Government Argues MoneyGram Isn’t 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 DECISION OF
THE UNITED STATES TAX COURT

BRIEF FOR THE APPELLEE

RICHARD E. ZUCKERMAN
Principal Deputy Assistant Attorney General

ARTHUR T. CATTERALL (202) 514-2937
RANDOLPH L. HUTTER (202) 514-2647
Attorneys
Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044

STATEMENT REGARDING ORAL ARGUMENT

Counsel for the Commissioner respectfully inform the Court that they believe oral argument should be heard in this case because it presents an important issue of first impression.

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TABLE OF CONTENTS

Statement regarding oral argument

Table of contents

Table of authorities

Statement of jurisdiction

Statement of the issue

Statement of the case

Summary of argument

Argument:

Conclusion

Certificate of service

Certificate of compliance with Rule 32(a)

TABLE OF AUTHORITIES

Cases:

Alfred I. Dupont Testamentary Tr. v. Commissioner, 514 F.2d 917 (5th Cir. 1975)

Austin State Bank v. Commissioner, 57 T.C. 180 (1971)

BC Ranch II, L.P. v. Commissioner, 867 F.3d 547 (5th Cir. 2017)

Commissioner v. Nat'l Alfalfa Dehydrating & Milling Co., 417 U.S. 134 (1974)

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

Corley v. United States, 556 U.S. 303 (2009)

Engel v. O'Malley, 219 U.S. 128 (1911)

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

Fleckner v. Bank of U.S., 21 U.S. (Wheat.) 338 (1823)

In Matter of Galaz, 841 F.3d 316 (5th Cir. 2016)

Georgia Mobile Dental, LLC v. Napper, No. CV 18-269-SDD-EWD, 2018 WL 6037527 (M.D. La. Nov. 16, 2018)

Harland Clarke Holdings Corp. v. Milken, 997 F. Supp. 2d 561 (W.D. Tex. 2014)

INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992)

Melasky v. Commissioner, 803 F. App'x 732 (5th Cir. 2020)

MoneyGram Int'l, Inc. & Subs. v. Commissioner, 664 F. App'x 386 (2016) (MoneyGram II)

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

 Matter of Pengo Indus., Inc., 962 F.2d 543 (5th Cir. 1992)

Reed v. City of Arlington, 650 F.3d 571 (5th Cir. 2011) (en banc)

Smith v. Kansas City Title & Tr. Co., 255 U.S. 180 (1921)

Smith v. Reg'l Transit Auth., 827 F.3d 412 (5th Cir. 2016)

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

Todd v. Commissioner, 486 F. App'x 423 (5th Cir. 2012)

Union Bank of Benton, Ark. v. First Nat'l Bank in Mt. Pleasant, Tex., 621 F.2d 790 (5th Cir. 1980)

United States v. Salam, Inc., 191 F. Supp. 2d 725 (E.D. La. 2001)

Statutes:

12 U.S.C.:

Internal Revenue Code (26 U.S.C.):

Internal Revenue Act of 1936, § 104

31 U.S.C.:

Regulations:

Treasury Regulations (31 C.F.R.):

Miscellaneous:

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

Fed. R. App. P. 13(a)

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STATEMENT OF JURISDICTION

On April 4, 2012, the IRS issued a notice of deficiency to MoneyGram International, Inc., and Subsidiaries for 2005-2007, determining over $71 million in total federal tax deficiencies for those years. (ROA.53-84.)¹ On May 14, 2012, MoneyGram timely filed a petition in the Tax Court challenging the IRS's determinations. (ROA.16-52.) The Tax Court had jurisdiction under §§ 6213(a) and 7442 of the Internal Revenue Code (I.R.C.) (26 U.S.C.).

On December 3, 2019, the Tax Court issued an opinion granting summary judgment to the Commissioner (ROA.24763; see 153 T.C. 185), and on February 7, 2020, the court entered a final, appealable decision (ROA.24859). MoneyGram filed a timely notice of appeal on February 21, 2020. (ROA.24861.) See I.R.C. § 7483; Fed. R. App. P. 13(a). This Court has jurisdiction under I.R.C. § 7482.

STATEMENT OF THE ISSUE

Whether the Tax Court correctly held that, during the years in issue, MoneyGram was not a “bank” within the meaning of I.R.C. § 581 and thus was not entitled to deduct, as bad debts under I.R.C. § 166, the losses it incurred in 2007 and 2008 from its disposition of asset-backed securities.

STATEMENT OF THE CASE

1. Procedural overview

On its tax returns for 2007 and 2008, MoneyGram claimed bad-debt deductions for losses incurred with respect to its non-real-estate mortgage investment conduit (non-REMIC) asset-backed securities. (ROA.24786-87.) Generally, such losses are treated under the Code as capital losses and are deductible only against capital gain. See I.R.C. § 165(g)(1) and (2)(C). Under I.R.C. § 582(a), however, an entity may deduct such losses against ordinary income if it qualifies as a bank under I.R.C. § 581. MoneyGram had no net capital gain during the years in issue and deducted the losses against its ordinary income.

The IRS issued a notice of deficiency to MoneyGram, denying the claimed deductions and determining deficiencies in MoneyGram's income tax for the years 2005-2007.² MoneyGram challenged that determination in the Tax Court, arguing that it is a bank within the meaning of I.R.C. § 581. The Commissioner prevailed on this issue in the Tax Court, MoneyGram appealed, and this Court vacated the decision and remanded the case for further proceedings. (See ROA.2422.)

On remand, the Tax Court again granted summary judgment to the Commissioner, holding that MoneyGram was not a bank as defined in I.R.C. § 581 and therefore was not entitled to its claimed loss deductions. (ROA.24763.) This appeal followed.

2. Factual background

MoneyGram Payment Systems, Inc. (MPSI) is a wholly-owned subsidiary of MoneyGram International, Inc. (MoneyGram). (ROA.24767.) MoneyGram “is a leading global payment services company,” and it conducts such business chiefly through MPSI. (ROA.24767.) MoneyGram is registered with the U.S. Treasury Department as a money services business (MSB). (ROA.3577, ¶152; ROA.24779; see also 31 C.F.R. § 1010.100(ff).) MSBs include money transmitters, money order issuers and sellers, check cashers, and issuers of travelers checks. (ROA.24779; see also 31 C.F.R. § 1010.100(ff)(5).) MoneyGram divides its business generally into two segments: the global funds transfer segment, which provides global money transfer services,³ money orders, and bill payment services; and the payment systems segment, which provides payment processing services to financial institutions, including the processing of “official checks” such as cashier's checks. (ROA.3542, 24768, 24777.)

a. Money orders

MoneyGram's business consists, in part, of selling money orders, primarily to individuals who have “a checking and or a savings account, but still need the help of alternative financial services.” (ROA.3657; see also ROA.5263, 24770.) A survey conducted by MoneyGram showed that many of its customers used money orders to pay bills and for goods and services. (ROA.3661-62, 24770.) Customers choose money orders for a variety of reasons, including the “security of . . . [the] transaction,” because the “transaction can be tracked,” because a money order is “required by biller,” and because “cash is not accepted everywhere.” (ROA.3664, 24770.)

To obtain a money order, a customer goes to a MoneyGram agent and pays cash equal to the amount of the money order, plus an additional fee. (ROA.3544, ¶37; ROA.24770.) In return, the customer receives a blank money order in the amount requested. (ROA.24770-71.) A MoneyGram money order form refers to the customer obtaining the money order as the “purchaser,” and it refers to MoneyGram as the “drawer.”⁴ (ROA.5920.)

The customer then completes the money order by filling in the name of the payee and the customer's own name, and signing the money order. (ROA.3544, 24771.) If the customer later decides that he no longer needs the money order, he may obtain a refund by submitting the unused money order, along with an additional processing fee, to MoneyGram. (ROA.24771.) Alternatively, if the customer has not filled in the payee line, he may fill in his own name as the payee and redeem the money order for cash. (ROA.24771.) In neither case will the initial fee paid by the customer be returned. (ROA.24771.)

A money order typically remains outstanding for fewer than 10 days. (ROA.5264, 24771.) On its consolidated financial statements, MoneyGram classified its outstanding money orders as “payment service obligations” and treated them as liabilities. (ROA.3548, ¶51, ROA.24776.) When a money order is deemed to be abandoned under state law, it escheats to the state. (ROA.3545-46, ¶43.)

MoneyGram's money-order agents include banks, supermarkets, convenience stores, and other retail locations. (ROA.24768, 24770.) MoneyGram generally receives transaction fees from its agents for each money order sold, and it generates income by investing the funds remitted by its agents. (ROA.5264, 24771, 24776.)

