Back in November of 2016 we wrote about the Fifth Circuit reversing the holding of the Tax Court in a dispute that revolved over whether MoneyGram is a bank for tax purposes.[1]  The Fifth Circuit found that the Tax Court had not applied the proper test to determine if MoneyGram was a bank—so the appellate court sent the case back to the Tax Court for a determination of whether MoneyGram was a bank using a different standard.

Nearly five years later, the case is back before the Fifth Circuit Court of Appeals, as the Tax Court determined yet again that MoneyGram was not a bank under IRC §581, so was not able to write off losses from mortgage backed securities as an ordinary rather than capital loss.  As a C corporation, capital losses can only be deducted against capital gains.  This time, the Fifth Circuit sustained the decision of the Tax Court, finding that MoneyGram was not a bank.[2]

What MoneyGram Does

The Fifth Circuit gave the following description of what MoneyGram’s business consisted of:

MoneyGram offers various money transfer services to individuals and financial institutions. It may be best known for wiring money around the world, but it does not contend those wires or other “money transfers” make it a bank. It contends that two other services do make it a bank: “money orders” and “official check processing.”

MoneyGram sells money orders through agents like WalMart or convenience stores. To purchase a money order, a customer gives the agent cash in exchange for a blank money order. The cost is the amount of the money order plus a fee. The customer fills in her name, the name of the recipient, and her signature. She might use the money order to pay bills, send a gift, or make purchases from sellers who do not accept cash. Most recipients present and redeem the money order within ten days of its purchase.

MoneyGram also offers payment processing services to financial institutions, including the processing of “official checks.” Official checks include cashier’s checks and bank checks. Compared to personal checks, which may bounce, these checks assure payment. Financial institutions both provide these checks to their customers (for example, to close on a home) and use them to pay the institution’s own obligations. While the financial institution issues the official checks, MoneyGram processes them. At the end of each business day, the financial institution reports the dollar amount of official checks it issued that day and then transfers that amount to MoneyGram, usually the following morning. When the payee later presents the check for payment, the funds held at MoneyGram are drawn down. In other words, the financial institution has an account with MoneyGram that depletes and replenishes in a daily cycle based on how many official checks the financial institution issued the day before. Before the first day the financial institution issues official checks, it gives MoneyGram funds “equal to its anticipated average daily volume of official checks,” to cover any checks presented for payment before the first daily transfer.[3]

What is a Bank?

IRC §581 defines a bank as:

…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.[4]

As the panel points out, this literally first defines a bank as a bank, but once we get past the circular part of the definition the opinion points out that there are three requirements MoneyGram must meet in order to be a bank under IRC §581:

• The entity must be a “bank” within the common understanding of the term;

• A substantial part of the entity’s business must consist of deposits, loans, and discounts; and

• The entity must be subject to state or federal regulation.[5]

The panel notes that the original decision of the Circuit provided a look at what it generally means to be a bank:

Our focus is on the first and most fundamental requirement — that the taxpayer be a bank under the common understanding of that term. We previously explained that the “bare requisites” of a traditional bank are:

(1) “the receipt of deposits from the general public, repayable to the depositors on demand or at a fixed time;” (2) “use of deposit funds for secured loans;” and (3) “the relationship of debtor and creditor between the bank and the depositor.” MoneyGram, 664 F. App’x at 391 (quoting Staunton Indus. Loan Corp. v. Comm’r, 120 F.2d 930, 933–34 (4th Cir. 1941)).[6]

Does MoneyGram Receive Deposits as a Bank?

The panel discusses what represents the acceptance of deposits by a bank in order to determine if that describes what MoneyGram does:

It makes sense to start with deposits. “Strictly speaking the term bank implies a place for the deposit of money, as that is the most obvious purpose of such an institution.” Oulton v. German Sav. & Loan Soc’y, 84 U.S. 109, 118 (1872); see also Staunton, 120 F.2d at 933 (quoting multiple dictionary definitions that include accepting deposits as a function of banks); Adam J. Levitin, Safe Banking: Finance and Democracy, 83 U. CHI. L. REV. 357, 366. (2016) (“The taking of deposits is what makes a bank a bank.”).

