MoneyGram Seeks Reversal of Tax Court, Argues It Is a Bank

MONEYGRAM INTERNATIONAL, INCORPORATED, AND SUBSIDIARIES,
Petitioner-Appellant,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee.

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT

On Appeal from the United States Tax Court

MONEYGRAM INTERNATIONAL, INC.
AND SUBSIDIARIES' OPENING BRIEF

BAKER BOTTS L.L.P.
Aaron M. Streett
Richard A. Husseini
J. Mark Little
Jacob Walley
Brenton H. Cooper
910 Louisiana St.
Houston, Texas 77002
Tel: (713) 229-1234
Fax: (713) 229-1522

Counsel for Appellants

CERTIFICATE OF INTERESTED PERSONS

The undersigned counsel of record certifies that the following listed persons and entities as described in the fourth sentence of Fifth Circuit Rule 28.2.1 have an interest in the outcome of this case. These representations are made in order that the judges of this court may evaluate possible disqualification or recusal.

A. Petitioners-Appellants: MoneyGram International, Inc. and Subsidiaries

B. Respondent-Appellee: Commissioner of Internal Revenue

Aaron M. Streett
Counsel of Record for Appellants

STATEMENT REGARDING ORAL ARGUMENT

Pursuant to Fifth Circuit Rule 28.2.3 and Federal Rule of Appellate Procedure 34(a)(1), Appellants MoneyGram International, Inc. and Subsidiaries believe that oral argument would be helpful in this case due to the complexity of the question presented and the variety of sub-issues in dispute.

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TABLE OF CONTENTS

Certificate of Interested Persons

Statement Regarding Oral Argument

Table of Contents

Table of Authorities

Jurisdictional Statement

Issue Presented

Introduction

Statement of the Case

Summary of the Argument

Standard of Review

Argument

Conclusion

Certificate of Service

Certificate of Compliance

TABLE OF AUTHORITIES

CASES

Adam Int'l Trading Ltd. v. Mfrs. Hanover Trust Co., 150 A.D.2d 294 (N.Y. App. Div. 1989)

Austin State Bank v. Comm'r, 57 T.C. 180 (1971)

Barr v. United States, 324 U.S. 83 (1945)

Byerlite Corp. v. Williams, 286 F.2d 285 (6th Cir. 1960)

Comm'r v. Kelley, 293 F.2d 904 (5th Cir. 1961)

Comm'r v. Valley Morris Plan, 305 F.2d 610 (9th Cir. 1962)

Deaton v. Comm'r, 440 F.3d 223 (5th Cir. 2006)

Deputy v. Du Pont, 308 U.S. 488 (1940)

Evans v. Nat'l Bank of Savannah, 251 U.S. 108 (1919)

Heft v. Comm'r, 294 F.2d 795 (5th Cir. 1961)

In re Morales Travel Agency, 667 F.2d 1069 (5th Cir. 1981)

Kelly v. Comm'r, 62 T.C.M. (CCH) 1406 (1991)

Ludwig v. Comm'r, 68 T.C. 979 (1977)

Magruder v. Safe Deposit & Tr. Co. of Baltimore, 121 F.2d 981 (4th Cir. 1941)

MoneyGram Int'l, Inc. & Subsidiaries v. Comm'r, 664 F. App'x 386 (5th Cir. 2016)

Morris Plan Bank of New Haven v. Smith, 125 F.2d 440 (2d Cir. 1942)

Nat'l Bank v. Johnson, 104 U.S. 271 (1881)

Sec. Indus. Ass'n v. Bd. of Governors, 468 U.S. 137 (1984)

Selden v. Equitable Tr., 94 U.S. 419 (1876)

Staunton Indus. Loan Corp. v. Comm'r, 120 F.2d 930 (4th Cir. 1941)

Trump Plaza Assocs. v. Haas, 692 A.2d 86 (N.J. Super. Ct. App. Div. 1997)

United Apparel Distribs. Inc. v. Chase Manhattan Bank, N.A., 548 F. Supp. 672 (S.D.N.Y. 1982)

Whitehouse Hotel Ltd. P'ship v. Comm'r, 615 F.3d 321 (5th Cir. 2010)

STATUTORY AND REGULATORY AUTHORITIES

12 U.S.C. § 378

26 U.S.C. § 581

26 U.S.C. § 582

26 U.S.C. § 117(m)

26 U.S.C. § 6213(a)

26 U.S.C. § 7482

Rev. St. § 3407, 18 Stat. 673 (1874)

12 C.F.R. § 304.3(a)

Advisory Opinion FDIC-93-55, Bank Must Report Funds Collected From Purchases of American Express Official Checks as Deposits in its Call Report (Aug. 6, 1993)

H.R. Rep. No. 74-2475 (1936)

Office of the Comptroller of the Currency, Exploring Special Purpose National Bank Charters for Fintech Companies (December 2016).

OTHER AUTHORITIES

Black's Law Dictionary (11th ed. 2019)

David Enrich and Matthew Karnitschnig, Citi, U.S. Rescue Wachovia, Wall St. J. (Sept. 30, 2008)

Lakhbir S. Hayre et al., Mortgage Pass-Through Securities, The Handbook of Fixed Income Securities (1995)

Kevin Keyes, Federal Taxation of Financial Instruments and Transactions ¶ 8.01, 1999 WL 629685

Oxford English Dictionary (1933)

Steven L. Schwarcz, Understanding the Subprime Financial Crisis, 60 S.C. L. Rev. 549 (2009)

O. Howard Wolfe, Elementary Banking (1915)

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JURISDICTIONAL STATEMENT

The Tax Court had jurisdiction under 26 U.S.C. § 6213(a) because MoneyGram International Inc. and Subsidiaries (“MoneyGram”) timely filed petitions for redetermination of the Commissioner of Internal Revenue's (“Commissioner”) two notices of deficiency. ROA.16, 53-56, 24882, 24903-08. This Court has jurisdiction under 26 U.S.C. § 7482(a)(1) and (b)(1)(B) because MoneyGram's principal place of business is, and was when it petitioned in the Tax Court, in Dallas, Texas. ROA.16. The Tax Court entered final judgment on February 7, 2020. ROA.24859. MoneyGram timely appealed on February 21, 2020. ROA.24861.

ISSUE PRESENTED

Does MoneyGram qualify as a “bank” under 26 U.S.C. § 581?

INTRODUCTION

MoneyGram provides much-needed banking solutions to countless Americans. The fees and required minimum balances of traditional banks often place them out of reach for lower-income customers. MoneyGram fills this gap by offering money orders — essentially one-shot checking accounts — through thousands of its agents in retail stores. MoneyGram also provides banking services to hundreds of small and mid-sized banks and credit unions by facilitating their ability to issue official checks, such as cashier's checks.

Because MoneyGram provides these and other banking services, it faces many of the same regulations as traditional banks. For example, MoneyGram must maintain adequate reserves in investments deemed “safe” by the regulatory authorities. Like many banks, MoneyGram chose mortgage-backed securities, among other investments, to fulfill that obligation in the mid-2000s. MoneyGram then suffered the same catastrophic losses that many banks did when those investments cratered in value in the Great Recession of 2007 and 2008. Traditional banks were allowed to deduct those losses against their ordinary income. Yet the Commissioner balked when MoneyGram claimed the same treatment.

MoneyGram acts like a bank, is regulated like a bank, and made the same ill-fated investments as banks to comply with banking regulations. As a result, it meets the Tax Code's definition of a bank and thus can deduct those investment losses just as traditional banks did.

STATEMENT OF THE CASE

I. Section 581 of the Tax Code grants “banks” favorable tax treatment for certain losses.

The appeal concerns the application of 26 U.S.C. § 581. There, the Tax Code defines the term “bank,” which is then used in later sections of the Code that grant “banks” favorable tax treatment for certain losses. Section 581 reads:

For purposes of sections 582 and 584, the term “bank” means a bank or trust company incorporated and doing business under the laws of the United States (including laws relating to the District of Columbia) or of any State, a substantial part of the business of which consists of receiving deposits and making loans and discounts, or of exercising fiduciary powers similar to those permitted to national banks under authority of the Comptroller of the Currency, and which is subject by law to supervision and examination by State or Federal authority having supervision over banking institutions. Such term also means a domestic building and loan association.

That text “is not a model of statutory clarity” because the statute's “construction and circular use of the term 'bank' are inherently ambiguous.” MoneyGram Int'l, Inc. & Subsidiariesv. Comm'r, 664 F. App'x 386, 389 (5th Cir. 2016) (“MoneyGram I”).

Fortunately, this Court has crystallized § 581's definition of “bank” into four requirements. First, the entity must “be[ ] a 'bank' within the commonly understood meaning of that term.” Id. Consequently, it must: (a) receive “deposits from the general public, repayable to the depositors on demand or at a fixed time”; (b) “use . . . deposit funds for secured loans”; and (c) have a “relationship of debtor and creditor” with its depositors. Id. at 390-91.

Second, the entity must “mak[e] loans and discounts.” § 581; MoneyGram I, 664 F. App'x at 390-91, 393-94. Third, for an entity to qualify as a bank, “a substantial part of [its] business [must] consist[ ] of receiving deposits and making loans and discounts.” § 581; MoneyGram I, 664 F. App'x at 390. Fourth, the entity must be subject “by law to supervision and examination by State or Federal authority having supervision over banking institutions.” § 581.

II. MoneyGram claims “bank” status on its 2007 and 2008 tax returns based on the statutorily required relationships with depositors, borrowers, and banking regulatory authorities.

MoneyGram claimed “bank” status under § 581 when it filed its 2007 and 2008 taxes. ROA.16, 24884-85. Doing so allowed MoneyGram to offset certain of its losses against its ordinary income, as opposed to only against its capital gains. § 582. That right is especially important where, as here, the taxpayer has no capital gains in a given year and thus would lose the deduction entirely. ROA.24787. Although not a traditional brick-and-mortar bank, MoneyGram concluded it was entitled to “bank” status because it possesses the requisite statutory relationships with depositors, borrowers, and banking regulatory authorities.