In the absence of an agreement providing otherwise, when a customer purchases a money order, the agent must remit the funds to MoneyGram immediately. (ROA.3550, ¶61.) MoneyGram and its agents, however, typically enter into an agreement, titled “Master Trust Agreement” (MTA) (e.g., ROA.3701), which generally allows an agent to delay remittance for a short, agreed-upon period of time. Such an agreement is set forth either in the MTA or in a “Money Order Attachment” that is part of the MTA. (ROA.24771, 24773, e.g., ROA.3707, 3729, 3778, 3811.) Under these agreements, the remittance schedule varies by agent and is dependent upon MoneyGram's investigation into the agent's creditworthiness. (ROA.24773.) One chain agent, The Money Store, remits funds to MoneyGram once a week under its agreement (ROA.3681), but other agents generally must remit the funds due MoneyGram twice a week (ROA.3425, ¶32; ROA.24773; e.g., ROA.3707, 3729, 3778, 3811). MoneyGram does not have delayed remittance arrangements with its large chain agents, such as Wal-Mart, which remit the funds daily. (ROA.3553, ¶74; ROA.24773.) MoneyGram has delayed remittance agreements with approximately 83% of its money order agents (ROA.3553, ¶74), and in 2007 and 2008, approximately 60% of MoneyGram's money orders were sold by agents with delayed remittance agreements (ROA.3548, ¶54).

Under the MTAs, the agent is identified as the “Trustee” of the “Trust Funds,” which are “h[e]ld in trust for [MoneyGram] and separate from Trustee's funds.” (ROA.3554, ¶77; ROA.24771; e.g., ROA.3676, 3701, 3725.)⁵ The MTAs generally define “Trust Funds” as “fees, face amount of money orders, gift certificates, money transfer checks, principal amounts of . . . money transfers and all proceeds from the sale” of money transfer services (ROA.24771), and the Trustee is required under the MTA to “maintain a Trust Account” in which to hold the Trust Funds (E.g., ROA.3676, ¶5; ROA.3701, ¶6). If the Trust Funds become “commingled with other funds, the total commingled funds are impressed with a trust and shall belong and are payable to [MoneyGram] to the extent of amounts due [MoneyGram] from Trustee.” (ROA.3554, ¶78; ROA.3676, 3684, 24771-72.) MTAs further provide MoneyGram with “a continuing security interest in the Trust Funds.” (ROA.3702, ¶13; ROA.24772.) On its consolidated financial statements, MoneyGram classified funds due from its money-order agents as “accounts receivable” rather than loans. (ROA.3556, 24776.)

In numerous bankruptcy cases involving MoneyGram's money-order agents, MoneyGram has argued that the agent's payment obligation to MoneyGram under the applicable MTA is excepted from discharge under federal bankruptcy law. To that end, MoneyGram has consistently maintained in such proceedings that under an MTA, agents hold Trust Funds as fiduciaries in an express trust for MoneyGram's benefit. (E.g., ROA.3720, 3789, 3837, 3863.) MoneyGram's bankruptcy litigation position is that an agent's failure to turn over Trust Funds constitutes “defalcation while acting in a fiduciary capacity.” (ROA.3790, 24772; see also ROA.3720, 3754-55, 3771, 3864, 3909; ROA.3557-58, ¶¶94, 96.)⁶

MoneyGram does not charge agents any additional fee or interest for the privilege of delaying remittance of the Trust Funds. Rather, MoneyGram imposes a charge only if the remittance is late, and the charges vary. Generally, the MTA provides that MoneyGram charges an agent either a fixed-dollar amount (such as $40) or interest at the “highest rate allowed by law,” whichever amount is greater. (ROA.22774; e.g. ROA.3702, ¶20.) Some agreements require a “service fee” in a fixed-dollar amount, with interest accruing if the payment is more than one day late. (ROA.24774.) MoneyGram's MTA with Wal-Mart provides that interest accrues with no service fee. (ROA.24774.) The MTA for the 7-11 Stores of Oklahoma provides for a late fee “of 2% of any late payment of Trust Funds.” (ROA.3688, ¶2.8(G); ROA.24774) Whether MoneyGram actually received any late fees or interest from its money-order agents during the years at issue is not shown by the record. (ROA.24776.)

b. Payment systems segment

MoneyGram's payment processing services are provided primarily to “financial institutions, thrifts and credit unions” and include “official check” outsourcing services. (ROA.5265; see ROA.3564, ¶100, and ROA.24778, n.4.) Official checks include bank checks, cashier checks, and teller checks that are used when the payee requires a check drawn on a bank or other third party for assurance of payment and fund availability. (ROA.5266, 24777-78.) Official checks are commonly used in consumer loan closings. (ROA.5266, 24777.) Financial institutions also use official checks to pay their own obligations. (ROA.24778.)

MoneyGram and its official-check customers typically enter into a “payment processing services agreement” that lasts for three to five years. (ROA.3656, ¶103, ROA.24778.) Before the first day on which a bank issues official checks under such an agreement, it supplies MoneyGram with funds equal to its anticipated average daily value of official checks. (ROA.3565, ¶106; ROA.24778.) This is called the “first day settlement.” (ROA.24778.) At the end of each business day, the bank creates a report showing the total dollar value of official checks issued that day, and the next day the bank must deposit with MoneyGram the amount of funds to cover the prior day's official checks. (ROA.3565-66, ¶106; ROA.24778.) As official checks clear, a bank's account balance with MoneyGram is drawn down, but it is replenished daily as described above. (ROA.3566, ¶110; ROA.24778-79.)

MoneyGram receives fees from financial institution customers for its official-check services. (ROA.3565, ¶104; ROA.24779.) MoneyGram also derives income from the temporary investment of funds remitted by those customers until such time as the official checks clear. (ROA.24779.) On its consolidated financial statements, MoneyGram classifies outstanding official checks as “payment service obligations” and treats them as liabilities. (ROA.24779.) As with unused money orders, official checks may ultimately escheat to the state. (ROA.3566, ¶109.)

c. Federal and State regulation

Title 31 of the Code of Federal Regulations contains the regulations governing “Money and Finance” and contains regulations governing MSBs such as MoneyGram. (Title 12 of the Code of Federal Regulations contains the regulations governing “Banks and Banking.”) The Title 31 regulations exclude MSBs from the definition of “bank” and provide that the term “Money Services Business” does not include any “bank.” 31 C.F.R. § 1010.100(d)(7) and (ff)(8)(i).

MoneyGram is not regulated as a bank by the Federal Reserve Board, the Office of the Comptroller of the Currency, or the Federal Deposit Insurance Corporation (FDIC). (ROA.24781.) Rather, it is regulated as an MSB/money transmitter. (ROA.5116, 5127, 24780; see 31 C.F.R. § 1010.100(d)(7) and (ff)(1) through (ff)(8)(i).) All United States banks that receive deposits are required to maintain deposit insurance through the FDIC, and all U.S. banks are regulated by one of the federal bank regulators. (ROA.24780-81.) 12 U.S.C. §§ 1811, 1813. MoneyGram does not maintain deposit insurance through the FDIC and it has never been regulated as a bank by any federal banking regulator. (ROA.24781.) No MoneyGram affiliate is incorporated as a bank under state law. (ROA.24781.) States regulate MoneyGram as a money transmitter, not as a bank. (ROA.5127, 24781.)

MoneyGram annually files Form 10-K (Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934) with the Securities and Exchange Commission (SEC). (ROA.5155, 5258, 5386, 24782.) On its Forms 10-K, MoneyGram has described itself as a “global payment services company” (ROA.5158, 5261, 5389), and it has never represented to the SEC or to its shareholders that it is a bank or that any part of its business consists of receiving deposits or making loans. MoneyGram's financial statements filed along with its 10-Ks do not list any loans among its assets or list any deposits among its liabilities. (ROA.5216, 5336, 5475, 24782.) MoneyGram has informed the IRS that, if it were classified as a bank under state law, its “business would be adversely impacted because (i) [it] would be required to pay for FDIC insurance and (ii) there would be duplicative and sometimes inconsistent regulatory schemes that could confuse our customers and unnecessarily increase our operating costs.” (ROA.5864.) Accordingly, MoneyGram is “careful not to use bank terms (such as 'deposits') with [its] customers.” (ROA.5864.)

d. Representations on MoneyGram's tax returns

On its 2005 through 2008 U.S. Corporation Income Tax Returns (Form 1120), MoneyGram listed its business activity code as “522298,” which is the code for “nondepository credit intermediation.” (ROA.5665, 5669, 5674, 5680 (tax returns — Sch. K), ROA.5700-02, 5722-24, 5745-47, 5770-72 (return instructions — list of Principal Business Codes); ROA.24782.) Activities that fall within the “nondepository credit intermediation” classification include money transmitting, check clearing, and loan brokering. (ROA.5701 (code 522300), 24782.) On these returns, MoneyGram did not list its business activity as including “depository credit intermediation” (see ROA.5701 (codes 522110, 522120, 522130, and 522190)), which activities include those of commercial banks, savings institutions, and other financial institutions that accept deposits (ROA.24782).

