Fifth Circuit Finds Fault With Tax Court’s Definition of “Bank”

By James A. Beavers, J.D., LL.M., CPA, CGMA

The Fifth Circuit vacated the Tax Court's decision that MoneyGram International Inc. was not a bank because the Tax Court applied incorrect definitions of "deposits" and "loans" in analyzing whether the company was a bank. The case was remanded for reconsideration of the issue.


MoneyGram International, a U.S. corporation, offers services involving the movement of money through three main channels: money transfers, money orders, and payment processing services. Generally, a corporation can only offset its capital gains against its capital losses; however, under Sec. 582, a bank, as defined in Sec. 581, can use capital losses to offset ordinary income. Sec. 581 states:

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

MoneyGram took the position it qualified as a bank under Sec. 581, and it offset its capital losses against its ordinary income for the years in question. The IRS, determining that MoneyGram was not a bank, issued notices of deficiency for those years. MoneyGram contested the IRS's determination in Tax Court.

The Tax Court sided with the IRS. The Tax Court held that MoneyGram did not meet the Sec. 581 definition for several reasons. First, the Tax Court found that Sec. 581 requires an entity to be a "bank" within the common meaning of that term. The Tax Court then determined that MoneyGram did not meet the common meaning of this term, which it defined to include "(1) the receipt of deposits from the general public, repayable to the depositors on demand or at a fixed time; (2) the use of deposit funds for secured loans; and (3) the relationship of debtor and creditor between the bank and the depositor" (Moneygram Int'l, Inc., 144 T.C. No. 1 (2015), slip op. at 20, quoting Staunton Indus. Loan Corp., 120 F.2d 930, 933-34 (4th Cir. 1941)).

The Tax Court also held that Money- Gram did not satisfy Sec. 581 because "receiving deposits and making loans do not constitute any meaningful part of MoneyGram's business, much less 'a substantial part' " (id. at 26). Because Sec. 581 does not define "deposits" or "loans," the Tax Court used its own definitions. The Tax Court defined "deposits" in the context of Sec. 581 as "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," and that are held "for extended periods" (id. at 28). The Tax Court found that money received by MoneyGram as part of its money order and financial services segments did not meet this definition because MoneyGram does not hold these funds for safekeeping or for an extended period of time.

The Tax Court defined a "loan" as an agreement, "memorialized by a loan instrument, [that] is repayable with interest, and generally has a fixed (and often lengthy) repayment period" (id. at 33). The Tax Court determined that the Master Trust Agreements entered into between MoneyGram and its agents do not meet this definition and are therefore not loans. Specifically, the Tax Court focused on the fact that the instrument used to memorialize this agreement is facially a trust agreement and not a loan agreement and does not charge interest.

MoneyGram appealed the Tax Court's decision to the Fifth Circuit. MoneyGram argued on appeal that the Tax Court had erred in imposing the requirement that an entity be a bank within the common meaning of the term and its articulation of that common meaning.

The Fifth Circuit's Decision

The Fifth Circuit determined that the Tax Court's analysis of whether MoneyGram was a bank was faulty but not for the reasons argued by MoneyGram. It instead concluded that the Tax Court had erred because it applied incorrect definitions for the terms "deposits" and "loans" in its analysis. Accordingly, the court vacated the Tax Court's decision that MoneyGram was not a bank and remanded the case for reconsideration of whether MoneyGram was a bank based on what it held were the correct definitions of these terms.

As noted above, the Tax Court held that there were three elements constituting "deposits": (1) "funds that customers place in a bank for the purpose of safekeeping"; (2) are "repayable to the depositor on demand or at a fixed time"; and (3) are held "for extended periods" of time. The Fifth Circuit agreed with the Tax Court except for the last element. The Tax Court imposed this requirement based on a passage from the opinion in AmSouth Bancorporation, 681 F. Supp. 698 (N.D. Ala. 1988). However, the Fifth Circuit found that the passage from the decision did not state that duration is an essential element of a deposit, so it held that the Tax Court had improperly interpreted the term "deposit" to require that a bank "hold its customers' funds for extended periods of time."

The Tax Court defined "loan" as a memorialized instrument that is repayable with interest and that "generally has a fixed (and often lengthy) repayment period." The Fifth Circuit found that, under its own precedent and that of other circuits, a transaction is a bona fide loan for tax purposes if the parties to the transaction intend that the money advanced be repaid, and that courts have repeatedly held that interest is not required for a transaction to be a loan. According to the court, to determine whether the parties intended a loan, a nonexhaustive seven-factor test from Welch, 204 F.3d 1228 (9th Cir. 2000), which was endorsed by the Fifth Circuit in Todd, 486 Fed. Appx. 423 (5th Cir. 2012), should be applied. The seven factors of this test are (1) whether the promise to repay is evidenced by a note or other instrument; (2) whether interest was charged; (3) whether a fixed schedule for repayments was established; (4) whether collateral was given to secure payment; (5) whether repayments were made; (6) whether the borrower had a reasonable prospect of repaying the loan and whether the lender had sufficient funds to advance the loan; and (7) whether the parties conducted themselves as if the transaction were a loan.

Finally, the court noted that Sec. 581 provides that a substantial part of the taxpayer's business must consist of "making loans and discounts." The court concluded that the use of the conjunctive "and" rather than the disjunctive "or" in this phrase indicated that "discounts" is a required element under Sec. 581. Thus, the Tax Court had erred in not addressing whether MoneyGram made discounts, and the Fifth Circuit directed the Tax Court on remand to consider whether MoneyGram satisfied this requirement of Sec. 581.


MoneyGram probably received only a temporary reprieve. A dissenting opinion in the case argued that the Fifth Circuit should have affirmed the Tax Court's decision because under the majority's definitions of "deposits" and "loans," MoneyGram had "wholly failed to prove that it either receives 'deposits' or makes 'loans.' " The dissent argued that MoneyGram's customers purchase a product—money orders; they do not deposit funds for safekeeping. The dissent also noted that MoneyGram's "loans" are, on their face, trust agreements and not loans in the "well-established context of 'bank' loans." Since, according to the dissent, MoneyGram failed to prove that it either receives deposits or makes loans, it cannot be a bank under Sec. 581.

Moneygram International, Inc., No. 15-60527 (5th Cir. 11/15/16)

Tax Insider Articles


Business meal deductions after the TCJA

This article discusses the history of the deduction of business meal expenses and the new rules under the TCJA and the regulations and provides a framework for documenting and substantiating the deduction.


Quirks spurred by COVID-19 tax relief

This article discusses some procedural and administrative quirks that have emerged with the new tax legislative, regulatory, and procedural guidance related to COVID-19.