A. MoneyGram accepts “deposits” from both its official-check and money-order customers.

MoneyGram “receives deposits,” § 581, from two groups of customers.

1. The first source of MoneyGram's deposits is its official-check customers, which consist of approximately 1,900 small and mid-sized banks and credit unions. ROA.3564, 24827.¹ MoneyGram essentially operates checking accounts for these customers. Just as an individual or a business deposits funds into a conventional checking account, MoneyGram's financial-institution customers open accounts with MoneyGram and place a minimum balance of funds into those accounts. ROA.3565, 24778. Just as checking-account holders would then make various expenditures by writing checks, MoneyGram official-check account holders use official checks to pay their own expenses or pass the official checks on to their own customers, who then use the checks for major transactions like home closings and automobile purchases. ROA.3564, 24777. And just as the holder of a conventional checking account watches her balance go down as she issues checks from her account, a MoneyGram official-check account holder observes its account balance decrease as payees present the official checks for payment. ROA.3566, 24778-79.

When presented for payment, an official check clears through the Federal Reserve interbank system in the same way as a check drawn from a traditional checking account. ROA.3566. Thus, the payee may redeem the official check at any bank in the interbank system. ROA.3566. Each MoneyGram official-check account holder receives a monthly statement detailing the account activity for the prior month. ROA.3567. MoneyGram classifies outstanding official checks as “payment service obligations” and lists them as liabilities. ROA.3567, 24779. Occasionally, an account holder lacks sufficient funds to cover its outstanding official checks. ROA.3567, 24779. When that occurs, MoneyGram provides overdraft protection and allows the payments to clear, so long as the account holder wires the necessary funds to MoneyGram that day. ROA.3566-67, 24779.

MoneyGram's official-check business is substantial. In 2007 and 2008, it received, respectively, approximately $337 billion and $275 billion in official-check deposits. ROA.3567.

2. MoneyGram also receives deposits from its money-order customers. Money orders operate like one-time, single-use checking accounts and often substitute for traditional checking accounts for lower-income customers. ROA.3541-42, 24178.

To make a rent payment, for example, a customer would first visit any one of MoneyGram's approximately 24,000 money-order agents. ROA.3540. These agents, which range from banks and credit unions to convenience stores and big-box retailers, are third parties that have contracted to accept money-order deposits on MoneyGram's behalf. ROA.3540, 3542, 24768. The customer gives the agent's cashier or teller the amount in cash that the customer needs for rent, plus a small transaction fee, and the agent transmits those funds to MoneyGram. ROA.3544-45, 24768. In exchange, the customer receives a money order in that amount, which is an instrument that operates like a check. ROA.3544-45, 24770-71.

The customer then completes the money order by: (a) filling in the name of the payee; (b) inserting the customer's own name as the purchaser; and (c) signing the order. ROA.3544, 24771. As with a check, the customer has sole discretion as to whom the money order is paid and, in this example, would make the money order payable to the customer's landlord. ROA.3545, 24771. The customer also has a right to demand a refund of the money order any time before it is presented for payment. ROA.3545, 24771.

MoneyGram uses money-order funds in the same way a bank would use funds in a checking account: MoneyGram keeps some of the funds in cash and invests some of the funds in liquid, “safe” investments designated by regulatory authorities. ROA.3548, 24783. These investments ensure that MoneyGram can pay the money order when presented for payment. ROA.3547, 24783.

Once the customer delivers the money order to the payee — here, the landlord — the payee has sole discretion about when to present the money order for payment. ROA.3544-45. When the landlord presents the money order for payment at any bank in the Federal Reserve's interbank system, MoneyGram must pay it. ROA.3545, 3548. The money orders clear through the interbank system in the same way as a check. ROA.3545, 24771.

Some money orders are used and presented for payment shortly after issuance; some are presented weeks, months, or years later; and some are never presented. ROA.3545. When a money order is abandoned, the funds escheat to the state, just as with abandoned checking-account funds. ROA.3546.

MoneyGram's money-order business is substantial. On an average day in 2007 and 2008, MoneyGram held approximately $800 million in outstanding money orders. ROA.3548. In 2007, MoneyGram issued approximately 246 million personal money orders totaling more than $43 billion. ROA.3548.

B. MoneyGram “makes loans and discounts” by purchasing commercial paper and asset-backed securities and entering into delayed-remittance agreements.

MoneyGram “mak[es] loans and discounts,” § 581, in a variety of ways.

1. First, MoneyGram made loans and discounts by purchasing commercial paper. Commercial paper is a type of promissory note issued by a company to secure short-term financing. ROA.3573-74, 24783. MoneyGram purchases the commercial paper from the borrowing company at a discount to its face value, and the company pays MoneyGram the full face value upon the note's maturity. ROA.3574, 24182, 24784-85. The discount represents the interest on the commercial paper. ROA.3574-75, 24784.

In 2007, MoneyGram purchased approximately $66 billion of commercial paper. ROA.3573, 24182, 24185-24224, 24784. MoneyGram purchased $5.7 billion directly from the borrower-issuers and the remaining $60 billion through commercial-paper agents who connect lenders to borrowers. ROA.24182.

2. Second, MoneyGram made loans and discounts by purchasing asset-backed securities (“ABS”), including mortgage-backed securities (“MBS”). ROA.24785. ABS are debt securities that represent ownership in a pool of assets like loans, leases, or credit-card debt. ROA.3570. MBS are a type of ABS in which the underlying pool of assets comprises residential mortgages. ROA.3570.

During 2007 and 2008, MoneyGram, like many banks, satisfied the regulatory requirement to maintain adequate reserves in part by purchasing ABS. ROA.3569. MoneyGram purchased ABS at a “discount” — a price less than the remaining balance of the underlying debt. ROA.3570, 24785. The discount's magnitude depended on borrower risk and the terms of the underlying loans, including interest. ROA.3571, 24785. MoneyGram earned an interest yield on ABS when the underlying borrowers made timely payments on their loans — payments which flowed to MoneyGram as the holder of the securitized debt. ROA.7113 (reproducing Lakhbir S. Hayre et al., Mortgage Pass-Through Securities, The Handbook of Fixed Income Securities 504-05 (1995)).

In 2007, MoneyGram held $260 million of MBS and $340 million of other ABS. ROA.3571. That same year, a precipitous drop in housing prices, combined with a significant rise in unemployment, led to a dramatic increase in borrowers' default rates. ROA.3571-72. When many borrowers did not make their monthly mortgage payments, principal and interest could not be passed through to the lenders. As a result, MBS plummeted in value, wreaking financial havoc on banks and causing MoneyGram to suffer $260.6 million in losses. ROA.3572; see generally Steven L. Schwarcz, Understanding the Subprime Financial Crisis, 60 S.C. L. Rev. 549 (2009). These losses, which MoneyGram seeks to offset against its ordinary taxable income, are the subject of this appeal.

3. Third, MoneyGram makes loans by entering into delayed-remittance agreements with its money-order agents. ROA.3548. Ordinarily, money-order agents must remit the money-order customers' funds in their custody to MoneyGram at the end of the business day. ROA.3550, 24774. But under a delayed-remittance agreement, an agent may keep and use those funds for defined periods before remitting them to MoneyGram. ROA.3551, 24775. The agent pays MoneyGram a fee for that privilege. ROA.3551, 24774.

The details of these agreements vary. Some include an initial “service fee” and then a later interest component if remittance is delayed by more than a day. ROA.24774. Various other combinations of fees and interest exist as well. ROA.24774-75. Regardless of their precise structure, these delayed-remittance agreements function as short-term working-capital financing for small cash-based businesses. ROA.3551.

MoneyGram faces significant credit exposure from the delayed-remittance agreements. ROA.3551. Before entering into a delayed-remittance agreement, MoneyGram completes a credit check of the agent and adjusts the terms and fee depending on the agent's credit worthiness. ROA.3557. In many cases, MoneyGram obtains personal guarantees of repayment from individual representatives of the agent and acquires the rights of a secured creditor under the Uniform Commercial Code. ROA.3549. MoneyGram records delayed-remittance loans as “receivables” on its financial statements and has claimed bad-debt deductions (which the IRS allowed) when delayed-remittance loans became uncollectible. ROA.3553-54, 24821.

MoneyGram maintains delayed-remittance agreements with approximately 83 percent of its money-order agents. ROA.3553. In 2007 and 2008, its money-order agents remitted billions of dollars of money-order funds to MoneyGram on a delayed timetable under these agreements. ROA.3551.

C. MoneyGram is regulated by the banking regulatory authorities.

MoneyGram is regulated by the same federal and state entities that regulate banks. See § 581; ROA.3576-77. It is overseen by agencies enforcing the Bank Secrecy Act, anti-money-laundering laws, and laws covering data protection, consumer protection, and consumer privacy. ROA.3576-77, 24779-80. MoneyGram is regulated as a “financial institution” under title 31 of the United States Code and title 31 of the Code of Federal Regulations, which govern “Money and Finance.” ROA.3576, 24780. In this respect, MoneyGram is regulated on the same footing with state-chartered banks, which are also “financial institutions” under these titles. ROA.3576.

MoneyGram's banking regulatory obligations include the requirement that MoneyGram “meet minimum net worth requirements, post surety bonds, and maintain adequate reserves.” ROA.3578, 24786. The question on appeal is whether MoneyGram can deduct the crushing losses it suffered on investments it made to comply with those regulations, just as traditional banks did.

III. The Commissioner challenges MoneyGram's “bank” status and wins an initial victory in the Tax Court.

Despite MoneyGram's relationships with depositors, borrowers, and banking regulatory authorities, the Commissioner insisted that MoneyGram was not a “bank” and issued notices of deficiency for MoneyGram's claimed deductions. ROA.53-56, 24765, 24903-08. MoneyGram challenged these deficiency notices — and the Commissioner's understanding of the term “bank” — in Tax Court. ROA.16, 24882.