On its 2008 Form 1120, MoneyGram continued to use the same business activity code for nondepository credit intermediation, but it changed its typed-in description of its business activity on prior returns from “PMT SERVICES/CR AGENCY” (ROA.5665, 5669, 5674) to “BANKING,” and it changed its product or services description from “MONEY-WIRE TRANSFERS” to “FINANCIAL SERVICES.” (ROA.5680, 24783). MoneyGram's Forms 10-K for 2007 and 2008 do not reflect any change in MoneyGram's business activities from payment services to banking. (See ROA.5258-70, 5386-98, 24783.)

e. MoneyGram's investments and recapitalization

To comply with state regulatory requirements, MoneyGram was required to maintain financial reserves equal to at least the outstanding face amount of its payment service obligations (i.e., its outstanding money orders and official checks). (ROA.3569, ¶119; ROA.24783.) During 2007 and 2008, MoneyGram satisfied this requirement in part by holding interests in commercial paper and in asset-backed securities, including mortgage-backed securities. (ROA.3573, ¶137; ROA.24783-84.)

Commercial paper is issued initially at a discount to the face amount of the obligation. The initial discount, referred to as “original issue discount,” “results when a [debt instrument] is issued for less than its face value. The discount . . . equals the difference between a [debt instrument]'s face amount (stated principal amount) and the proceeds, prior to issuance expenses, received by the issuer.” Matter of Pengo Indus., Inc., 962 F.2d 543, 546 (5th Cir. 1992) (internal quotation marks and citation omitted). “The discount on a debt instrument . . . is in the nature of additional interest.” Ibid. (internal quotation marks and citation omitted). During 2007, MoneyGram invested in commercial paper with maturities as short as one day (known as “overnight commercial paper”) and as long as 270 days, and it held an aggregate of $66 billion in commercial paper during that year. (ROA.24784.) MoneyGram invested in commercial paper to earn a return on cash balances that it held pending clearance of money orders and official checks through the banking system. (ROA.24784.) During 2007, MoneyGram purchased commercial paper on about 2,400 occasions from broker-agents, such as Merrill Lynch, and on about 118 occasions it purchased commercial paper directly from the issuer. (ROA.24784.)

At the beginning of 2007, MoneyGram held asset-backed securities valued at approximately $4.2 billion. (ROA.24786.) During 2007 and 2008, however, global financial markets experienced extreme volatility and the asset-backed securities held by MoneyGram lost much of their value. (ROA.1531, ¶5; ROA.24786.) MoneyGram thus was required to recapitalize and divest itself of its low-rated and largely worthless securities. (ROA.1531-32, ¶¶7-10; ROA.24786.)

f. MoneyGram's 2007 and 2008 tax reporting, the initial Tax Court proceedings, and the first appeal

MoneyGram claimed significant loss deductions on its 2007 and 2008 tax returns. In particular, MoneyGram claimed bad-debt deductions on its 2007 and 2008 returns of $524,435,525 and $16,516,192, respectively, for its losses on “non-real-estate mortgage investment conduit” (non-REMIC) asset-backed securities. (ROA.24787.) As debts evidenced by a security, however, MoneyGram is required to treat such losses as losses “from the sale or exchange . . .  of a capital asset” — and deduct them only to the extent of capital gain for the same year — unless it is a “bank.” I.R.C. §§ 165(g)(1) & (g)(2)(C), 166(e), 581, 582(a).

Because MoneyGram did not meet the definition of a bank under I.R.C. § 581, the IRS disallowed its bad-debt deductions (among other adjustments) and determined income tax deficiencies against the company. (ROA.24787.) Under § 581, 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.

MoneyGram filed petitions in the Tax Court challenging the IRS's determinations, and both parties moved for partial summary judgment on the issue whether, during the years in issue, MoneyGram was a bank as defined in I.R.C. § 581. The Tax Court held that MoneyGram was not a bank under § 581 and, accordingly, granted partial summary judgment to the Commissioner. (ROA.2338, 2415.)

MoneyGram appealed, and a divided panel of this Court vacated the decision and remanded the case for further proceedings. (ROA.2424; MoneyGram Int'l, Inc. & Subs. v. Commissioner, 664 F. App'x 386 (2016) (MoneyGram II).) In particular, the majority (Judges Owen and Prado) “disagree[d] with the manner in which [the Tax Court] defined 'deposits' and 'loans' as relevant to” the inquiry regarding whether MoneyGram was a “bank” and regarding the requirement under I.R.C. § 581 “that a substantial part of the [bank's] business consist of receiving deposits and making loans.” (ROA.2432.) Accordingly, this Court remanded the case for the Tax Court to reconsider its decision regarding whether MoneyGram met the requirements under I.R.C. § 581. (ROA.2436.) Judge Wiener dissented, opining that MoneyGram had failed to carry its burden of proving that it qualifies as a bank “under any iteration of the definition of” that term. (ROA.2437.)

g. The second Tax Court opinion

On remand, the parties filed a new stipulation of facts (ROA.3538), along with 274 exhibits (ROA.3606–22715), and each party filed a motion for summary judgment (ROA.22722, 23821). The Tax Court again granted summary judgment to the Commissioner, holding that MoneyGram did not qualify as a bank under I.R.C. § 581. (ROA.24763-24837.)

The court rejected MoneyGram's contention that it received “deposits” (as that term is used in § 581) from financial institutions using its official-check services and from its retail money order customers. (ROA.24795-24807.) The court observed that “[t]he most essential attribute of a bank deposit is its placement in a bank 'for the purpose of safekeeping,'” and it found that “[n]either the financial institutions that purchase MoneyGram's official check services nor the consumers who purchase its money orders transfer funds to MoneyGram for the purpose of safekeeping.” (ROA.24807.)

In addition, the Tax Court rejected MoneyGram's position that its delayed-remittance arrangements constituted loans to its agents selling money orders. (ROA.24808-23.) The court first noted (citing this Court's opinion, MoneyGram II, 664 F. App'x at 391) that I.R.C. § 581 requires a bank to use deposits to make secured loans, but that MoneyGram could not meet this requirement because it did not receive deposits. (ROA.24809.) Further, applying a multi-factor test endorsed by this Court, the Tax Court found that MoneyGram does not “'make loans' to its money order agents to the extent the MTAs require them to remit Trust Funds pursuant to the agents' normal (generally bi-weekly) remittance schedules.” (ROA.24823.)

The Tax Court further found that MoneyGram did not make discounts as required under § 581 when it purchased commercial paper and asset-backed securities. When MoneyGram purchased asset-backed securities, the court observed, it might have done so at a discount to the face value, but that was not a discount that equated to unstated interest charged to the seller, and it did not constitute making a discount in the sense used in I.R.C. § 581. (ROA.24832-34.) For similar reasons, the court found that MoneyGram did not “make discounts” when it purchased commercial paper at a discounted value from broker-dealers. Without deciding whether purchasing commercial paper directly from issuers constituted “making discounts,” the court concluded that MoneyGram did not show that such activity was a substantial part of its business. (ROA.24835.)

The Tax Court thus held that MoneyGram “was not a 'bank' for purposes of § 581 because it could not show that a substantial part of its business consisted of 'receiving deposits and making loans and discounts.'” (ROA.24837.) Accordingly, the court held that MoneyGram's securities losses were capital losses and were not deductible against its ordinary income. The court granted summary judgment to the Commissioner (ROA.24837), and MoneyGram now appeals.

SUMMARY OF ARGUMENT

MoneyGram seeks to be classified as a bank under I.R.C. § 581 in order to claim bad-debt deductions under I.R.C. § 166 for losses it incurred in 2007 and 2008 with respect to its non-REMIC asset-backed securities. MoneyGram, however, does not meet the requirements for a bank under § 581 and under long-established case law interpreting that provision. In particular, MoneyGram neither receives deposits nor makes loans and discounts, as those terms are generally understood in the banking industry (and thus for purposes of § 581). The Tax Court thus correctly upheld the IRS's determination that MoneyGram was ineligible to deduct its claimed losses as bad debts under § 166. The record fully supports the Tax Court's decision, and this Court should affirm.

1. Deposits, in the banking sense, are “funds that customers place in a bank for the purpose of safekeeping that are repayable to the depositor on demand or at a fixed time.” MoneyGram II, 664 F. App'x at 392 (internal quotation marks omitted). MoneyGram argues that it receives “deposits” from the financial institutions for which it provides official-check services. Those customers, however, are contractually obligated to make payments to MoneyGram on a daily basis in the exact amount of the official checks they issued the day before, i.e., to fund MoneyGram's contractual liability for obligations already incurred by the customer. The funds are not paid to MoneyGram for safekeeping, or with any expectation of withdrawal during the 3-5 year term of MoneyGram's typical payment processing services agreement, and thus do not constitute deposits under § 581.

