Moneygram Int'l, Inc. v. Comm'r, 144 T.C. No. 1

• Decision Date: 07 January 2015
• Docket Number: Docket No. 30309-12.,Docket No. 12231-12,144 T.C. No. 1
• Parties: MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES, Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

144 T.C. No. 1
Docket No. 12231-12
Docket No. 30309-12.

UNITED STATES TAX COURT

January 7, 2015

To qualify as a "bank" under I.R.C. section 581, a taxpayer must meet three distinct requirements. First, it must be "a bank or trust company incorporated and doing business" under Federal or State law. Second, "a substantial part" of its business must "consist[] of receiving deposits and making loans and discounts." Third, it must be "subject by law to supervision and examination" by Federal or State authorities having supervision over banking institutions.

P, a U.S. corporation, is in the "money services business." Its business involves the movement of money through three main channels: money transfers, money orders, and payment processing services. During 2007 and 2008 P undertook a recapitalization that included writing down or writing off a substantial volume of partially or wholly worthless securities. P claimed ordinary loss deductions on disposition of certain of these securities, a treatment available only to banks. See I.R.C. sec. 582. R disallowed the ordinary loss deductions on the ground that P did not qualify as a "bank."

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1. Held: P during 2007 and 2008 did not qualify as a "bank" within the meaning of I.R.C. section 581 because it did not display the essential characteristics of a bank as that term is commonly understood and because a substantial part of its business did not consist of receiving bank deposits or making bank loans.

2. Held, further, because P was not a "bank" within the meaning of I.R.C. section 581, it was ineligible to claim ordinary loss deductions on account of the worthlessness of its securities under I.R.C. section 582.

Henry Todd Miller, James A. Bruton, James Tazwell Fuller, and Peter J. Anthony, for petitioner.

Dana E. Hundrieser, Reid Michael Huey, and James L. Gessford, for respondent.

OPINION

LAUBER, Judge: With respect to petitioner's Federal income tax for the taxable years 2005-2007 and 2009, the Internal Revenue Service (IRS or respondent) determined deficiencies in the following amounts:

Year	Deficiency
2005	$13,852,600
2006	25,471,993
2007	31,796,692
2009	11,644,589

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In large part, these deficiencies stem from the disallowance of bad debt deductions that petitioner claimed for 2007 and 2008 under section 166(a) with respect to "non-real-estate mortgage investment conduit" (non-REMIC) asset-backed securities.¹ Normally, losses realized upon the worthlessness of such securities are deductible as capital losses under section 165(g)(1) and (2)(C). Under section 582(a), however, petitioner was entitled to bad debt deductions on account of these losses--deductible in full against ordinary income--if it qualified as a "bank" within the meaning of section 581. The parties have filed cross-motions for partial summary judgment on this question. We conclude that petitioner was not a "bank" within the meaning of section 581 and hence that the losses in question must be treated as capital losses. We will accordingly grant respondent's motion for partial summary judgment and deny petitioner's motion.

Background

The following facts are not in dispute. MoneyGram International, Inc., is incorporated in Delaware and headquartered in Texas. It is the parent of a group of companies that operate a global payment services business. This business is conducted chiefly through MoneyGram Payment Systems, Inc. (MPSI), a wholly

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owned subsidiary incorporated in Delaware. We will refer to MoneyGram International, Inc., and its subsidiaries, including MPSI, as petitioner or MoneyGram.

MoneyGram's Lines of Business

MoneyGram has been in business since 1940. Its core purpose is to provide consumers and financial institutions with payment services that are affordable, reliable, and convenient. MoneyGram's business involves the movement of money through three main channels: money transfers, money orders, and payment processing services.

MoneyGram sells money orders and money transfer services to consumers through "agents." These agents include banks, credit unions, supermarkets, convenience stores, and other retail locations. MoneyGram's agents range from well-known businesses such as Wal-Mart (during the years in issue), Albertson's, and CVS Pharmacy, to thousands of "mom and pop" convenience stores. MoneyGram sells payment processing services directly to banks and other financial institutions.