In January 2015, in the first of two Tax Court proceedings, the Tax Court granted the Commissioner summary judgment and held that MoneyGram did not meet § 581's definition of a bank. ROA.2338-76. The Tax Court reasoned that § 581's circular use of “bank” imposes an independent requirement that an entity be a “bank” within the term's common understanding, which the Tax Court defined to require: (1) the receipt of deposits from the general public, repayable to depositors on demand or at a fixed time; (2) the use of deposit funds for secured loans; and (3) the relationship of debtor and creditor between the bank and depositors. ROA.2356.

The Tax Court held that MoneyGram did not meet that definition of “bank” for two reasons. First, it held that neither MoneyGram's official-check customers nor its money-order customers made “deposits.” ROA.2367. The Tax Court defined “deposits” as “funds that customers place in a bank for the purpose of safekeeping,” which are held “for extended periods of time” and “repayable to the depositor on demand or at a fixed time.” ROA.2364, 2367. It concluded that MoneyGram had not met the “safekeeping” and “extended period of time” elements of that definition. ROA.2367.

Second, the Tax Court held that MoneyGram did not satisfy § 581 because it did not “mak[e] loans.” ROA.2372. The Tax Court defined a “loan” as an agreement “memorialized by a loan instrument” that “is repayable with interest” and “generally has a fixed (and often lengthy) repayment period.” ROA.2370. The Tax Court held that MoneyGram's delayed-remittance agreements with its agents were not “loans” because, in the Tax Court's view, the agreements were trust agreements instead of loan agreements, did not charge interest, and lacked a fixed term. ROA.2371. The Tax Court did not have occasion to address whether MoneyGram's commercial paper and ABS purchases qualified as loans.

IV. This Court vacates the Tax Court's judgment.

On appeal, this Court vacated the Tax Court's decision and remanded for further consideration. MoneyGram I, 664 F. App'x at 388-89. The Court disagreed with various definitions used by the Tax Court. Id.

This Court rejected the Tax Court's requirement that a “deposit” must be held “for an extended period of time.” Id. at 392. The Court also repudiated the Tax Court's definition of “loan” as requiring a memorialized instrument, interest, and a “fixed (and often lengthy) repayment period.” Id. at 393. Instead, this Court defined a “loan” simply as “a contract by which one delivers a sum of money to another and the latter agrees to return at a future date a sum equivalent to that which he borrow[ed].” Id. The Court also supplied a non-exhaustive, seven-factor test for determining whether a transaction qualifies as a “loan.” Id.

A dissent urged affirmance of the Tax Court's judgment on the ground that MoneyGram could not satisfy this Court's definitions of deposit and loan. Id. at 394-95 (Wiener, J., dissenting). But the majority apparently disagreed, vacated the Tax Court's judgment, remanded for the Tax Court to apply the correct standards in the first instance, and additionally instructed the Tax Court to determine whether MoneyGram made “discounts” under § 581. Id. at 393.

V. On remand, the Tax Court reaches the same result under this Court's newly announced standards.

On remand, the Tax Court again concluded that MoneyGram is not a “bank” under § 581 and granted the Commissioner's motion for summary judgment.² Despite the vacatur of its first opinion, the Tax Court applied much of the same reasoning to conclude that MoneyGram did not accept deposits or make loans.

As before, the Tax Court primarily based its “deposit” holding on its view that MoneyGram's official-check and money-order customers did not give MoneyGram funds “for safekeeping.” ROA.24807. The Tax Court conceded, however, that MoneyGram met certain other requirements for a depositor relationship with its customers and agreed that MoneyGram's money-order and official-check operations constituted a “substantial part” of MoneyGram's business under § 581. ROA.24827-28.

Turning to loans, the Tax Court considered only whether MoneyGram's delayed-remittance agreements constituted loans. It held, just as before, that those arrangements were trust agreements and not loans, emphasizing many of the same reasons from its earlier opinion despite this Court's substantially revised definition. ROA.24823. The Tax Court further concluded that even if the delayed-remittance agreements were “loans,” they did not constitute a “substantial part” of MoneyGram's business. ROA.24828.

Finally, the Tax Court held that MoneyGram's purchases of commercial paper and ABS were not “discounts.” ROA.24834-35. The Tax Court accepted that commercial paper MoneyGram bought directly from original issuers constituted a “discount,” but held that those transactions did not constitute a “substantial part” of MoneyGram's business. ROA.24835-36. The Tax Court concluded that commercial paper MoneyGram purchased from agents (rather than the original issuers) and MoneyGram's ABS purchases did not qualify as “discounts” at all. ROA.24834-35.

MoneyGram appealed. ROA.24861.

SUMMARY OF THE ARGUMENT

As interpreted by this Court, § 581 sets forth four elements of “bank” status. MoneyGram satisfies them all.

First, MoneyGram “receives deposits” in two ways: from its official-check customers and from its money-order customers. Even though official-check accounts operate as checking accounts for smaller financial institutions, the Tax Court held that official-check funds are not “deposits” because the customers do not place those funds with MoneyGram “for the purpose of safekeeping.” But it is indisputable that those funds are as much “deposits” and are submitted for the same reasons as are the funds in any ordinary checking account.

Likewise, since money orders operate as secure, single-use checking accounts, the Tax Court's “safekeeping” objection is misplaced there as well. The Tax Court's assertion that money-order customers submit funds for the purpose of paying bills rather than safekeeping does not distinguish ordinary checking accounts and improperly resurrects the durational requirement already rejected by this Court.

Second, MoneyGram “makes loans and discounts.” Under the long-established meaning of the term, MoneyGram makes “discounts” when it purchases commercial paper and ABS for sums below their face value. The Tax Court rejected most of those purchases because MoneyGram bought from agents or intermediaries, rather than the original issuer of the note — a position squarely foreclosed by both the Supreme Court's seminal decision on discounts and economic common sense. And because “discounts” are, by definition, “loans,” MoneyGram's commercial-paper and ABS purchases qualify as making loans as well. MoneyGram also makes additional loans through its delayed-remittance agreements. The Tax Court reached the opposite conclusion only by badly gerrymandering this Court's definition of “loan” to reinstate its previously vacated conclusion.

Third, these deposit, loan, and discount activities constitute a “substantial part” of MoneyGram's business. The Tax Court agreed that MoneyGram's deposit activities satisfied this element. That conclusion is only bolstered when considering the billions of dollars that MoneyGram held in commercial paper and ABS. The ABS holdings were particularly important to MoneyGram, for they were one of its primary means for complying with the regulatory-reserves requirements and the source of the catastrophic losses MoneyGram suffered. MoneyGram's delayed-remittance agreements add to the “substantial part” conclusion due to their role in attracting and retaining the vast majority of money-order agents MoneyGram needs to operate its core business.

Fourth, MoneyGram is “subject by law to supervision and examination by State or Federal authority having supervision over banking institutions.” That analysis begins and ends with the parties' stipulation that MoneyGram is subject to the banking regulatory authorities of forty-four states and territories and the same federal entities that regulate banks.

With each of those four elements satisfied under the stipulated facts and the law, MoneyGram qualifies as a “bank” under § 581. Therefore, the Court should reverse and render judgment for MoneyGram on this issue.

STANDARD OF REVIEW

This Court reviews Tax Court decisions “in the same manner . . . as decisions of the district courts,” Whitehouse Hotel Ltd. P'ship v. Comm'r, 615 F.3d 321, 330 (5th Cir. 2010), “examin[ing] this decision [de novo] as [it does] other summary judgment decisions.” Deaton v. Comm'r, 440 F.3d 223, 226 (5th Cir. 2006).

ARGUMENT

MoneyGram is a “bank” under the plain language of § 581 and MoneyGram I because it meets each of the four requirements for “bank” status. MoneyGram accepts deposits from its official-check and money-order customers; makes loans and discounts through commercial paper and ABS purchases and makes loans via delayed-remittance agreements; devotes a substantial part of its business to those deposit, loan, and discount activities; and is regulated by the banking regulatory authorities. The Tax Court concluded otherwise only by misapplying this Court's interpretation of § 581 and overlooking critical stipulated facts. This Court should reverse.

I. The Tax Court erred in concluding that MoneyGram does not receive deposits.

Section 581's first overarching requirement concerns MoneyGram's relationship with its depositors. To qualify as a bank, MoneyGram must receive “deposits,” which are defined as:

MoneyGram I, 664 F. App'x at 391-92.³ MoneyGram satisfies these requirements in two independent ways — through official-check customers and money-order customers.

A. MoneyGram accepts deposits from its official-check customers.

1. One source of MoneyGram's deposits is its official-check customers. Official-check accounts operate exactly like conventional checking accounts, except that their holders are small and mid-sized banks and credit unions. ROA.3564. These smaller institutions open official-check accounts with MoneyGram to pay their own expenses and so that they can issue official checks — cashier's checks and the like — to their own customers. ROA.3564, 24777. As with a conventional checking account, the account holder deposits money into the account and MoneyGram pays out the deposited funds according to the account holder's instructions, with the balance being depleted as the official checks are presented. ROA.3566, 24778-79. Once a balance reaches zero, MoneyGram generally stops making payments, subject to the account holder's overdraft protection. ROA.3566-67. As with most checking accounts, MoneyGram pays interest on funds in the official-check accounts and charges fees for maintaining the accounts. ROA.3565.

The Tax Court ruled against MoneyGram on only one of the four requirements for “deposit” status for these official-check accounts. The Tax Court held that MoneyGram had a debtor/creditor relationship with official-check customers. ROA.24824-25, 24828. The Tax Court did not reach the issue of whether official-check funds were from the general public.⁴ And the Commissioner never contested that funds in official-check accounts were payable on demand. ROA.24807.

The Tax Court held, however, that account holders do not place funds in official-check accounts “for the purpose of safekeeping.” ROA.24807.It instead analogized those deposits to “security deposits” a tenant might pay to a landlord or a retainer a client might pay to an attorney, reasoning that MoneyGram accepts these funds “to protect itself from risk of loss in the event its customer should default or delay in payment.” ROA.24799.