MoneyGram likewise does not receive deposits from customers who purchase its money orders. Money-order customers do not transfer funds to MoneyGram for safekeeping, subject to withdrawal at a later date at the customer's discretion; rather, they purchase a payment instrument payable to someone else. For present purposes, the purchase of a money order is not appreciably different from the purchase of any other good or service, and it bears no resemblance to a bank deposit.

2. MoneyGram also does not make discounts. A bank generally makes a discount by purchasing a third party's debt instrument from a customer at a discount from the face amount. MoneyGram argues that it makes discounts by purchasing commercial paper and asset-backed securities, but those transactions do not involve making discounts in the banking sense (i.e., for purposes of § 581). Rather, MoneyGram is no different from any other institutional investor participating in these markets. Any discount involved in the vast majority of these transactions is not borne by the party selling the investments to MoneyGram, as is the case when a bank discounts a third-party note presented by a customer. Even if MoneyGram's purchases of commercial paper directly from the issuer could conceivably qualify as “making discounts” within the meaning of § 581, such transactions did not constitute a substantial part of MoneyGram's business and, in any event, cannot make up for the fact that MoneyGram received no deposits (see above) and made no loans (see below).

3. In addition, MoneyGram does not lend money to its customers or to the general public. MoneyGram briefly suggests that it makes loans when it invests in commercial paper and asset-backed securities, on the theory that “discounts” are “loans.” Aside from the fact that MoneyGram did not make “discounts” when it made those investments (see above), MoneyGram's argument in this regard — which the Tax Court did not even see fit to address — is baseless and would render the distinction between loans and discounts in § 581 meaningless.

MoneyGram contends that it provides loans to its money-order agents through “delayed remittance agreements” that permit most of its agents to delay sending money-order proceeds to MoneyGram for a few days rather than sending them on a daily basis. The agreement between MoneyGram and its agents, however, is entitled “Master Trust Agreement”; it provides that the agent is a “trustee,” not a borrower. And MoneyGram fights tooth-and-nail for that characterization when it comes to enforcing the agreement in bankruptcy proceedings. Thus, the objective evidence in the record — documentary and otherwise — demonstrates that the funds that MoneyGram allows its agents to hold for a few days before turning them over to MoneyGram are not loans to the agents. That conclusion likewise follows from the application of the 7-factor test that this Court endorsed in MoneyGram II, which the Tax Court correctly applied.

4. Other circumstances demonstrate that MoneyGram is not a bank as that term is commonly understood. MoneyGram is not registered with the United States Treasury as a bank; it is registered as a “money services business.” MoneyGram is not regulated by the Federal Reserve Board, the Office of the Comptroller of the Currency, or the FDIC, and it is not incorporated as a bank under any state law. Moreover, on the Form 10-K that it is required to file annually with the SEC, MoneyGram has never represented that it is a bank or that any part of its business consists of receiving deposits or making loans. On its tax returns for 2005 through 2008, MoneyGram listed the business activity code for “nondepository credit intermediation.”

MoneyGram thus wants to be treated as a bank exclusively for the purposes of this case, but the record demonstrates that it does not qualify as a bank under § 581 and therefore is not entitled to such treatment. The Tax Court correctly applied § 581 and correctly followed existing precedent in interpreting the statute.

ARGUMENT
The Tax Court correctly held that MoneyGram did not qualify as a “bank” under I.R.C. § 581

Standard of review

This Court reviews the Tax Court's grant of summary judgment de novo. Smith v. Reg'l Transit Auth., 827 F.3d 412, 417 (5th Cir. 2016); Melasky v. Commissioner, 803 F. App'x 732, 736 (5th Cir. 2020); see also BC Ranch II, L.P. v. Commissioner, 867 F.3d 547, 551 (5th Cir. 2017) (“We review the Tax Court's decisions using the same standards that are applicable to district court decisions.”).

A. Introduction

The sole remaining issue in this case is whether MoneyGram may claim a bad-debt deduction for losses it incurred with respect to its non-REMIC asset-backed securities. “[A]n income tax deduction is a matter of legislative grace and . . . the burden of clearly showing the right to the claimed deduction is on the taxpayer.” INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992) (quotation omitted); see also Alfred I. Dupont Testamentary Tr. v. Commissioner, 514 F.2d 917, 922 (5th Cir. 1975). “[D]eductions are strictly construed and allowed only as there is a clear provision therefor.” INDOPCO, 503 U.S. at 84 (internal quotation marks and citation omitted).

The losses at issue relate to debt investments evidenced by a security within the meaning of I.R.C. § 165(g)(2)(C). Under I.R.C. § 582(a), only a corporation that qualifies as a “bank” under I.R.C. § 581 may deduct such losses against ordinary income. Under § 581, the term “bank” means, in part, “a bank or trust company incorporated and doing business under the laws of the United States . . . a substantial part of the business of which consists of receiving deposits and making loans and discounts.” See pp. 18-19, supra. This Court held in its prior opinion in this case that the “bare requisites” necessary for an entity to be considered a bank under I.R.C. § 581 are that it (1) receive deposits from the general public, “repayable to the depositors on demand or at a fixed time,” (2) use deposited funds to provide secured loans, and (3) create a debtor-creditor relationship between itself and the depositor. MoneyGram II, 664 F. App'x at 391 (citing Staunton Indus. Loan Corp. v. Commissioner, 120 F.2d 930, 933–34 (4th Cir. 1941)). As discussed below, the Tax Court correctly held that MoneyGram cannot qualify as a bank under I.R.C. § 581 and thus cannot deduct the securities losses at issue.

B. MoneyGram does not receive deposits from its customers

As this Court noted in the first appeal, the term “deposits,” as used in § 581, “should have a narrower definition than its broadest possible meaning.” MoneyGram II, 664 F. App'x at 392 (citing Commissioner v. Valley Morris Plan, 305 F.2d 610, 616 (9th Cir. 1962), for the proposition that the “[t]erm 'deposit' always has had a meaning of its own, peculiar to the banking business, and one that the courts should recognize and deal with according to commercial usage and understanding.”) (alteration added). Drawing on the “relevant authorities,” the Court found that “the essential elements of a 'deposit' include the following”: (1) it “must involve the placement of funds with another for 'safekeeping,'” and (2) the deposited funds “must be subject to the control of the depositor such that they are repayable on demand or at a fixed time.” Id.; see also Engel v. O'Malley, 219 U.S. 128, 136 (1911). The Tax Court found that MoneyGram does not receive deposits in that sense, and the record and the case law fully support the court's decision.

1. MoneyGram does not receive deposits from its official-check customers

MoneyGram contends that it “accepts deposits from its official-check customers.” (Br. 22.) The Tax Court, however, correctly rejected MoneyGram's position.

Funds remitted to MoneyGram by its financial institution clients for official-check services are not deposits for purposes of § 581, since they are not placed with MoneyGram for safekeeping, to be withdrawn by the financial institutions at their discretion or on demand at a later date. The idea of “placing funds for safekeeping” suggests a voluntary action; MoneyGram's official-check customers, in contrast, remit funds to MoneyGram because they are contractually obligated to do so. And those customers cannot withdraw the remitted funds at all under their contractual agreements, as those funds are already subject to third-party claims when they are remitted to MoneyGram.

With the exception of the “first day settlement” amounts, all funds provided to MoneyGram by its official-check customers are provided after those customers have issued the corresponding amount of official checks. (ROA.3565-66, ¶106; ROA.24778.) Thus, the funds are not provided to MoneyGram for safekeeping and later withdrawal upon demand, but to fund MoneyGram's obligation to honor official checks that have already been issued.

In other words, MoneyGram's official-check customers have not contracted with MoneyGram to store their money for later withdrawal by them at times, and in amounts, at their discretion. Instead, they “have out-sourced their official checking product and related services to MoneyGram” because it is “cost-effective and/or profitable” for banks to do so. (ROA.1545, ¶6.) By the time funds are provided to MoneyGram, official checks committing those funds to third parties have already been issued. Thus, no subsequent withdrawal of the funds by the financial institutions is permitted under the agreement with MoneyGram.⁷

MoneyGram considers its official-check service to be a product it sells that creates a debtor-creditor relationship between itself and the payees of the official checks issued by the product purchaser, not between itself and the product purchaser (as would arise under a bank deposit arrangement). See Morris Plan Bank of New Haven v. Smith, 125 F.2d 440, 442 (2d Cir. 1942) (recognizing that the nature of the “obligations on the part of the receiver” of funds is determinative of whether the remittance is a bank deposit). MoneyGram does not represent that it accepts deposits from its official-check customers. Indeed, in a brief in a recent Supreme Court case, MoneyGram stated that its “Official Check product is a prepaid payment item generally sold at a financial institution . . . . In exchange for a transaction fee and the value of the payment, the Official Check seller issues an instrument to the purchaser upon which MoneyGram is liable.” (ROA.3568, ¶118.) MoneyGram's official-check customers, therefore, do not place funds with MoneyGram for safekeeping, but to purchase a product and to fund a service that MoneyGram provides. Accordingly, such funds are not “deposits” in the banking sense. See Staunton, 120 F.2d at 933-34.