And deposits have always been tied up with the need for safekeeping. Oulton, 84 U.S. at 118; see Levitin, supra, at 366 (“Banks’ distinctive function is to provide safekeeping for deposits.”); Richard A. Lord, The Legal History of Safekeeping and Safe Deposit Activities in the United States, 38 ARK. L. REV. 727, 727 (1985) (“Historically, the safekeeping function is perhaps the oldest function in banking.”).[7]

Moneygram argued that it did accept deposits from customers for its money-order and official-check functions, thus meeting the primary condition to be a bank.

Buying a Money Order is Not Placing Funds on Deposit

The panel first looked at the issuance of money orders to see if this represented a receipt of deposits by MoneyGram.  The taxpayer argued that this is exactly what is happening:

MoneyGram contends that when a customer buys a money order, the customer is placing funds with MoneyGram for safekeeping, at least until such time as the recipient of the money order presents it for payment.[8]

The Tax Court on remand did not accept that view:

The tax court rejected this argument, likening a money order to the purchase of a gift card rather than a deposit in a bank account.[9]

The panel agreed with the Tax Court on this point.

… Although a customer views the money order as a secure way to transfer funds, it does not follow that the purchaser is placing money with MoneyGram for safekeeping. See Levitin, supra, at 367 (describing the making of secure payments as ancillary to, but distinct from, safekeeping).[10]

The panel finds that the primary purpose of purchasing a money order is not to place money on deposit for safekeeping:

…[W]hen it comes to money orders, the “purpose of safekeeping” inquiry is getting ahead of things because a money order customer is never keeping its funds with MoneyGram at all. Consider someone who goes to a convenience store to buy a $100 MoneyGram money order that will be used to pay a utility bill. The customer hands over a $100 bill, plus a few more dollars for the fee, to MoneyGram's agent. In exchange, the agent gives the customer a blank money order. At this point, the $100 belongs to MoneyGram (held in trust for the company by the agent). This is largely true of bank deposits too. But unlike a bank that incurs a corresponding liability to the customer who gave it the $100, MoneyGram owes the $100 not to the money order purchaser but to the person or business listed on the payee line. Cf. Morris Plan Bank of New Haven v. Smith, 125 F.2d 440, 442 (2d Cir. 1942) (asking whether the obligations of the entity receiving the “deposit” mirror the obligations of a bank to a traditional depositor). As a result, the purchaser of a money order is not keeping its money with MoneyGram.[11]

The taxpayer objects that nothing stops the purchaser of the money order from putting his/her own name on the payee line, but the panel does not find this argument persuasive:

But even assuming these uncommon occurrences could establish that customers purchase money orders for the purpose of safekeeping, the mechanics of the money order are still inconsistent with safekeeping. When a customer deposits $100 in a bank, she can later withdraw $10, or $50, or the full $100. That is consistent with the notion of safekeeping. Engel v. O’Malley, 219 U.S. 128, 136 (1911). It is still the depositor’s money, just being held by the bank. But the purchaser of a $100 money order cannot go back to the convenience store and ask for $20 back. Any return is for the full $100 (but not the fee) just like when one receives a full refund for returning a shirt or toaster. This ability to return is a common feature of products. That is the label a MoneyGram executive used to describe the money orders to a Senate Committee: “just another product [that its agent convenience stores] offer to their customers, like milk or bread.” An Update on Money Services Businesses Under Bank Secrecy and USA Patriot Regulation: Hearing Before the S. Comm. on Banking, Housing, and Urban Affairs, 109th Cong. 74 (2005) (statement of Dan O’Malley, Vice President, MoneyGram Int’l, Inc.). Buying a product is not depositing money for safekeeping. Customers buying a product are doing the opposite of keeping their money; they are spending it.[12]

But, MoneyGram argues, the money order is just like the personal checks that depositors use to assign funds in their bank accounts to third parties.  Again, the panel rejects this view.