2. That was error. For starters, the Tax Court's analogy is inapt. The funds in official-check accounts are used to pay third parties via official checks issued by MoneyGram's account holders. ROA.3564, 24778. The funds do not exist to protect against a contingency — like a dog damaging a landlord's apartment floor — that would cause MoneyGram to claim official-check funds for itself. Nor are the funds deposited to secure some independent service provided by MoneyGram, as with an attorney who may cease his work when a retainer is depleted. ROA.22970. Unlike with security deposits or retainers, in no event do the official-check funds accrue to MoneyGram.

Rather, official-check accounts are functionally identical to conventional checking accounts, and MoneyGram's customers use these accounts “for safekeeping” just as holders of conventional checking accounts do. The Tax Court thought that official-check funds were deposited not for safekeeping but to “ensure that [MoneyGram] has funds available when official checks are presented to [MoneyGram] for payment.” ROA.24801. But that could equally be said of banks that accept deposits for traditional checking accounts. Thus, any attempt to characterize MoneyGram's official-check funds as “security deposits” or “retention funds” absurdly results in characterizing conventional checking accounts the same way.

3. As further evidence of the deposits' safekeeping purpose, multiple layers of security protect account holders' funds in official-check accounts. Only persons authorized by official-check account holders can access funds in the account. ROA.3566. Regulatory constraints likewise ensure that official-check accounts are a safe repository for customers' funds. For example, MoneyGram must hold permissible investments in an amount equal to its outstanding payment obligations, which guarantees that customers can rely on MoneyGram to protect their deposits and not squander them in risky ventures. ROA.3579, 24780. Yet another safeguard is the Federal Reserve's interbank system, which allows the official check, like any conventional check, to clear securely at any bank in that system. ROA.3566, 24778. Thus, “[t]he only reasonable conclusion is that [MoneyGram's official-check customers] would not enter into any such transaction if [they] did not believe the institution a reasonably safe place to place [their] funds.” Comm'r v. Valley Morris Plan, 305 F.2d 610, 623 (9th Cir. 1962). That suffices to satisfy the “safekeeping” requirement. See id. at 626 (holding that a taxpayer was a “bank” because its depositors were motivated by the security inherent in the taxpayer's accounts).

4. Venturing outside of this Court's definition of “deposit,” the Tax Court found it persuasive that MoneyGram's public financial statements describe official-check funds as “payment service obligations” rather than “deposits”; that MoneyGram had previously described its business as “nondepository credit intermediation”; and that MoneyGram “appears to be prohibited by law from receiving bank deposits.” ROA.24801 (citing 12 U.S.C. § 378). The Tax Court's approach improperly substituted out-of-context labels for this Court's substance-based definition.

None of the labels the Tax Court relied on has anything to do with the four requirements for a “deposit” under § 581 set forth by this Court in MoneyGram I. Those requirements define deposits in a functional way to determine whether an entity is undertaking the activities of a bank and thus should be entitled to the tax treatment accorded to banks. Nomenclature from other regulatory regimes is irrelevant. See, e.g., Staunton Indus. Loan Corp. v. Comm'r, 120 F.2d 930, 932, 934 (4th Cir. 1941) (holding that an entity can be a bank for federal tax purposes even though it is not chartered as a bank under state law).

Indeed, the bedrock principle of tax law is that “taxation is concerned with realities” and tax disputes are “controlled by matters of substance and not of form.” Id. at 934; see also Valley Morris, 305 F.2d at 620 (“Names are not what control. Realities do.”) (internal citation omitted). Valley Morris is instructive. There, the taxpayer was not a state or national bank, never represented itself as being a bank, and was prohibited by law from receiving deposits. Valley Morris, 305 F.2d at 618-19. The certificates at issue in that case even stated: “THIS IS NOT A CERTIFICATE OF DEPOSIT.” Id. at 614-15, 618-19. Nevertheless, the Ninth Circuit, honoring substance over form, held that the thrift certificates qualified as deposits under § 581's predecessor statute. Id. at 619.

The case for this commonsense approach is substantially stronger here. MoneyGram is running checking accounts for its official-check customers that comply with all four statutory requirements and are indistinguishable from traditional checking accounts. Under MoneyGram I, therefore, those funds are “deposits” for purposes of § 581.⁵

B. MoneyGram accepts deposits from its money-order customers.

MoneyGram satisfies the deposit requirement in a second, independent way through the funds it receives from money-order customers. See supra at 7-9 (describing money orders in detail).

On this point, the Tax Court ruled against MoneyGram on only two of the four requirements for “deposit” status. The Commissioner did not dispute that these funds were from the general public and payable on demand. But the Tax Court erroneously held that the money-order funds did not satisfy the other two requirements of “deposit” status — that the funds were placed with MoneyGram “for the purpose of safekeeping” and that MoneyGram has a “debtor/creditor relationship” with its money-order customers. ROA.24804, 24824.

1. MoneyGram's money-order customers place funds with MoneyGram “for the purpose of safekeeping.”

The Tax Court made two missteps in its safekeeping analysis: (1) mistakenly identifying the putative depositor as MoneyGram's money-order agent rather than the money-order customer; and (2) concluding, in the alternative, that money-order customers do not give funds to MoneyGram for “safekeeping.”

The Tax Court began by opining that MoneyGram's agents “would seem” to be the putative depositors. ROA.24803. To the contrary, MoneyGram's agents are exactly that: agents who act on MoneyGram's behalf — as the Tax Court elsewhere acknowledges. ROA 24770 (noting that “MoneyGram sells money orders through agents”). When a money-order customer purchases a money order at a MoneyGram agent's place of business, the customer gives funds to MoneyGram through the agent. ROA.3540, 3542. The customer, not the agent, is the depositor, and thus the Tax Court's conclusion that the agent does not give MoneyGram funds for safekeeping is beside the point.

Turning to customers as potential depositors, the Tax Court reasoned that money-order customers view “MoneyGram as offering, not a safe place to keep their money, but a secure way to deliver their money to someone else.” ROA.24805. In emphasizing that MoneyGram customers typically use the deposited funds for money orders to quickly pay bills, however, the Tax Court effectively weighed the brief duration of the deposit against “safekeeping” intent. The “intent to transfer” imputed by the Tax Court is just another way of saying that customers provided funds to MoneyGram that would remain with MoneyGram for only a short duration. But this Court squarely rejected the Tax Court's earlier use of a durational requirement for deposit status. MoneyGram I, 664 F. App'x at 392. The Tax Court should not be permitted to re-insert a durational requirement as the crux of its “safekeeping” analysis. Instead, the dispositive point on “safekeeping” is that MoneyGram's customers deposited funds because MoneyGram would securely maintain and then transfer the funds to the desired payees — regardless of how long the money-order customer asked MoneyGram to maintain a particular deposit, which could be days, weeks, or even months. ROA.3545.

In a similar vein, the Tax Court likened money orders to gift cards issued by restaurants and retail stores. ROA.24806. But that is another ill-fitting analogy. Gift cards are a way to prepay for goods and services from a particular store. Contrast that with money orders, which are a means of securely storing fungible funds that can be spent anywhere. A money-order holder can demand that MoneyGram return his stored funds, ROA.3545; a gift-card holder cannot make such a demand. If lost, gift cards may be freely used by the finder. Not so with money orders, which must be signed by the customer and are thus more secure. The gift-card detour led the Tax Court astray in its safekeeping analysis.

To be sure, a primary feature of money orders is their facilitation of delivering funds to others. But that is equally true of traditional checking accounts; indeed, why else does one open such an account? And no one would suggest that funds in traditional checking accounts do not qualify as deposits for safekeeping simply because account holders maintain such accounts for the purpose of securely transferring funds to third parties. The outcome should be no different for money orders, which serve the same purpose, acting as single-use checking accounts typically for lower-income people who cannot afford the fees and minimum-balance requirements associated with traditional accounts. ROA.3541-42, 24178. The Tax Court overlooked that both money orders and traditional checking accounts facilitate the secure storage and delivery of funds. That suffices to satisfy the “safekeeping” requirement. See Valley Morris, 305 F.2d at 626 (holding that a taxpayer was a “bank” because its depositors were motivated by the security inherent in the taxpayer's accounts).⁶

The law and evidence confirm this outcome. Courts have long recognized that a money order is functionally identical to a conventional personal check. See Morris Plan Bank of New Haven v. Smith, 125 F.2d 440, 442 (2d Cir. 1942) (holding that “certificates of indebtedness,” which, like money orders, could be assigned, were deposits for § 581 purposes); United Apparel Distribs. Inc. v. Chase Manhattan Bank, N.A., 548 F. Supp. 672, 673 (S.D.N.Y. 1982) (“[P]ersonal money orders function as personal checks.”); Adam Int'l Trading Ltd. v. Mfrs. Hanover Trust Co., 150 A.D.2d 294, 294 (N.Y. App. Div. 1989) (describing money orders as “the poor man's oneshot checking account”).In fact, since 1995, the Uniform Commercial Code has defined a personal money order as a check. Trump Plaza Assocs. v. Haas, 692 A.2d 86, 91 (N.J. Super. Ct. App. Div. 1997) (citing UCC § 3-104(f)).