MoneyGram erroneously contends that its “official-check accounts are functionally identical to conventional checking accounts” in that its official-check customers remit funds to MoneyGram to “'ensure that [MoneyGram] has funds available when official checks are presented to [MoneyGram] for payment,'” which can “equally be said of . . .  traditional checking accounts.” (Br. 24 (quoting ROA.24801). While it may be theoretically possible for the holder of a traditional checking account to maintain that account in the same manner as one of MoneyGram's official-check accounts, i.e., by limiting his deposits to the dollar amount of checks he wrote the previous day, the critical difference is that he is not legally constrained to do so. Rather, holders of conventional checking accounts are free to deposit as much money as they choose for safekeeping with the bank, above and beyond the amount necessary to cover the checks that they write. That crucial difference wholly undermines MoneyGram's attempt to equate the remittances it receives from its official-check customers with the deposits a bank receives from its conventional checking account holders.

Simply put, MoneyGram is not in the business of providing accounts where customers can “keep” cash. Rather, it provides an official-check service for which financial institutions are required to provide funding under a contractual relationship. That this service involves “checks” does not transform it into a banking or “checking account” arrangement in the narrow, commercial sense “peculiar to the banking business.” Valley Morris Plan, 305 F.2d at 616. The dispositive fact is that MoneyGram's official-check customers do not transfer money to MoneyGram for safekeeping, to be drawn upon later as needed; they do so to fund MoneyGram's obligation to honor official checks that the customers have already issued. Nor does MoneyGram have any intention of accepting those funds for safekeeping. See Smith v. Kansas City Title & Tr. Co., 255 U.S. 180, 210 (1921) (“Speaking generally, a bank is a moneyed institution to facilitate the borrowing, lending and caring for money.”); Morris Plan Bank of New Haven, 125 F.2d at 442 (payments to an entity must be “received and held . . . as are . . . bank deposits” in order to be considered deposits for purposes of Section 104 of the Revenue Act of 1936).⁸

MoneyGram erroneously contends (Br. 24) that the “security” of its official-check service constitutes “further evidence” that its official-check customers remit funds to MoneyGram for “safekeeping purpose[s].” As the Tax Court correctly recognized (ROA.24800-01), the mere fact that MoneyGram provides a secure payment service does not establish that its official-check customers make their daily remittances for the purpose of safekeeping. Indeed, if “security of service” were dispositive of the “safekeeping” inquiry, then companies like PayPal that provide internet payment services could claim that they receive “deposits” from their customers as contemplated in § 581.

Again, “safekeeping” refers to the idea that an account is a safe place to keep money. The security provided by MoneyGram for its official-check customers, however, is a guarantee for the service or product it has sold to those customers. MoneyGram's financial reserves provide security — a guarantee — for official-check transactions. But MoneyGram does not provide a place for official-check customers to “keep” their funds in the ordinary sense of that word.

MoneyGram objects to the Tax Court analogizing official-check payments to an attorney's retainer (ROA.24799), arguing that the official-check payments never accrue to MoneyGram (Br. 23-24), but the analogy is apt. Like MoneyGram, an attorney holding a retainer uses those funds to pay for his or her services, and if and when the funds are depleted the attorney ceases to provide the service. The client relies on the attorney to retain the funds to support the service, but he or she has not given the attorney funds for “safekeeping.”

Until MoneyGram incurred millions of dollars in worthless-security losses that only banks may deduct against ordinary income, the company listed itself on federal tax returns — filed under penalty of perjury — as an entity involved in “nondepository credit intermediation,” which involves activities such as money transmitting, check clearing, and loan brokering. (ROA.24782.) MoneyGram is registered with the Department of the Treasury as a “money service business,” and subject to regulation under title 31 of the United States Code, not title 12, which governs banking. (ROA.24779-80.)

MoneyGram argues that these are mere “labels,” and that the Court must look to the “functional way” it operates to determine its status. (Br. 25-26.) The Tax Court, however, did not rely on labels in deciding this case. Rather, it looked at MoneyGram's actual activities and found that they did not meet the requirements of a bank under I.R.C. § 581. In this regard, the terms MoneyGram used to describe itself on prior tax returns more accurately described MoneyGram's activities and the substance of its operations, and it is MoneyGram's revisionist description (or re-labeling) of its business activity as “banking” on its 2008 return that is not supported by the facts. Moreover, MoneyGram's competitors are not regulated as banks (ROA.24780); MoneyGram has never been regulated as a “bank by any Federal banking regulator”; and it “has never maintained deposit insurance with, or paid deposit premiums to, the FDIC.” (ROA.24781.) MoneyGram therefore should not be permitted to recast its business solely for the purposes of this case in order to reap tax benefits for which it is ineligible.

MoneyGram's assertion that Advisory Opinion FDIC-93-55 “decisively” supports its position that the amounts it receives from official-check customers are “deposits” (Br. 27, n.5) is baseless. The Advisory Opinion (reproduced at ROA.24434) involves official checks issued by American Express through an “agent bank.” It advises that when the agent bank sells an American Express official check to a “user bank” and holds the sale proceeds overnight before remitting them to American Express, the agent bank is treated as holding that amount as a one-day deposit by American Express (not the “user bank”) for federal deposit insurance purposes. Nothing in the opinion even remotely supports MoneyGram's assertion that the daily remittances it receives from its official-check customers are “deposits.”⁹

Accordingly, for several reasons, factual and legal, MoneyGram does not receive “deposits” from its official-check customers as contemplated in I.R.C. § 581.

2. MoneyGram does not receive deposits from the purchasers of its money orders

MoneyGram further contends that it “accepts deposits from its money-order customers” (Br. 27) and that such customers “place funds with MoneyGram 'for the purpose of safekeeping'” (Br. 28). The Tax Court correctly rejected those contentions as well.

Purchasers of MoneyGram money orders do not place their funds with MoneyGram for safekeeping, and those funds generally are not “repayable to the [purchaser] on demand or at a fixed time.” MoneyGram II, 664 F. App'x at 392 (internal quotation marks omitted). Rather, such customers provide funds to MoneyGram agents in order to purchase a product and/or service, i.e. a money order and facilitation of a payment to a third party. As MoneyGram characterizes them, money orders are “just another product [that MoneyGram's convenience-store agents] offer to their customers, like milk or bread.” (ROA.5132.) MoneyGram's consolidated financial statements explain that the company “generates funds from the sale of money orders, official checks  . . . and other payment instruments, all of which are classified as 'Payment service obligations' in the Consolidated Balance Sheets.” (E.g., ROA.5222 (emphasis added).) Indeed, MoneyGram's money order forms identify the customer as the “purchaser” (ROA.5920).

Money-order customers thus do not pay over funds to MoneyGram's agents for safekeeping and later withdrawal, but rather to purchase a check with which the customer can pay a third party. Unused money orders may be returned for a refund (similar to other purchased products), but customers cannot receive a refund of the fee charged for the money order (ROA.24771), nor is there any evidence that customers can receive a refund of any amount less than the entire amount of the money order. Thus, even customers who receive refunds do not “withdraw” their money from MoneyGram, a conclusion that is confirmed by the fact that MoneyGram does not establish accounts for its money-order customers.

Stated differently, as soon as a money order is purchased, the customer's funds become MoneyGram's property (subject only to escheat laws). They are held in trust for the company by the agent who sold the money order (ROA.24771-72), and when MoneyGram receives the funds, it invests them solely for its own benefit (ROA.24776). MoneyGram does not in any sense keep a customer's “stored funds.” (Br. 29.) Indeed, if the transaction goes as planned, the customer will never see the funds again. Payments for money orders thus are not deposits made for the purpose of safekeeping, and the Tax Court correctly concluded that “[t]he consumer who buys a money order is purchasing a product, not making a deposit . . . . Because he intends to alienate the funds by directing payment to a third party, he cannot be regarded as putting those funds in a safe location for his future use. He cannot be viewed, in other words, as giving money to the convenience store 'for the purpose of safekeeping.'” (ROA.24804.)

As the Tax Court noted, a MoneyGram survey showed, among other things, that consumers purchased money orders “'to pay personal bills' (65%), 'to pay for goods or services' (43%), 'to help a friend' (21%), and 'to make a gift' (15%).” (ROA.24804.) The survey also showed that consumers chose money orders over other forms of payment “because of the 'security of . . . [the] transaction' (41%), because the 'transaction can be tracked' (40%), because money orders are 'required by the biller' (32%), and because cash 'is not accepted everywhere' (23%).” (ROA.24805.) This led the Tax Court to conclude, correctly, that MoneyGram's “consumers 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.)

