Many rules in our tax law apply only to “banks,” as that term is defined in §581 of the Internal Revenue Code (the Code). Perhaps surprisingly, it is not always obvious whether an entity is or is not a “bank” within the meaning of that provision, and significant tax obligations may turn on that issue. A recent Tax Court case, MoneyGram International v. Commissioner,1 interprets and applies the statutory definition in the context of special provisions providing liberal rules under which “banks” may claim deductions for bad debts.

Background

MoneyGram International and its subsidiaries (collectively, MoneyGram) provided payment services to consumers and financial institutions. In the case of its consumer-oriented business, MoneyGram sold money orders and provided money transfer services through a variety of agents, including banks, credit unions, supermarkets, convenience stores, and other retail businesses.

Typically, a consumer would pay cash to an agent for the amount of a money order, plus a fee. The form completed by the consumer would state that the agent was not accepting a “deposit.” The money order would then be issued in blank, completed by the customer and delivered, and cleared through the banking system, typically within 10 days.

The agent would remit the cash received to MoneyGram, either immediately or at intervals of, most commonly, twice a week. MoneyGram would derive revenue from such transactions through the transaction fees and, with respect to international money transfers, from the management of currency exchange spreads.