The record likewise reflects that most money-order customers use money orders to substitute for checking accounts. ROA.3541-42, 24178, 24806.Money orders and checks are parallel in all relevant respects. When a customer purchases a MoneyGram money order, the customer receives a check-like instrument that directs MoneyGram to pay a set amount to a particular person.ROA.3544. The money-order customer has a claim against MoneyGram for the amount of the money order. ROA.3544.Just like a bank, MoneyGram reports its obligation to pay on its outstanding money orders as a liability. ROA.3548, 6692, 6892. These funds are “substantially restricted,” which means MoneyGram cannot freely use the funds, unlike a non-bank business that can use its sale proceeds for any purpose it wishes. ROA.3548. In short, money orders serve as one-time checking accounts because they collapse into a single transaction the act of depositing funds and drawing a check that authorizes withdrawal of the deposited funds. ROA.3544.⁷

Unsurprisingly then, money orders are just as secure as checking accounts for purposes of the safe keeping requirement. Merriam-Webster defines “safekeeping” as “the duty of a financial institution to keep its customers' funds in a safe area.” ROA.22832. Money orders guarantee that the stated amount of funds has been deposited and thus command greater confidence in the market than conventional personal checks, which could bounce. As with traditional banks, MoneyGram must maintain enough cash and other safe investments to fulfill its payment service obligations when the money order is presented for payment. ROA.3544-48, 24780. As with checks, a money order allows the customer to limit who can access the customer's money. Also as with checks, a customer can cancel a lost money order before it has been cashed by an unintended party. ROA.3545. By contrast, stolen or misplaced cash is almost certainly irretrievably lost and can be freely spent by the bearer.

This high level of security is a chief reason that MoneyGram's customers choose money orders. More than 40 percent of MoneyGram's customers cite “security of transaction” as the primary reason they do so. ROA.3415, 24770. An equal number prefer money orders because the transaction can be tracked. ROA.3415, 24770. When thinking about money orders, the top words that come to the minds of survey participants are “reliable/safe.” ROA.3415, 24770. In sum, customers deposit money-order funds with MoneyGram for safekeeping no less than wealthier individuals do with traditional checking accounts.

2. MoneyGram has a debtor/creditor relationship with its money-order customers.

The Tax Court erroneously held that MoneyGram lacks a debtor/creditor relationship with its money-order customers by deeming it dispositive that money orders are typically paid to a third party rather than to the purchaser of the money order. ROA.24804. In the Tax Court's view, that meant that in “the vast majority of transactions, MoneyGram's creditor will be the payee of the money order, not the purchaser.” ROA.24825. The purchaser of the money order “could be classified as the creditor only if he wrote his own name on the payee line or returned the money order for a refund.” ROA.24825.

Once again, money orders' similarity to personal checks illustrates that the Tax Court used the wrong lens to analyze this issue. To determine whether there is a debtor/creditor relationship, courts look not at “what obligation is discharged, if any, by the one who pays in,” but rather at the “obligations on the part of the receiver” of the funds that “come into being upon the receipt of what is paid in.” Morris Plan Bank, 125 F.2d at 442. Viewed from MoneyGram's perspective, a money order operates precisely the same as a personal checking account at a traditional bank. MoneyGram holds funds for its money-order customer and pays them out on demand according to the customer's directions, whether to a third party or back to the customer. MoneyGram thus operates as the debtor and its money-order customers as the creditor, just as with a traditional checking account. After all, most checking accounts are also used primarily to pay funds to third parties, and no one would contend that those accounts do not constitute deposits.

Case law, too, confirms that funds may qualify as deposits regardless of whether they are used to pay third parties. Valley Morris Plan is particularly on-point. The court considered whether amounts paid for “Term Thrift Certificates” qualified as deposits. As with money orders, the customer exchanged cash for a certificate and named a payee who would be eligible to redeem the certificate. Valley Morris Plan, 305 F.2d at 617-18. The Ninth Circuit held that customers made deposits under § 581's predecessor because the purchase of certificates was “nothing more or less than a deposit transaction, the money to be kept safely for the purchaser and repaid according to the terms of the certificate.” Id.

So too for money orders. MoneyGram's transactions with its money-order customers create the same debtor/creditor relationship that is the hallmark of traditional checking accounts and many other forms of banking transactions.

II. The Tax Court erred to the extent it held that MoneyGram did not make loans and discounts.

The second requirement for “bank” status under § 581 is that the entity “mak[e] loans and discounts.”MoneyGram I, 664 F. App'x at 393 (quoting § 581)). In MoneyGram I, this Court vacated and remanded for the Tax Court to apply the correct definition of “loan” and to decide whether MoneyGram makes discounts. Id. at 394. While the Tax Court accepted that some of MoneyGram's commercial-paper purchases met the loans-and-discounts requirement, it erred in holding that most such purchases and all of MoneyGram's ABS purchases did not qualify. It further erred in holding that MoneyGram's delayed-remittance agreements are not loans.

A. MoneyGram makes discounts by purchasing commercial paper and asset-backed securities.

1. A “discount” is “[a]n advance deduction of interest when a person lends money on a note, bill of exchange, or other commercial paper, resulting in its present value.” Black's Law Dictionary (11th ed. 2019); see also Nat'l Bank v. Johnson, 104 U.S. 271, 276 (1881) (explaining that a discount “is the difference between the price and the amount of the debt, the evidence of which is transferred”). A bank “makes a discount” when it purchases a note or other debt security for less than its face value. See ROA.7102-03 (reproducing O. Howard Wolfe, Elementary Banking 67-68 (1915)); Am. Nat'l Bank of St. Paul v. Comm'r, 14 B.T.A. 476, 485 (1928) (recognizing that “to discount signifies the act of buying a bill of exchange or promissory note for a less sum than that which upon its face is payable”).

An illustration from a leading treatise translates that jargon into concrete terms. A purchases goods from B in exchange for a promissory note under which A promises to pay B $1,000 in ninety days. See ROA.7102-03 (reproducing Elementary Banking at 67-68). Instead of waiting ninety days, B immediately transfers the note to a bank in exchange for a cash payment. The bank, however, will not pay the full face value of the note. Instead, it will pay B the face value of the note less the interest for ninety days. Id. For example, if the interest would have totaled $10, the bank pays B $990. That is “ma[king] a discount.” Id. When the note comes due, A repays the $1,000 to the bank rather than to B. Id. Thus, “[d]iscounting may be defined as the process through which future maturities are converted into immediate cash.” Id.

2. MoneyGram makes discounts in two ways: (1) by purchasing commercial paper, and (2) by purchasing ABS. Starting with commercial paper, MoneyGram purchased approximately $66 billion of commercial paper in 2007. ROA.3573, 24835. Commercial paper consists of promissory notes issued by businesses that need short-term financing. ROA.24182, 24783. The businesses receive cash in exchange for the promissory notes, which obligate them to pay back a greater amount (representing the original cash received plus interest) at a later date. ROA.3574, 24182, 24784. MoneyGram acquired this commercial paper at a “discount” because it paid less than the face value of the notes, with the discount reflecting expected interest, risk of default, and other contingencies. ROA.3574. Once the commercial paper reached maturity, the borrowers paid MoneyGram the full face value. ROA.3574.

That is a classic example of making a “discount.” Indeed, commercial paper defines a “discount” in Black's Law Dictionary. See Black's Law Dictionary (11th ed. 2019) (defining a “discount” as “[a]n advance deduction of interest when a person lends money on a note, bill of exchange, or other commercial paper” (emphasis added)); see also Sec. Indus. Ass'n v. Bd. of Governors, 468 U.S. 137, 158 (1984) (recognizing that “the authority to discount commercial paper . . . places banks in their traditional role as a prudent lender”); Evans v. Nat'l Bank of Savannah, 251 U.S. 108, 113-14 (1919) (holding that banks discount commercial paper “in the usual course of business”).

The Tax Court did not question the discount status of the $5.7 billion in commercial paper that MoneyGram acquired directly from issuers. ROA.24834-35. Nor could it. Because those purchases indisputably constitute both loans and discounts, see infra Part II.B.1, the Court may find the requirement to “make[ ] loans and discounts” satisfied on this basis alone.

The Tax Court, however, refused to credit the remaining $60 billion of commercial paper that MoneyGram acquired through commercial-paper agents.⁸ ROA.24835.For example, in one such transaction, MoneyGram purchased $60 million of commercial paper that had been issued by Leggett & Platt, a furniture company, to SunTrust Bank, which then sold it to MoneyGram. ROA.24182.

The Tax Court thought the presence of intermediaries between the issuer and MoneyGram defeated discount status. In its view, “[i]n making these investments MoneyGram did not lend money to a customer by discounting a note.” ROA.24835. Rather, “[a]ny lending was done by the underwriters who initially purchased [commercial paper] from the issuer.” ROA.24835.

The Tax Court's reasoning conflicts with the classic treatise example discussed above and the Tax Court's own definition of discount earlier in its opinion. In the example, A issued the note to B, and the bank purchased the note from B — an intermediary — thus making a discount. Indeed, the Tax Court itself recognized that a discount occurs when a bank customer “h[olds] a 'bill' or promissory note from a third party” and “ask[s] his bank to 'discount' the bill by giving him (say) 90 cents on the dollar.” ROA.24830 (emphasis added). This is identical to MoneyGram's purchase of Leggett & Platt's promissory notes from SunTrust Bank. The Tax Court inexplicably contradicted its own definition when it held that only commercial paper purchased directly from the issuer counts as making discounts.

The Tax Court's understanding also clashes with long-established Supreme Court precedent and common sense. In Fleckner v. Bank of the United States, the Supreme Court first defined the term “discount”: “[A] discount by a bank means . . . a deduction or draw-back made upon [the bank's] advances or loans of money, upon negotiable paper, or other evidences of debt, payable at a future day, which are transferred to the bank.” 21 U.S. 338, 350-51 (1823). The Court then held that a bank's purchase of a promissory note that had changed hands multiple times qualified as a “discount,” thereby ruling out any requirement that a discount may only be made in a direct purchase from the original issuer. Id. at 339, 350-51. Thus, this Court need look no further than Fleckner to reverse the Tax Court on this point, as it establishes that the presence of intermediaries does not affect the discount status of a transaction.