It is true that a money order and a personal check are quite similar. The analogy breaks down, though, because writing a personal check is not turning over money for safekeeping. Look at your bank statement — a check is listed as a withdrawal from the checking account, not a deposit. MUNN ET AL., supra, at 250 (9th ed. 1993) (deposit banking includes “receiving deposits” and separately “paying them out by check”). It is the checking account, not the checks themselves, that involves safekeeping. Because the withdrawals from a checking account will rarely correspond 1:1 with the deposits, a checking account usually carries a balance (secured by FDIC insurance, something MoneyGram does not provide for its money orders, which if lost can no longer be used by the purchaser). Checking accounts thus serve a safekeeping function, not just a money-transferring one. Id. at 179 (listing, among the benefits of checking accounts, removing the risk of losing money and preventing loss of money by robbery). In contrast, a money order purchaser does not have an account with MoneyGram. A money order account would not make sense as there is no balance to track. In other words, there are no funds being kept with MoneyGram.[13]

Payment Processing and Official Checks – Still Not Used for Safekeeping

But what about the financial institutions using MoneyGram for payment processing—they seem to be making deposits with MoneyGram and keeping a running balance. 

Those institutions do have an account with MoneyGram. And there is a balance, reflecting the funds banks have transferred to MoneyGram to cover official checks that have been issued but not yet presented for payment. The “first day settlement,” which functions as a sort of overdraft protection in the event the bank does not make the required daily payment for checks it has just issued, is also part of the positive balance. MoneyGram claims the first-day-settlement funds are “deposits” as that money is not already obligated to the third-party recipient listed on an issued check.[14]

Isn’t this banking? The panel decides no because these deposits are not primarily for the purpose of safekeeping:

We recognize that because the financial institution still owns this first-day-settlement money, it is at least “keeping” those funds with MoneyGram. The problem is that a financial institutions is not leaving these funds with MoneyGram for safekeeping; it is doing so to fulfill a contractual requirement of using the check processing service.

MoneyGram compares the financial institution’s “account” with MoneyGram to a personal checking account and emphasizes the security of the transaction. But we agree with the tax court that the obligatory nature of the first-day settlement makes it more like a tenant’s security deposit or an attorney’s retainer. MoneyGram is requiring a financial cushion to guard against nonpayment, just as an attorney does in requiring a retainer before providing legal services. Although money “kept” with the attorney via a retainer may be relatively safe, the client is not giving the attorney that money for safekeeping. As the tax court noted, the client is leaving those funds with the attorney “to satisfy the demand of the other contracting party for assurance of payment.” The same is true with the first-day settlement financial institutions give MoneyGram before official checks start to issue.

Fulfillment of a contractual obligation thus explains why financial institutions are leaving funds with MoneyGram. We see no evidence, and more fundamentally no reason, that the financial institutions would be leaving the funds with MoneyGram for safekeeping. As the tax court noted, financial institutions “presumably have ample means of keeping their cash safe.” See also Levitin, supra, at 366 (noting that banks typically “invest in security measures like fireproof vaults, security guards, and computer security systems”). They are not like individuals who put money in a bank because that is safer than leaving cash in a wallet.[15]

As well, the financial institutions cannot demand repayment of those first-day settlement funds:

In addition to being inconsistent with a safekeeping purpose, the obligatory nature of the first-day settlement means another feature of deposits is missing: the depositor’s ability to demand repayment of funds.

See MoneyGram, 664 F. App’x at 392; MUNN ET AL., supra, at 68 (“Checking account deposits are payable on demand.”). This is really just another angle of the safekeeping requirement. Cf. Oulton, 84 U.S. at 118 (observing that safekeeping involves a depositor leaving a valuable item with a bank “until the depositor should see fit to draw it out for use”). When a depositor voluntarily leaves funds with a bank because that is a safer place to keep the money than under the mattress, the depositor can withdraw the money whenever she likes or, in the case of an instrument like a certificate of deposit, on a date certain. That is not true for the first-day settlement. As long as the financial institution continues to use MoneyGram’s check processing service, it cannot get its money (the first-day settlement) back.[16]

The panel concludes that while this service may look more like banking, in the end it still does not qualify under the IRC §581 definition.

