What constitutes a bank? The answer to that question is not as clear as it used to be. Recent years have seen growth in the variety of financial institutions seeking to hold bank status and just such a legal challenge is one that will be getting a hearing this week in Washington.
The matter is being watched closely because of the potential precedent it could set and the implications it might have in sparking tax disputes with the Internal Revenue Service.
At the center of the current conflict is MoneyGram International Inc. Most readers may know the firm as the second-largest company in the world after Western Union in the area of making money transfers, but MoneyGram is going to court asking that it be granted bank status. At stake is a $900 million tax deduction the company says it is eligible to take, but with the IRS says it is not.
MoneyGram reportedly claimed that amount on its taxes after a 2008 sell-off of mortgage-backed securities. The value of the MBS holdings had tanked at the start of the last recession and MoneyGram sought to write them off as ordinary losses on their taxes, rather than as capital losses.
U.S. tax code allows banks to declare such valueless securities as ordinary losses because of reserves they are required to hold against possible loan losses. But the same would not apply to non-bank institutions and so in 2012, the IRS rejected the MoneyGram deduction.
The question is now slated to be put to the U.S. Tax Court. The argument MoneyGram is expected to make is that, while the word "bank" doesn't appear in its name, its money-order transfer service is similar to what banks have with their customers. The IRS's counter position, reflected in court filings, is that MoneyGram's position is simply a tax planner's ploy to evade taxes.
Some legal observers say the outcome is meaningful for all taxpayers because if MoneyGram wins it could open the door to other financial institutions seeking to write off bad MBS holdings as deductions.
Source: Reuters, "MoneyGram claims bank status in tax dispute with U.S. IRS," Patrick Temple-West, May 27, 2014