A money transfer involves the transfer of funds from a consumer at one location to a consumer at a different location in the United States or abroad. In a typical money transfer, a consumer goes to the location of a MoneyGram agent, completes a form, and pays the agent the money to be transferred (plus a fee). This form explicitly states that the agent is not accepting a "deposit."

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In a matter of minutes, the funds are made available for payment to the designated recipient, in various currencies, through MoneyGram's agent network. The fee paid by the consumer at the sending location is based on the amount to be transferred and the location at which the funds are to be received. The "sending" and "receiving" agents each receive a commission from MoneyGram on the transaction. MoneyGram derives its revenue from the transaction fees paid by consumers and from management of currency exchange spreads on international money transfers.

MoneyGram in 2007 was the leading issuer of money orders in the United States. It sells money orders under the MoneyGram brand, on a private label basis, and under cobranding arrangements with retail agents. Money orders, much like checks, can be presented by a consumer to make a payment or receive cash. To obtain a money order, a customer enters the location of a MoneyGram agent and gives the agent cash equal to the money order amount (plus a fee). The customer receives a blank money order in that amount. He completes the money order by filling in the name of the person to whom the money order is to be paid and signing the order. Once presented for payment, the money order is cleared through the Federal Reserve interbank system. Typically, money orders remain outstanding for fewer than ten days.

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MoneyGram generally receives a transaction fee from its agents for each money order sold. MoneyGram also derives revenue from the investment of funds remitted by its agents. MoneyGram earns income on these funds until the money orders are cleared through the banking system or (if not presented for payment) escheat to the relevant State. Outstanding money orders are classified as "payment service obligations" and treated as liabilities on MoneyGram's consolidated financial statements.

In the absence of an agreement otherwise, when a customer purchases a money order by giving cash to a MoneyGram agent, the agent must remit these funds to MoneyGram immediately. However, MoneyGram typically enters into agreements with its agents allowing them to retain and use these funds for an agreed-upon period. These agreements, called "delayed remittance agreements," set forth a schedule that generally requires agents to remit funds to MoneyGram twice weekly.

To effectuate a delayed remittance agreement, MoneyGram and its agent typically execute a "Master Trust Agreement" (MTA). Under the MTA Money-Gram's agent accepts appointment as "Trustee" for MoneyGram. The MTA defines "Trust Funds" as "fees, face amounts of money orders, gift certificates, money transfer checks, principal amounts of * * * money transfers and all proceeds from

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the sale" of money transfer services. The agent "agrees to hold Trust Funds in trust for * * * [MoneyGram] and separate from Trustee's funds."

Funds due MoneyGram under delayed remittance agreements are classified as "accounts receivable" and treated as assets on MoneyGram's consolidated financial statements. MoneyGram does not charge interest on these accounts receivable unless a remittance is late. In that event, the MTA states that MoneyGram "may charge interest at the highest legal rate until payment is made."

Whereas money transfers and money orders usually involve transactions with individual consumers, MoneyGram's "payment systems" segment provides services to financial institutions. These services generally consist of payment processing, including the provision of money orders for sale to financial institution clients and outsourcing services for "official checks."

Financial institutions provide clients with official checks, such as bank checks, cashier's checks, and teller checks, for use in various transactions. Official checks are commonly used in closings of consumer home and car loans and in other situations where the payee requires assurance of payment and availability of funds. Financial institutions also use official checks to pay their own obligations. In 2007 MoneyGram provided official check services to more than 1,900 financial institutions, consisting mainly of banks, thrifts, and credit unions.

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Typically, MoneyGram and its customer (say a bank) execute a "payment processing services agreement" that lasts between three and five years. Before the first day on which the bank issues official checks, it supplies MoneyGram with funds equal to its anticipated average daily volume of official checks. This is called the "first day settlement." At the end of each business day, the bank generates a settlement report showing the dollar volume of official checks it issued that day. The bank then transfers funds in that amount to MoneyGram, typically before 11 a.m. Central time the next business day. As official checks clear, the bank's account balance with MoneyGram is drawn down, but it is replenished with funds from the next day's settlement report. If a bank issues significantly more official checks than anticipated, its account balance with MoneyGram may temporarily go negative....