MoneyGram criticizes this reasoning and complains that it violates this Court's ruling that the Tax Court erred in its initial opinion by “interpreting 'deposit' to include the requirement that MoneyGram 'hold its customers' funds for an extended period of time.'” (Br. 29.) The Tax Court's reasoning, however, has no time component. Rather, it focuses on the intent of consumers in purchasing money orders “to deliver their money to someone else” in a secure manner, not as a way to keep their money in a safe place (for whatever period of time). MoneyGram inserts the idea of “quickly pay[ing] bills” into the court's conclusion (Br. 29), but the court said nothing about time or speed, and MoneyGram's criticism in this regard is misconceived.

MoneyGram's argument also reads too much into this Court's ruling. To be sure, the Court rejected the Tax Court's inclusion of a durational element in the concept of “deposit.” MoneyGram II, 664 F. App'x at 393. It expressly recognized, however, that funds must be transferred to MoneyGram “for the purpose of safekeeping” in order to be considered deposits under I.R.C. § 581, and safekeeping necessarily requires an entity to “keep” a customer's funds in some manner.¹⁰ Indeed, MoneyGram acknowledges this when it (wrongly) contends that it “maintain[s]” and “store[s]” money-order customers' funds. (Br. 29.)

MoneyGram, however, does not “store” its money-order customers' funds for even the briefest amount of time. Rather, it converts them to its own use in exchange for a payment instrument that MoneyGram will honor from its own funds. This can be seen from MoneyGram's own representations that it sells a customer a product in the form of a money order, and from the provision in its MTAs that all money order proceeds are held by MoneyGram agents “in trust for [MoneyGram].” (ROA.3554, ¶77; ROA.24771; e.g., ROA.3676, 3701, 3725.) Thus, even without a durational aspect to the definition of “deposit,” the funds paid by money-order purchasers cannot fit within that definition for the purposes of I.R.C. § 581.¹¹ See MoneyGram II, 664 F. App'x at 394 (Wiener, J. dissenting).

MoneyGram stresses the security of a money order and the fact that a money order resembles a personal check. (Br. 32-33.) Providing a secure method of payment, however, is not equivalent to providing a customer with a secure place to keep his or her funds. And the issue is not whether a money order — once it is purchased, filled out, and delivered to the payee — functionally resembles a check drawn on a personal checking account. Rather, the issue is whether the purchaser of a money order — similar to the consumer who establishes a checking account with an initial bank deposit — transfers his funds to MoneyGram (or its agent) for safekeeping. Inasmuch as the money-order purchaser (unlike the bank depositor) is no longer the owner of the transferred funds, it is difficult to conceive how he could be considered to have transferred the funds for safekeeping.

Finally, MoneyGram takes issue with the Tax Court's determination that a debtor/creditor relationship is not created between MoneyGram and its money-order customers. (ROA.24825.) The court reasoned that, once the customer receives the money order in exchange for the purchase price and makes it out to the payee, it is the payee to whom MoneyGram is liable, not the purchaser. (ROA.24825.) This is the correct characterization, but MoneyGram contends that, because it “holds funds for its money-order customer,” the customer is its creditor. (Br. 34.) This is mistaken. Once the customer makes out the money order to the payee, MoneyGram must pay the payee, not the customer.

The Tax Court thus correctly held that MoneyGram does not receive “deposits,” within the meaning of I.R.C. § 581, from its money-order customers.

C. MoneyGram failed to demonstrate that a substantial part of its business consists of “making loans and discounts”

In addition to the fact that MoneyGram does not receive deposits (and for that reason alone cannot satisfy I.R.C. § 581), the Tax Court correctly held that it failed to demonstrate that a “substantial part” of its business consists of “making loans and discounts.” The Tax Court found that MoneyGram did not make any loans, and that any possible discount activity did not constitute a substantial part of MoneyGram's business. The record fully supports the court's findings.

1. MoneyGram generally does not make discounts

MoneyGram contends that it makes discounts by purchasing commercial paper and asset-backed securities (ABS). (Br. 37.) Discounting generally involves “the taking of interest in advance by bankers, upon loans.” Evans v. Nat'l Bank of Savannah, 251 U.S. 108, 113 (1919). As the Tax Court noted, “'a discount by a bank means . . . a deduction or draw-back made upon its advances or loans of money, upon negotiable paper, or other evidences of debt, payable at a future day, which are transferred to the bank.'” (ROA.24830-31, quoting Fleckner v. Bank of U.S., 21 U.S. (Wheat.) 338, 350-51 (1823)). In general terms, a bank customer holding a third party's debt instrument presents that instrument to the bank, the bank then pays the customer the face amount of the instrument minus an amount for interest paid in advance, and the bank receives the unstated interest when the full face amount of the debt is paid at maturity. (See ROA.24831.) The Tax Court correctly held that MoneyGram's investment in commercial paper and ABS did not, as a general matter, constitute making discounts.

a. Commercial paper

As the Tax Court noted, commercial paper is generally defined as “unsecured promissory notes issued by a corporation with a fixed maturity of no more than 270 days.” (ROA.24834.) During 2007, MoneyGram purchased commercial paper on around 2,400 occasions, 118 of which were purchases made directly from the issuers. (ROA.24834.) The other purchases were made from broker-dealers. (ROA.24834.) As is standard in the commercial paper market, MoneyGram acquired all of its commercial paper holdings “at a discount to par.” (ROA.3574, ¶ 140; ROA.24834.)

As the Tax Court held (ROA.24835), MoneyGram's purchases of commercial paper from dealers did not constitute “making discounts.” No customer presented MoneyGram with a third party's debt instrument that MoneyGram purchased at a discount from face value. Rather, MoneyGram entered an anonymous market and acquired “an asset from another investor.” (ROA.24835.) The fact that MoneyGram purchased the asset at a price less than its face value does not mean that MoneyGram was “making a discount” to a bank customer as contemplated in § 581. Rather, as MoneyGram acknowledges, the discount in price was due to market forces, including the “expected interest, risk of default, and other contingencies.” (Br. 37.) The discount did not represent interest charged by MoneyGram to the seller.

MoneyGram wrongly contends that the Tax Court's decision conflicts with Fleckner. (Br. 40.) In Fleckner, a promissory note had passed through several holders before, in the final transaction, it was purchased by the Bank of the United States from Planters' Bank of New Orleans in consideration of a discount of six per cent per year. 21 U.S. at 339, 352. MoneyGram cites Fleckner as a case where, even though a note had passed through several holders, the final holder could still be considered to be making a discount. (Br. 40.)

Fleckner is distinguishable, however, because the final holder, Bank of the United States, actually discounted the note directly for the penultimate holder at an interest rate of six percent. Because it discounted a note that it received directly from the holder, the transaction met the definition of making a discount. MoneyGram, on the other hand, purchased in the after-market an obligation previously issued at a discount. Accordingly, with regard to its purchases of commercial paper through dealers, MoneyGram did not make discounts.

MoneyGram separately argues that it made discounts with regard to commercial paper that it purchased directly from issuers. (Br. 61.) In a supplemental filing following the hearing on the parties' motions for summary judgment, MoneyGram's CFO stated that, during 2007, MoneyGram purchased $5.8 billion of commercial paper directly from the issuer. (ROA.24619, ¶ 2.) No figures were provided for any other year. The Tax Court assumed arguendo “that MoneyGram's purchases of CP directly from issuers involved 'making discounts.'” (ROA.24835.) The court found, however, that such purchases did not constitute a “substantial part” of MoneyGram's business and thus could not, by themselves, satisfy § 581. (ROA.24835-36.) The court did not err in that regard.

In 2007 and 2008, MoneyGram sold a total of $43.8 billion and $43.5 billion in money orders, respectively (ROA.3548, ¶ 54), and received $337 billion and $275 billion, respectively, in funds for official checks (ROA.3567, ¶¶114, 115).¹² By comparison, during 2007, MoneyGram purchased only $5.7 billion of commercial paper directly from the issuer. (ROA.24619, ¶10.) Moreover, as the Tax Court found, MoneyGram purchased commercial paper from the issuer on only 118 occasions out of 2,400 total purchases in 2007. That paper — which MoneyGram held for very short periods of time — generated only $1.2 million in income for MoneyGram during 2007. (ROA.24834-35.) Accordingly, the Tax Court did not err in holding that MoneyGram's direct purchases of commercial paper did not constitute a substantial part of MoneyGram's business, even assuming that such purchases could be considered “making discounts” as contemplated in § 581.