That result also comports with the twenty-first-century economic reality of the commercial-paper market. The record evidence establishes that commercial-paper agents are nothing more than matchmakers that “minimize administrative expenses” in bringing together issuers and buyers of commercial paper. ROA.24182. Although these agents acquire the commercial paper, they do so only for the purpose of conveying it to the ultimate purchaser. ROA.24182. And, most importantly, there is no meaningful difference between commercial-paper agents and the series of banks in Fleckner that acquired the promissory note before it was ultimately discounted by the last bank in the chain of ownership. 21 U.S. at 339. Regardless of intermediaries, MoneyGram purchased the notes at less than face value and then received the full amount from the issuer-borrower upon maturity — the dual hallmarks of discounts.

3. MoneyGram also made discounts by purchasing ABS, including MBS. ROA.3569, 24785. ABS are modern forms of the discounts described centuries ago in cases like Fleckner, which involved successive transfers of a single mortgage. Buying and selling entire mortgages can be inefficient, cumbersome, and difficult to scale. As a leading treatise explains, the “extensive details, paperwork, and cost involved in these types of transactions prevented many small buyers from entering the market” and thereby kept a considerable amount of capital out of the mortgage market. ROA.7112 (reproducing Mortgage Pass-Through Securities at 504-05).

MBS were created to eliminate these barriers to entry and facilitate the frictionless flow of capital into the mortgage market. MBS come into existence when an investment bank purchases numerous home mortgages, pools them together, and then sells interests in that pool of mortgages on the open market. ROA.7113. Although the buyers of MBS do not hold title to the underlying mortgages, they own the only rights that matter — the rights to their “pro rata share[ ] of the interest . . . and principal cash flow from a pool of mortgages” and the proceeds from any foreclosure and liquidation of the underlying real estate collateral. ROA.7113, 8046-47, 8055. In other words, just like any other lender, a buyer of MBS exchanges a sum of money upfront for the right to a payment stream from the borrowers into the future.

MoneyGram purchased both ABS and MBS at a discount — for a price less than the sum of the expected stream of future payments (analogous to the “face value” of the mortgages). ROA.3570. As with MoneyGram's commercial-paper purchases, the discount reflected the interest rate, risk of borrower default, and other contingencies. ROA.3571.

Despite these undisputed facts, the Tax Court held that MoneyGram's buying ABS and MBS did not qualify as making discounts. Once again, the Tax Court's misunderstanding of Fleckner was the primary source of this error. The Tax Court acknowledged that MoneyGram purchased ABS and MBS “at a discount to [their] face value,” but, as with commercial paper, it effectively held that only purchases from the original issuer of the underlying loans counted as making a discount under § 581. ROA.24832. It rejected purchases of ABS and MBS because the “market discount” baked into those transactions “might reflect” additional factors beyond the “unstated interest” apparent when the issuer first sold the loans — e.g., that “interest or inflation rates had increased during the interim, that economic conditions had deteriorated, or that the loans backing the security were perceived by investors as having declined in value owing to increased risk of default.” ROA.24832.

To begin with, that reasoning does not apply to much of MoneyGram's ABS purchases because it bought a substantial portion of ABS in the initial offering rather than on the secondary market. Indeed, at least 43.7% of the ABS MoneyGram held at the end of 2007 was purchased in the initial offering from the underwriter. ROA.3597-604, 7274-22715 (MoneyGram ABS purchase trade tickets and underlying offering memoranda). For those ABS, MoneyGram's purchase would not reflect any “market discount” that concerned the Tax Court. ROA.24834.

Even as to ABS MoneyGram purchased on the secondary market, those subsequent purchases were still made — by the Tax Court's own admission — at a “discount.” And Fleckner makes plain that having multiple entities in the chain of ownership does not destroy the “discount” status of a transaction. 21 U.S. at 339, 350-51. Nor does it make a difference that the nature of the discount may evolve through multiple transactions. “[F]rom the holder's viewpoint, market discount is economically indistinguishable from original issue discount . . . [because] [b]oth forms of discount represent substitutes for stated interest.” Kevin Keyes, Federal Taxation of Financial Instruments and Transactions ¶ 8.01, 1999 WL 629685. Even in the simpler Fleckner scenario, the final discounter would likely have paid a different discount than the discounter who purchased the mortgage from the issuer, for the loan would be closer to maturity, market conditions may have improved or deteriorated, and default risk could have changed. But that did not alter the final discounter's status. Accordingly, the fact that MoneyGram obtained its ABS and MBS from parties other than the original issuers cannot defeat discount status. The dispositive fact remains that MoneyGram purchased the ABS and MBS at a “discount” — a “difference between the price and the amount of the debt.” Johnson, 104 U.S. at 276.

The Tax Court's assertion that MoneyGram did not “acquire ownership of any existing promissory note and had no rights in the event of default on any individual mortgage” does not undermine discount status. ROA.24832. Indeed, the Comptroller of the Currency has recognized that “purchasing bank-permissible debt securities . . . [is a] form[ ] of lending money.” ROA.22918 (reproducing Office of the Comptroller of the Currency, Exploring Special Purpose National Bank Charters for Fintech Companies 4 (December 2016)). It is the right to the payment stream from the borrowers that matters, not legal ownership of the notes. That is all that is required for the purchase of ABS or MBS to be a transaction in which “evidences of debt, payable at a future day, . . . are transferred to [MoneyGram].” Fleckner, 21 U.S. at 351. And that is the core of “discount” status under Fleckner. Id.

Moreover, the Tax Court was simply wrong to state that the MBS provide MoneyGram “no rights in the event of default.” ROA.24832. MBS holders are entitled to “Subsequent Recoveries,” e.g., ROA.8055, which are defined as “amounts received . . . by the related Servicer specifically related to a defaulted Mortgage Loan . . . that resulted in a Realized Loss, after the liquidation or disposition of such defaulted Mortgage Loan.” ROA.8046-47. Thus, even if these rights were important to discount status, MoneyGram possesses them.

Lastly, the Tax Court fretted that “'[d]iscounting' in its broadest sense” could sweep in “every investor who purchases a security at a discount.” ROA.24833. This led the Tax Court to adopt a “narrower” construction limited to a bank's “discount[ing] promissory notes for its customers.” ROA.24833-34. MoneyGram agrees that “making discounts” should not be given its “broadest” construction. But neither should it be constricted to the precise species of discount extant in 1936. See Barr v. United States, 324 U.S. 83, 90 (1945) (“[I]f Congress has made a choice of language which fairly brings a given situation within a statute, it is unimportant that the particular application may not have been contemplated by the legislators.”). “Making discounts” should instead be given its ordinary meaning in the banking context, as reflected in Fleckner and the definitions cited above. Under this approach, purchasing equity securities plainly would not be covered. But purchasing ownership in a pool of loans at a discount to their face value — even if the loans have been securitized and sold through intermediaries — falls within the heartland of that meaning. Improvements in the efficiency and sophistication of discounts do not change their fundamental nature as discounts.

B. MoneyGram's discounts also qualify as loans, and it makes additional loans through delayed remittances.

MoneyGram makes loans in two independent ways. First, MoneyGram's “discounts” through purchasing commercial paper and ABS are, by definition, also “loans” because discounts are simply one type of loan. Second, MoneyGram issues additional working-capital loans in the form of delayed-remittance agreements with its money-order agents.

1. MoneyGram's discounts through purchases of commercial paper and ABS are, by definition, loans as well.

The Tax Court never addressed MoneyGram's first kind of loans: its discounts. MoneyGram makes loans because it makes discounts, see supra at 35-45, and discounts are just a specific type of loan. As a leading treatise explained at the time of the enactment of § 581's predecessor, “[a]ll bank investments, whether by the discount of promissory notes, straight loans, mortgages or bonds, are loans.” ROA.7103 (reproducing Elementary Banking at 67). The Comptroller of the Currency agrees: “[D]iscounting notes, purchasing bank-permissible debt securities, engaging in lease-financing transactions, and making loans are forms of lending money.” ROA.22918. The Commissioner acknowledged this financial reality below when he conceded that making discounts is a “type of lending transaction.” ROA.23900. Because discounts are a subset of loans, MoneyGram's discounts satisfy the loan requirement as well.

The evolution of the statutory text supports this conclusion. Section 581's predecessor defined a “loan” as “money advanced or loaned on stocks, bonds, bullion, bills of exchange, or promissory notes.” Rev. St. § 3407, 18 Stat. 673 (1874). Interpreting that prior version of the statute, the Supreme Court held that that the reference to “bonds, bills of exchange, or promissory notes” limited the category of transactions that could be considered loans, such that mortgages, for example, would not qualify as “loans” under the statute. Selden v. Equitable Tr., 94 U.S. 419, 421 (1876). As the Supreme Court explained, “if [the statute] was intended to embrace loans generally, there was no necessity for introducing th[ose] qualifying words.” Id.

Section 581 dropped that qualifying language entirely. It refers only to “making loans.” § 581. It thus “embrace[s] loans generally” and includes every transaction that comes within the common definition of the term. Selden, 94 U.S. at 421. As demonstrated above, discounts fit the bill. In both its commercial paper and ABS purchases, MoneyGram exchanged a sum of money for the promise of future payments from borrowers. That is the essence of a “loan.” MoneyGram I, 664 F. App'x at 393 (defining loan as “a contract by which one delivers a sum of money to another and the latter agrees to return at a future time a sum equivalent to that which he borrows”).⁹

2. MoneyGram also makes loans in the form of delayed remittances.

MoneyGram also makes loans through delayed-remittance agreements with its money-order agents. Under a delayed-remittance agreement, a money-order agent may keep and use the funds that customers exchange for money orders for a defined period before remitting them to MoneyGram. ROA.3551, 24774. The agent pays MoneyGram a fee or interest in exchange for keeping the funds for the additional time. ROA.3551, 24774.

This Court's test for “loan” status from MoneyGram I controls whether the delayed remittances qualify as loans under § 581. MoneyGram I defined “loan” as “an agreement, either express or implied, whereby one person advances money to the other and the other agrees to repay it upon such terms as to time and rate of interest, or without interest, as the parties may agree.” 664 F. App'x at 393. Put another way, a loan is “a contract by which one delivers a sum of money to another and the latter agrees to return at a future time a sum equivalent to that which he borrows.” Id. Importantly, the “central inquiry” for determining if a transaction is a loan, the Court explained, is “whether it is 'the intention of the parties that the money advanced be repaid.'” Id.

