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.