MoneyGram argues that such holdings compare favorably to those under consideration in Austin State Bank v. Commissioner, 57 T.C. 180, 183 (1971), where “only 2 to 4 percent of [the bank's] deposits were invested in loans.” But the taxpayer in Austin State Bank did not engage in any other business; given the very limited market for loans in Austin, Indiana (population 3,500), it simply invested the vast majority of its deposits in U.S. government securities. Id. at 184, 187-88. In contrast, MoneyGram operates thriving money transfer, money order, and official check service businesses, and its relatively limited direct purchases of commercial paper pale in comparison to those business activities. Accordingly, Austin State Bank is not comparable to this case.

b. Asset-backed securities

The analysis concerning ABS is similar. MoneyGram purchased securities that were backed by a pool of residential mortgage (or other) loans from underwriters or from broker-dealers. (ROA.24831.) The securities were priced at a discount to the aggregate principal balance of the underlying loans. (ROA.24831.) As the Tax Court noted, however, the market discount was not “unstated interest.” (ROA.24832.) Rather, it reflected the market's response to various factors. (See Br. 42.)

As the Tax Court found, this sort of investment by MoneyGram does not constitute making a discount within the meaning of § 581. See ROA.24833-34 (“'Making discounts' must be interpreted as referring to the type of activity in which banks engaged when they discounted promissory notes for their customers.”). Asset-backed securities derive from loans previously made to the original borrowers by other parties, which are then bundled “by a trust or a special-purpose entity.” (ROA.24785.) The trust then issues, “typically to underwriters, debt securities backed by these loans, and the underwriters s[ell] the securities to investors, such as MoneyGram.” (ROA.24785.)¹³ The investors purchasing the securities are not making discounts for customers as described above; they are purchasing securities at the market rate, which in turn depends upon the risk level and other market factors, not only the interest rate provided by lenders to the original borrowers.

Accordingly, MoneyGram was not “making discounts” when it purchased ABS. It was investing in securities backed by loans already made by other parties. As MoneyGram acknowledges, purchasers of ABS, and MBS in particular, “do not acquire title to the underlying mortgages.” (Br. 41.) Rather, the investor is buying only an income stream while other parties service the underlying loans. As the Tax Court noted, “[a] bank that 'makes a discount by purchasing a customer's note in effect lends money to that person, deducts unstated interest from the customer's proceeds, and receives the unstated interest when the note matures.” (ROA.24832.) MoneyGram, however, “did not do any of these things when it purchased asset-backed securities from underwriters or broker-dealers.” (ROA.24832.)

2. MoneyGram does not make loans

a. MoneyGram does not make loans through purchases of commercial paper and ABS

MoneyGram half-heartedly contends that its investments in commercial paper and ABS qualify as loans, “because discounts are simply one type of loan.” (Br. 46.) As we have already demonstrated, however, MoneyGram does not make discounts within the meaning of § 581. Moreover, although a bank's purchase of a note at a discount may have the effect of a loan (ROA.24832), MoneyGram's interpretation would violate the canon of statutory construction that disfavors surplusage, since the requirement of “making loans” in § 581 would be superfluous if it could be satisfied by making discounts. See MoneyGram II, 664 F. App'x at 389 (citing Corley v. United States, 556 U.S. 303, 314-15 (2009), for the surplusage canon).

In any event, MoneyGram did not make any loans when it purchased commercial paper and ABS. Rather, it invested in securities backed by loans made by other parties. In that regard, MoneyGram's argument for an all-encompassing definition of “loan” for purposes of § 581 is directly contrary to this Court's interpretation of the word “deposit” in the same provision. See MoneyGram II, 664 F. App'x at 392 (noting that “because § 581 refers to deposits in the banking context, for the purposes of this statute, 'deposits' should have a narrower definition than its broadest possible meaning”). Further, by definition, commercial paper is unsecured (ROA.24834), and although ABS may be “asset-backed,” MoneyGram obtains no security interest in collateral through such purchases. See id. at 391 (noting that “Staunton's common meaning of bank correctly includes 'secured loans'”). For these reasons, MoneyGram's purchases of commercial paper and ABS do not constitute making loans within the meaning of § 581.¹⁴

b. MoneyGram does not make loans to its money-order agents

MoneyGram contends that it “makes loans through delayed remittance agreements with its money-order agents.” (Br. 48.) Through such agreements, MoneyGram asserts, its agents “may keep and use the funds that customers exchange for money orders for a defined period before remitting them to MoneyGram.” (Br. 48.) The Tax Court, however, correctly analyzed MoneyGram's agreements and concluded that they do not give rise to loans. As directed by this Court, it applied the multi-factor test used in Todd v. Commissioner, 486 F. App'x 423, 426 (5th Cir. 2012), to reach that conclusion. The court did not err in applying that test.

i. Note or other instrument

MoneyGram and its money-order agents do not execute any note or other instrument evidencing their intent to enter into a loan transaction. Instead, the agents enter into a contract with MoneyGram that is titled “Master Trust Agreement” (MTA). (ROA.24771.) Under this agreement, the agents agree to accept funds from customers on MoneyGram's behalf and to deliver those funds to MoneyGram. (ROA.24771, 24773.) According to the express terms of the MTA, an agent is designated a “trustee” who is authorized to sell MoneyGram's products, including money orders. (ROA.24771.) All proceeds from such sales, plus fees due MoneyGram, are denominated “Trust Funds,” and the agent/trustee holds such funds “in trust for Company [i.e., MoneyGram] and separate from Trustee's funds.” (ROA.24771.) If Trust Funds become commingled with other funds, the “total commingled funds are impressed with a trust and shall belong and are payable to the Company to the extent of amounts due Company from Trustee.” (ROA.24771-72.) The trustee is also required to “maintain a Trust Account to hold the Trust Funds.” (E.g., ROA.3676, ¶5; ROA.3701, ¶6.)

There is also a remittance schedule that is either part of the MTA or an incorporated attachment. (ROA.24773.) Under the remittance schedules, agents generally are not required to remit funds to MoneyGram daily, but instead may remit them twice a week. The remittance schedules are not loan documents and do not memorialize a loan transaction; indeed, they are part of a document that MoneyGram (the drafter) has styled a trust agreement.¹⁵ See MoneyGram II, 664 F. App'x at 394 (Wiener, J., dissenting) (noting that “MoneyGram's purported 'loans' are facially trust agreements,” and opining that “[t]his precludes a finding that MoneyGram makes loans”); see also Commissioner v. Nat'l Alfalfa Dehydrating & Milling Co., 417 U.S. 134, 149 (1974) (taxpayer is generally held to the form of his transaction).

ii. Interest

MoneyGram asserts that it charges agents “a fee or interest in exchange for keeping the funds for the additional time” under the delayed remittance agreements (Br. 48), but the Tax Court expressly found that the MTAs “invariably provide that no interest is charged if the agent remits Trust Funds 'in accordance with the remittance schedule for the Service.'” (ROA.24816.)¹⁶ Thus, MoneyGram charges no interest to agents holding funds under delayed remittance agreements. Rather, it charges “interest,” or a “late fee,” or a “service fee” only when an agent fails to meet a remittance deadline. (ROA.24774.) The charge is thus a penalty for failure to meet the terms of the agreement, not a charge for the use of funds or for the time-value of money between the date the funds are received and the date they are payable to MoneyGram. As the Tax Court found, such fees “resemble those commonly applied by trade creditors when a consumer neglects to pay an invoice on time,” and such “provisions are consistent with characterization of the agent's obligation as an account payable rather than a loan.” (ROA.24816.)

MoneyGram stresses that “interest” is a flexible term, such that “the fees that money-order agents must pay to keep MoneyGram's funds for a longer period [i.e., beyond the scheduled remittance date] qualify as 'interest.'” (Br. 52.) But the Tax Court found that MoneyGram submitted no evidence establishing that it actually received any such fees in 2007 or 2008. (ROA.24776.) Thus, in MoneyGram's words (Br. 54), “whatever the delayed-remittance agreements [may] say, the on-the-ground reality” — at least so far as the record is concerned — is that MoneyGram did not even bother to collect the purported “interest” on the purported “loans” that were allegedly a “substantial part” of its business.

iii. Fixed schedule for repayment, collateral to secure payment, whether repayments were made, and reasonable prospect of repayment

As MoneyGram notes (Br. 53), the Tax Court found all four of these factors to be neutral (ROA.24817-24819). MoneyGram disagrees with the Tax Court's application of these factors, but it does not offer any support for its claim that the factors “support loan status.” (Br. 53.) It argues only that, “[i]f a factor favors loan status, it favors loan status.” (Br. 53.)¹⁷

There is no question that courts may apply multi-factor tests and find that some factors are “neutral” with regard to the point the parties are contesting. Factors may be neutral when there is some evidence supporting each side. See, e.g., Georgia Mobile Dental, LLC v. Napper, No. CV 18-269-SDD-EWD, 2018 WL 6037527, at *9-10 (M.D. La. Nov. 16, 2018); Harland Clarke Holdings Corp. v. Milken, 997 F. Supp. 2d 561, 586-89 (W.D. Tex. 2014).

