax Attorney helped me to settle all my tax problems. They were there all the way. I respect their professionalism and appreciate their commitment to their clients.
See All Reviews