The Court also provided a non-exhaustive seven-factor test to guide this inquiry:

Id. These factors form a “general basis” upon which courts may analyze a transaction.” Id. A transaction need not satisfy all of them, and none is dispositive. See id.

Purporting to use that framework, the Tax Court held that MoneyGram's delayed remittances were not loans. Faithfully applied, however, this Court's test leads to the opposite conclusion. The Tax Court got off on the wrong foot by all but ignoring the “central inquiry” in the loan analysis — “whether it is 'the intention of the parties that the money advanced be repaid.'” Id. The Tax Court acknowledged that the delayed-remittance agreements possessed this key feature of a loan because they “explicitly establish the existence of an obligation to (re)pay.” ROA.24814-15. But without appreciating the critical nature of this finding, the Tax Court quickly moved on to other, less important considerations. That drive-by approach accords far too little weight to the “central inquiry” on the loan question. The Tax Court's misstep set it on the path to reaching the wrong result.

The Tax Court then turned to the seven MoneyGram I factors. But rather than applying them in light of the “central inquiry” noted above, the Tax Court instead “focus[ed] on the extent to which the factors help illuminate other aspects of MoneyGram's relationship with its agents.” ROA.24815. In so doing, the Tax Court hijacked the factors as a vehicle to reinstate its earlier conclusion that MoneyGram has a trustee-beneficiary relationship with its agents — often emphasizing the same rationales from its vacated opinion.

Beginning with the first factor — “whether the promise to repay is evidenced by a note or other instrument” — the Tax Court necessarily acknowledged that the promise to repay is expressly stated in the delayed-remittance agreement. ROA.24814-15. But the Tax Court immediately discounted this factor because that agreement was entitled “Master Trust Agreement,” reprising its reasoning that this Court vacated. ROA.24816; MoneyGram I, 664 F. App'x at 388-89 (noting that in its earlier opinion the Tax Court “focused on the fact that the instrument used to memorialize this agreement is facially a trust agreement and not a loan agreement”). That elevation of labels over substance ignores the language of this Court's factors, which simply inquires whether any “instrument” evidences a promise to repay, as the Master Trust Agreement undisputedly does.

The Tax Court's approach is also antithetical to the basic tenet of tax law that tax disputes are “controlled by matters of substance and not of form.” Staunton, 120 F.2d at 934; see also Morris Plan Bank, 125 F.2d at 441 (“Names are not what control. Realities do.”) (internal citation omitted). This Court has applied that precept to reject a similar argument that a “trust” label controls over the “loan” substance of a transaction. See In re Morales Travel Agency, 667 F.2d 1069, 1072 (5th Cir. 1981) (holding that an agreement whereby one party had to repay another at regular intervals was “for everyday purposes” a “conventional [relationship] of debtor-creditor” and the agreement's label as a “trust” was merely “a draftsman's concept”). In substance, the transaction here was a loan rather than a trust. Indeed, if the agents were trustees, then MoneyGram would pay them for trust services. But instead the agents act as borrowers and pay MoneyGram for the delayed remittances. The Tax Court erred by jettisoning this Court's approach in favor of its earlier determination to give primacy to nomenclature.

On the second factor — “whether interest was charged” — the Tax Court found it dispositive that most agents pay a fee rather than time-based interest if they fail to remit the funds on time. ROA.24816 (finding this “consistent with characterization of the agent's obligation as an account payable rather than a loan”). But in weighing this factor heavily against MoneyGram, the Tax Court neglected to mention that this Court “repeatedly stated that interest is not required” and “disagreed” with the Tax Court's earlier opinion that defined loans with reference to interest. MoneyGram I, 664 F. App'x at 393. In any event, “interest” is not so strict a term. In Deputy v. Du Pont, the Supreme Court defined interest on a loan as any “compensation for the use or forbearance of money.” 308 U.S. 488, 498 (1940). Similarly, in Samueli v. Commissioner, the Ninth Circuit allowed a taxpayer to claim an “interest deduction” for a fee that the taxpayer was required to pay to a securities broker. 661 F.3d 399, 416 (9th Cir. 2011). And in Kelly v. Commissioner, the Tax Court held that “points,” which are upfront fees charged in exchange for lowering the interest rate on a loan, are “considered to be prepaid interest.” 62 T.C.M. (CCH) 1406, 1408 (1991). Under these precedents, the fees that money-order agents must pay to keep MoneyGram's funds for a longer period qualify as “interest.”

The Tax Court then took a bizarre approach to factors three through six. It admitted that the delayed-remittance agreements satisfied those factors, but it nevertheless treated them as “neutral” because other non-loan transactions could also satisfy them:

• Third factor: The delayed-remittance agreements “invariably set forth a fixed 'remittance schedule,'” but “[f]ixed dates for payment or repayment are common in commercial settings” and any run-of-the-mill “invoice[ ] from trade creditors” includes a deadline. ROA.24817.

• Fourth factor: Although the delayed-remittance agreements require collateral security, collateral security is “also found in other types of commercial documents, such as trust instruments.” ROA.24818.

• Fifth factor: Although “MoneyGram's agents made remittances consistently with their stipulated remittance schedules,” “[o]bligations to pay arise in many commercial contexts.” ROA.24819.

• Sixth factor: “[W]hile MoneyGram's behavior is consistent with the existence of a debtor-creditor relationship, it is equally consistent with the existence of a trustee-beneficiary relationship.” ROA.24819.

Needless to say, that is not how a multi-factor analysis works. If a factor favors loan status, then it favors loan status. The fact that it might be consistent with some other transaction that the Tax Court does not believe should be treated as a loan is irrelevant. Under a faithful application of this Court's test, factors one through six all support loan status.

On the seventh and final factor — “whether the parties conducted themselves as if the transaction were a loan” — the Tax Court emphasized that the delayed-remittance agreements required segregation of the delayed-remittance funds from the agent's own funds. ROA.24815, 24820.But loan agreements often impose restrictions and negative covenants on borrowers that limit how funds can be used. See, e.g., Ludwig v. Comm'r, 68 T.C. 979, 989 (1977) (explaining that “covenants of this character, restricting the borrowing of funds, the sale of certain assets, or payment of dividends and forbidding gratuitous guaranties, are not at all uncommon”). And, more importantly, the stipulated facts establish that whatever the delayed-remittance agreements say, the on-the-ground reality is that MoneyGram's money-order agents often do not have separate cash registers to segregate the delayed remittances from other cash. ROA.3551, 3553. In practice, therefore, the agents use delayed remittances as working capital that would otherwise need to be borrowed from another financial institution. Thus, the restriction often goes unobserved in the actual conduct of the parties.

The Tax Court next created and then evaluated two additional factors not mentioned by this Court in MoneyGram I: (1) the manner in which the transaction was treated in the parties' books and records; and (2) the parties' subsequent behavior. ROA.24823. These factors effectively served as a hook for the Tax Court to triple-count the conduct-of-the-parties factor. On these factors, the Tax Court placed much weight on MoneyGram's reflecting the delayed remittances as “receivables,” rather than loans, on its consolidated financial statements, ROA.24776, 5216 — even though MoneyGram had no separate entry for “loans,” ROA.5216, and “accounts receivable” is the “nomenclature of debt,” Byerlite Corp. v. Williams, 286 F.2d 285, 290 (6th Cir. 1960). The Tax Court also noted that MoneyGram argued in the distinct context of bankruptcy proceedings that the delayed remittances were subject to an express trust. ROA.24772.

But the Tax Court overlooked substantial undisputed evidence establishing that MoneyGram satisfied the Tax Court's two additional factors. While conceding that “there is no evidence in the record to establish how MoneyGram's agents reflected on their balance sheets their remittance obligations,” ROA.24821, the Tax Court ignored that the agents behaved like borrowers when they requested increases in delayed remittances, just as a borrower would do with any line of credit. ROA.3552. MoneyGram and its agents also conducted themselves as parties to a loan when they agreed to increase the amount of the fees paid under delayed-remittance agreements in return for extending the duration of the remittances. ROA.3556. What is more, MoneyGram acted like a lender by performing credit checks on agents before entering into these agreements, obtaining personal guarantees of repayment from individual representatives of the agent, and acquiring the rights of a secured creditor under the Uniform Commercial Code. ROA.3549, 3555. Equally tellingly, MoneyGram claimed bad-debt expenses on uncollectable delayed remittances, which the IRS allowed. ROA.3553-54. Lastly, MoneyGram processed the delayed remittances through its credit department. ROA.3552.

Properly considering all of this evidence as relevant to the seventh factor, that factor is neutral at worst for MoneyGram, especially as the most direct evidence — the actual conduct of the parties throughout the life of the agreements — supports loan status. Even if it weighed against MoneyGram, the seventh factor could not change the outcome when the other six factors weigh in MoneyGram's favor. That is especially so when the “central inquiry” in the loan analysis — “whether it is 'the intention of the parties that the money advanced be repaid,'” MoneyGram I, 664 F. App'x at 393 — indisputably supports loan status here. The Tax Court concluded that MoneyGram's delayed-remittance arrangements were not loans only by subtly supplanting this Court's guidance at every turn.

III. Receiving deposits and making loans and discounts is a substantial part of MoneyGram's business.

A. The third requirement for “bank” status is that “a substantial part of [the entity's] business . . . consists of receiving deposits and making loans and discounts.” § 581; see MoneyGram I, 664 F. App'x at 390. The Tax Court's opinion reflects that MoneyGram could satisfy this requirement through its deposit-receiving activity alone. ROA.24828 (“[I]f MoneyGram were regarded as receiving bank deposits, that activity would be 'a substantial part' of its business.”); see supra at 6-9 (detailing MoneyGram's extensive official-check and money-order operations). If the Court agrees, then it need proceed no further to conclude that MoneyGram satisfies this requirement.