In the present case, one of the four factors the Tax Court found to be neutral concerned collateral to secure payment, and the other three involved whether payments were scheduled, reasonably expected to be made, and actually made. There is no question that the MTA purported to provide MoneyGram with a security interest in the funds and contained a fixed schedule for their payment, or that the agents were reasonably expected to, and generally did, pay over the amounts they collected from money-order sales. As the Tax Court pointed out, though, evidence regarding these factors is entirely consistent with the express terms of the MTA creating a trust arrangement instead of a loan. (ROA.24817-24819.) “Obligations to pay arise in many commercial contexts” (ROA.24819) and thus they do not, on their face, show that MoneyGram had extended loans to the agents. See note 17, supra.

iv. Conduct of the parties

As the Tax Court found (ROA.24820), this factor “strongly” favors the Commissioner's position. Although MoneyGram contends that “in practice” (Br. 54), its agents ignore their trust responsibilities and treat MoneyGram's funds as “short-term working-capital financing” (Br. 12), it presented no evidence from the agents themselves — such as affidavits — that would support this claim. The best that MoneyGram can come up with is a stipulation that its money-order agents “often do not have separate cash registers to segregate the delayed remittances from other cash.” (Br. 54.) Moreover, even if there were evidence that MoneyGram's agents uniformly disregarded their trust responsibilities, such evidence could be indicative of any number of other possible relationships between MoneyGram and its agents, including that of account-creditor and account-debtor. See ROA.24821-22; see also note 17, supra.

As for MoneyGram, it “recorded unpaid remittances on its balance sheet, not as 'loans,' but as 'receivables,'” and it treated those obligations as ordinary accounts receivable by establishing remittance schedules subject to late fees. (ROA.24821.) In addition, as the Tax Court noted (ROA.24822), MoneyGram's conduct in collecting its funds from agents that declared bankruptcy strongly undercuts its characterization of these arrangements as loan transactions. In 27 cases documented in the record where agents declared bankruptcy, MoneyGram argued that because the MTA signed by the agent created an express trust for the proceeds received by the agents, the agent's liability to MoneyGram, unlike the agent's liability to other creditors, was nondischargeable. (ROA.24822; ROA.3557-58, ¶94.) One district court, for example, agreed that MoneyGram's Trust Agreement gave MoneyGram “greater rights in the funds [collected by its agent] than that of a general creditor.” United States v. Salam, Inc., 191 F. Supp. 2d 725, 728-29 (E.D. La. 2001).

As the Tax Court observed, the Commissioner submits that, because of this litigation position, MoneyGram should be estopped from arguing in the present case that the delayed remittance agreements created a lender-borrower relationship between MoneyGram and its money-order agents rather than a trustee-beneficiary relationship. (ROA.24809-11.) Judicial estoppel applies where “'(1) the party against whom judicial estoppel is sought has asserted a legal position which is plainly inconsistent with a prior position; (2) a court accepted the prior position; and (3) the party did not act inadvertently.'” In Matter of Galaz, 841 F.3d 316, 326 (5th Cir. 2016) (quoting Reed v. City of Arlington, 650 F.3d 571, 574 (5th Cir. 2011) (en banc)). Those conditions are satisfied here, as MoneyGram's position in this case is directly inconsistent with its repeated litigating position in bankruptcy proceedings.

The Tax Court did not decide the estoppel issue, as it interpreted this Court's mandate in MoneyGram II as directing it to reconsider MoneyGram's argument on its merits. (ROA.24809-11.) The court then correctly found that MoneyGram's duplicitous behavior weighs against treating the delayed remittances as loans. (ROA.24822-23.) MoneyGram's position in the bankruptcy cases confirms that MoneyGram is trying to have its cake and eat it too. MoneyGram emphasizes the trust arrangement when it is beneficial for it to do so, but disavows that arrangement here in order to gain a different benefit. The Tax Court properly rejected this strategy, as should this Court.

D. Other factors demonstrate that MoneyGram is not a “bank” as that term is commonly understood

MoneyGram is registered with the United States Treasury Department as a “money services business” (MSB), not a bank. (ROA.24779.) Banks are regulated under Title 12 of the U.S. Code, while MSBs are regulated under Title 31 of that Code. Federal regulations exclude banks from the definition of an MSB. See 31 C.F.R. § 1010.100(d)(7) (2011); 31 C.F.R. § 103.11 (2007). MoneyGram has never been regulated as a bank by any federal banking regulator (such as the Federal Reserve Board, the Office of the Comptroller of the Currency, or the FDIC), and it carries no deposit insurance of any kind. (ROA.24781; ROA.5867.) MoneyGram is not incorporated as a bank under any state law but instead is regulated by states as a “money transmitter.” (ROA.24780.) Indeed, MoneyGram has taken steps to avoid being classified as a bank under state law in order to avoid the additional costs, e.g., FDIC insurance, that such classification would entail. (ROA.5864.) These factors support the Tax Court's decision and illustrate MoneyGram's attempt to be classified as a bank solely for the purposes of this litigation.

In addition, on the Forms 10-K that it files annually with the SEC, MoneyGram has never represented that it is a bank or that any part of its business consists of receiving deposits or making loans. (ROA.24782.) And the financial statements it files along with those forms do not list any loans among its assets or any deposits among its liabilities. (ROA.24782.)

Similarly, on its tax returns for 2005 through 2008, MoneyGram listed its business activity code as “52298,” the code for “nondepository credit intermediation.” (ROA.24782.) MoneyGram changed the written description of its business activities on its 2008 return to “BANKING” from the “PMT SERVICES/CR AGENCY” description it had used on its 2005-2007 returns, but its Forms 10-K do not reflect any change in its business activities from payment services to banking. (ROA.24782-83.) It is thus apparent that MoneyGram is not legally (or practically) considered a bank for any purpose, but that it wants to be treated as a bank exclusively for the purpose of being able to deduct the type of losses at issue in this case. If there were any doubt that MoneyGram did not satisfy the deposits/loans/discounts requirement of § 581 during the years at issue, it is abundantly clear that MoneyGram was not a “bank” in the first instance. See MoneyGram II, 664 F. App'x at 391 (holding that the term “'bank' as used in § 581 imposes an independent element and should be given its common meaning”).

E. State supervision of MoneyGram is of no probative value

In order to qualify as a “bank” under § 581, an entity must also be “subject by law to supervision and examination by State, or Federal authority having supervision over banking institutions.” I.R.C. § 581. The Tax Court did not address this requirement, but the record favors the Commissioner on this point. The parties stipulated that MoneyGram is “subject to the supervision of the bank supervisory authorities of many States” (ROA.3576, ¶151), but more importantly, it is generally not regulated under Title 12 (Banks and Banking) of the U.S. Code (ROA.24780), it is not incorporated as a bank in any state (ROA.24781), it “has never been regulated as a 'bank' by any Federal banking regulator” (ROA.24781), and it “has never maintained deposit insurance with, or paid deposit insurance premiums to, the FDIC” (ROA.24781).

MoneyGram asserts that the parties stipulated that it was “regulated by the same federal entities that regulate 'organizations chartered as 'banks'” (Br. 64), but this mischaracterizes the record. MoneyGram supports this claim with a citation to the parties' stipulation that the company is required to be “registered with the Financial Crimes Enforcement Network” and that it “must comply with the Bank Secrecy Act (31 U.S.C. Section 5311 et seq.),” “other anti-money laundering laws,” and other consumer protection laws. (ROA.3577, ¶ 153.) Nothing in this stipulation contradicts the Tax Court's finding that MoneyGram “has never been regulated as a 'bank' by any Federal banking regulator” (ROA.24781), and MoneyGram's reliance on broad statutory schemes and “consumer protection laws” carries no weight. Automobile dealers and the U.S. Postal Service are also among the many types of “financial institutions” subject to the Bank Secrecy Act. See 31 U.S.C. § 5312(a)(2)(T), (V). Accordingly, because MoneyGram is not regulated as a bank by any state or federal authority, it cannot satisfy this requirement under I.R.C. § 581.

_____________

Congress enacted a statute reserving for banks — and only banks — the tax benefit at issue in this case. Insurance companies, for example, are likewise required to maintain large reserves, yet Congress denied this tax benefit to insurance companies. (ROA.24836.) Banks are afforded unique treatment under the Internal Revenue Code, and not every business that generates accounts receivable and invests in commercial paper and other securities trading at a discount can be considered a bank. Moreover, as MoneyGram emphasizes, instead of banking it provides “alternative financial services.” (ROA.3657.) Such services may occupy an important niche in the financial system, but they do not permit MoneyGram to be considered a “bank” under the Internal Revenue Code.

CONCLUSION

For the foregoing reasons, the decision of the Tax Court is correct and should be affirmed.

RICHARD E. ZUCKERMAN
Principal Deputy Assistant Attorney General

ARTHUR T. CATTERALL (202) 514-2937
RANDOLPH L. HUTTER (202) 514-2647
Attorneys
Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044

OCTOBER 30, 2020