The fact that the service MoneyGram is selling — processing of official checks — relates to banking may give this arrangement the veneer of a banking relationship. But in substance MoneyGram is selling a service that just happens to involve checks. Consider someone without a checking account who gives a friend $20 to write a $20 check to pay a bill. The checkwriter will have the $20 for a few days before the check clears. But in handing over a $20 bill, the person gave money to the friend to buy a check, not for safekeeping.[17]

MoneyGram is Not  a Bank

The opinion concludes:

Examining the substance of MoneyGram’s business thus confirms how the company has long described itself on its tax returns: as a “nondepository” institution. And without deposits, MoneyGram cannot be a bank.[18]

While most of us don’t deal with “kind of” banks to which this case would directly apply, it’s still instructive on a couple of levels.  First, the opinion provides a look at how courts approach attempting to unravel what Congress meant in cases where Congress itself is not really clear—“a bank is a bank” is a definition that fails to define, but still what we have to work with since it’s what Congress wrote.

Second, it also illustrates the importance of not overreading an opinion, especially an appellate opinion that, while reversing the trial court, sends the case back to the court for further proceedings.  In this case, while the Fifth Circuit in 2016 did reverse a Tax Court decision holding that MoneyGram was not a bank, it did not ever say MoneyGram was a bank—just that if it wasn’t one, it wasn’t for the reasons the Tax Court had given.

[1] Edward Zollars, “Fifth Circuit and Tax Court Disagree on Whether Money Services Business Is a Bank,” Current Federal Tax Developments website, November 19, 2016, https://www.currentfederaltaxdevelopments.com/blog/2016/11/19/fifth-circuit-and-tax-court-disagree-on-whether-money-services-business-is-a-bank (retrieved June 4, 2021)

[2] MoneyGram International Inc. et al. v. Commissioner, CA5, Case No. 20-60146, June 1, 2021, https://www.taxnotes.com/research/federal/court-documents/court-opinions-and-orders/fifth-circuit-affirms-moneygram-is-not-a-bank/76k3d (retrieved June 5, 2021)

[3] MoneyGram International Inc. et al. v. Commissioner, CA5, Case No. 20-60146, June 1, 2021

[4] IRC §581

[5] MoneyGram International Inc. et al. v. Commissioner, CA5, Case No. 20-60146, June 1, 2021

[6] MoneyGram International Inc. et al. v. Commissioner, CA5, Case No. 20-60146, June 1, 2021

[7] MoneyGram International Inc. et al. v. Commissioner, CA5, Case No. 20-60146, June 1, 2021

[8] MoneyGram International Inc. et al. v. Commissioner, CA5, Case No. 20-60146, June 1, 2021

[9] MoneyGram International Inc. et al. v. Commissioner, CA5, Case No. 20-60146, June 1, 2021

[10] MoneyGram International Inc. et al. v. Commissioner, CA5, Case No. 20-60146, June 1, 2021

[11] MoneyGram International Inc. et al. v. Commissioner, CA5, Case No. 20-60146, June 1, 2021

[12] MoneyGram International Inc. et al. v. Commissioner, CA5, Case No. 20-60146, June 1, 2021

[13] MoneyGram International Inc. et al. v. Commissioner, CA5, Case No. 20-60146, June 1, 2021

[14] MoneyGram International Inc. et al. v. Commissioner, CA5, Case No. 20-60146, June 1, 2021

[15] MoneyGram International Inc. et al. v. Commissioner, CA5, Case No. 20-60146, June 1, 2021

[16] MoneyGram International Inc. et al. v. Commissioner, CA5, Case No. 20-60146, June 1, 2021

[17] MoneyGram International Inc. et al. v. Commissioner, CA5, Case No. 20-60146, June 1, 2021

[18] MoneyGram International Inc. et al. v. Commissioner, CA5, Case No. 20-60146, June 1, 2021