In any case, the substantiality of MoneyGram's banking activities is further confirmed when one adds its loans and discounts into the equation. The Tax Court only partially considered this issue because it held that MoneyGram's only discounts were the $5.7 billion in commercial paper it purchased directly from the issuer. See supra at 38 (addressing this holding). The Tax Court held that neither those purchases, nor MoneyGram's delayed-remittance agreements, comprised a substantial part of MoneyGram's business. ROA.24835-36. Those holdings were erroneous. But more importantly, when all of MoneyGram's loans and discounts are considered — including ABS and all commercial-paper purchases — it is apparent that they make up a substantial part of MoneyGram's business, especially when considered in conjunction with its already substantial deposit-receiving activity.

B. “Substantial part” is not defined in the statute. Thus, it should be given its “ordinary meaning,” Comm'r v. Kelley, 293 F.2d 904, 907 (5th Cir. 1961), and construed flexibly to consider the totality of the circumstances, elevating common sense over rigid metrics. Magruder v. Safe Deposit & Tr. Co. of Baltimore, 121 F.2d 981, 985 (4th Cir. 1941) (applying a “practical, commercial, functional approach” to this inquiry). In MoneyGram I, this Court explained that the substantial-part requirement distinguishes entities that merely “engage” in “the touchstone activities of a bank” from those for whom “these activities amount to a substantial part of its business.” 664 F. App'x at 390. This understanding is illustrated by Fifth Circuit and Tax Court precedent.

In Kelley, this Court, speaking through Judge Wisdom, interpreted the phrase “substantial part of the net income” in another tax statute. 293 F.2d at 905-06 (quoting 26 U.S.C. § 117(m)). The Court held that “the term [was] a relative one,” not susceptible of a strict percentage-based test. Id. at 913. Rather, relying on a dictionary from the time of § 581's adoption, the Court defined “substantial” to mean “of ample or considerable amount, quantity or dimension.” Id. at 914 (quoting Oxford English Dictionary (1933)). Section 581's substantial-part test is even more flexible than the statute in Kelley, since it is defined with reference to the more amorphous term “business,” rather than the bright-line guidepost of “net income.” The Tax Court agreed with these interpretive principles below, recognizing that substantiality could be satisfied if MoneyGram's banking activities were either “qualitatively” or “quantitatively” “important to [MoneyGram's] business.” ROA.24829.

C. Applying this test, MoneyGram's ABS purchases alone comprise a substantial part of its business. Qualitatively, MoneyGram purchased ABS and other investment-grade assets to comply with the reserve requirements imposed by banking regulations. ROA.3578, 3569. If MoneyGram failed to comply with these critical regulations, it could no longer operate its business. ROA.3572-73 (declining value of ABS meant MoneyGram “was out of compliance for a brief period of time with state regulations” and “state regulators could have . . . stopped MoneyGram from operating in their states”); ROA.24786. Thus, MoneyGram's ABS purchases were “important to its business in a qualitative sense.” ROA.24829.

Quantitatively, MoneyGram's $600 million in ABS holdings, ROA.3570, easily constitutes an “ample or considerable amount, quantity or dimension.” Kelley, 293 F.2d at 914 (quoting Oxford English Dictionary 1933). This amount comprises approximately 7.5 percent of MoneyGram's total 2007 assets and 9 percent of MoneyGram's total 2008 assets.¹⁰ These figures compare favorably to those in the case law. Austin State Bank v. Comm'r, 57 T.C. 180, 183 (1971) (holding that a substantial part of taxpayer's business was making loans where “2 to 4 percent” of assets “were invested in loans”); ROA.24828 (deposits were substantial part of MoneyGram's business where they generated just under 8% of revenues).¹¹

If that were not enough, the events of 2007-2008 conclusively reveal the importance of MoneyGram's ABS holdings to its business. Before the financial crash, in 2005 and 2006, MoneyGram's ABS holdings increased in value by roughly $34 million.ROA.5231.¹² After the housing crash, MoneyGram was forced to sell its ABS at a $260 million loss. ROA.3572. This caused MoneyGram to report negative $261.4 million in net income for 2008. ROA.5557. By contrast, in 2009, MoneyGram's net income was negative $1.9 million. ROA.5557. Assets that are this central to a company's fortunes plainly comprise a substantial part of its business.¹³ It would be especially perverse to hold otherwise here, where § 581 grants favorable tax treatment for banks' losses precisely because they must hold large amounts of such investments to protect depositors. See Staunton, 120 F.2d at 933 (stating that the purpose of special treatment for banks is that “the surplus of banks must be built up for the protection of the depositors”) (quoting H.R. Rep. No. 74-2475, at 9 (1936)); cf. Heft, 294 F.2d at 797. (interpreting “substantial part” in § 117(m) in light of the broader purpose of the statute).

D. For similar reasons, MoneyGram's purchases of discounted commercial paper also comprise a “substantial part” of its business. As with ABS, MoneyGram's commercial-paper purchases were qualitatively important to MoneyGram's compliance with mission-critical regulatory reserve requirements. ROA.24783. In absolute terms, MoneyGram purchased $66 billion of commercial paper in 2007 alone, with $5.7 billion purchased directly from the issuer — plainly an ample or considerable amount. ROA.3574, 24182, 24835-36. On any given day, MoneyGram held hundreds of millions of dollars in commercial paper. ROA.24185-224.

Moreover, the proportion of assets attributable to commercial paper frequently surpassed the level endorsed in Austin State Bank. For example, on April 18, 2007, MoneyGram held $477 million in commercial paper, ROA.24488, nearly 6 percent of MoneyGram's total assets. ROA.5475. Even directly purchased commercial paper — standing alone — often approached this level. For example, on December 13, 2007, MoneyGram held $150 million of directly purchased commercial paper, which amounted to roughly 2 percent of MoneyGram's total assets. ROA.5475, 24526; see also ROA.24464 (indicating that the highlighted entries on the spreadsheet are directly purchased commercial paper). Considering all these factors, MoneyGram's commercial-paper purchases — even when considered alone — comprised a substantial part of its business.¹⁴

E. MoneyGram's loans via delayed-remittance agreements with its agents also comprised a “substantial part” of MoneyGram's business. In holding otherwise, the Tax Court myopically focused on revenues and obscured that delayed-remittance agreements made up a substantial amount of MoneyGram's business under other metrics. ROA.24829. Indeed, MoneyGram lent “billions of dollars” in 2007 and 2008 pursuant to delayed-remittance agreements. ROA.3551. Of the $43.8 billion of money-order funds that MoneyGram received in 2007, $26.3 billion were received by agents that had delayed-remittance agreements with MoneyGram. ROA.3548. All told, MoneyGram had delayed-remittance agreements with 83 percent of its money-order agents. ROA.3548.

The Tax Court further erred in holding that MoneyGram's delayed-remittance agreements were not “substantial” in a “qualitative sense.” ROA.24829. It is undisputed that “attracting and retaining a large network of agents is, and was in 2007 and 2008, instrumental to MoneyGram's business and its ability to attract funds through its money order and money transfer divisions.” ROA.3548-49. But the Tax Court mistakenly held that the record lacked evidence that the delayed-remittance agreements are “an important factor in recruiting agents to sell its money orders.” ROA.24829. In fact, the delayed-remittance agreements provide a strong incentive for small businesses to serve as MoneyGram agents in two ways: First, MoneyGram “generally allowed the agent to retain any interest earnings that an agent generated on delayed remittance funds.” ROA.3551. Second, by lending this money, MoneyGram enabled the agents to “use [the] cash to complete other transactions.” ROA.3553. The Tax Court brushed aside the latter consideration by noting that the delayed-remittance agreements “barred agents from using [the funds] as working capital,” but it ignored the stipulated facts that many agents in practice do not comply with that restriction and that delayed remittances thus give “the agent greater liquidity for purposes of conducting the agent's business.” ROA.3551, 3553. Thus, the stipulated record evidence establishes that the delayed-remittance agreements provided important benefits to MoneyGram's agents and that the vast majority of agents chose to maintain these agreements and remit billions of dollars under them.

In sum, MoneyGram's deposits, loans, and discounts each could independently satisfy the “substantial part” requirement. When considered together, it is evident that these “touchstone activities of a bank . . . amount to a substantial part of its business.” MoneyGram I, 664 F. App'x at 390.

IV. MoneyGram is regulated by the banking regulatory authorities.

The Tax Court did not formally reach the fourth and final requirement for “bank” status — that the entity is “subject by law to supervision and examination by State or Federal authority having supervision over banking institutions.” § 581. But it acknowledged that “[a]s a rule, [MoneyGram] is subject to supervision by officials of the State banking (or similar) department.” ROA.24781. Indeed, the parties stipulated that “MoneyGram is subject to the supervision of the bank supervisory authorities of many states” and is regulated by the same federal entities that regulate “organizations chartered as 'banks.'” ROA.3576-77, 24780. These joint stipulations establish beyond any doubt that MoneyGram satisfies the final factor in the § 581 “bank” analysis.

It is precisely because MoneyGram was regulated by these banking authorities that it was required to hold reserves in investment-grade assets such as MBS. When those investments plummeted in value, MoneyGram suffered severe losses, just as other banks did. Traditional banks were permitted to offset these losses against ordinary income, compensating them for the risks they took to protect depositors. Because MoneyGram satisfies the § 581 requirements for bank status, it is entitled to the same treatment.

CONCLUSION

MoneyGram requests that the Court reverse the Tax Court's judgment, render judgment that MoneyGram is a “bank,” and remand for determination of MoneyGram's refund.

August 3, 2020

Respectfully submitted,

By: Aaron M. Streett
Richard A. Husseini
J. Mark Little
Jacob Walley
Brenton H. Cooper
BAKER BOTTS L.L.P.
910 Louisiana St.
Houston, Texas 77002
Tel: (713) 229-1234
Fax: (713) 229-1522

Counsel for Appellants MoneyGram International, Inc. and Subsidiaries