Tax Court holds money services corp not a bank

Tax Hot Topics newsletterThe Tax Court held in MoneyGram International, Inc., et. al. v. Commissioner (153 T.C. No. 9) that a corporation that was a “money services business” did not constitute a bank for tax purposes.

In the case, MoneyGram International, Inc. conducted a global payment services business through its subsidiaries. It incurred losses related to worthless securities under Section 165(g) and claimed that they were ordinary deductions under Section 582(a). Under Section 582(a), a bank is able to treat a worthless security as an ordinary loss despite that Section 165(g)(1) generally provides for a capital loss. Thus, MoneyGram’s ordinary loss position was based on whether it constituted a bank for Section 582 purposes.

The term “bank” is defined in Section 581 to include a corporation of which, among other requirements, a substantial part of its business consists of receiving deposits and making loans and discounts. MoneyGram’s business involved three main products: money transfers, money orders and payment processing services.

MoneyGram typically sold money orders through its agents, such as convenience stores, to which a customer would give cash plus a fee in exchange for a blank money order on which the customer could designate a payee. When the payee presented the money order for payment, the money order is cleared through the Federal Reserve interbank system.

MoneyGram also provided payment processing services to financial institutions. These financial institutions would provide their customers with bank checks, cashier checks and teller’s checks for various transactions and then use MoneyGram for payment processing services related to such checks. The financial institution would supply MoneyGram with funds equal to its anticipated daily volume of official checks. As official checks clear, the financial institution’s account balance with MoneyGram would be reduced but be replenished by the next day’s expected volume. MoneyGram paid interest on the average daily balance of funds.

The court held that MoneyGram was not a bank primarily because a substantial part of its business did not consist of receiving deposits and making loans and discounts. Thus, MoneyGram’s loss related to its worthless securities was a capital loss.

In determining whether MoneyGram received deposits, the court stipulated three primary elements of a bank deposit:
  • The funds were placed for safekeeping
  • The funds were subject to control of the depositor and repayable on demand or at a fixed time
  • The deposits are received from the general public.

The court concluded that MoneyGram did not receive deposits because its customers did not transfer funds to MoneyGram for safekeeping.

The court also analyzed whether MoneyGram was making loans. Because MoneyGram’s agents held the proceeds from each money order in trust for MoneyGram, MoneyGram contended that it had made a loan to each agent upon the sale of a money order because the agent was not required to immediately remit payment. The court rejected this position based on an analysis of the factors in Welch v. Commissioner (204 F.3d 1228 (9th Cir. 2000), which related to whether funds received by a taxpayer from a business associated constituted a loan.
Jeff Borghino
Washington National Tax Office 
T +1 202 521 1532

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