Pawnshop option fee counts as retail-sale payment for cash reporting

Plain-English summary

A Colorado pawnshop used contracts in which it advanced money for delivered property while the customer retained a time-limited option to cancel the transaction. The IRS viewed the option payment as arising from a retail sale for section 6050I's definition of cash. The advice reasoned that the state-law contract was a sales contract subject to cancellation and that the federal retail-sale definition was broad enough to cover it. Qualifying monetary instruments received in the transaction therefore counted toward the reporting rules for cash receipts over $10,000.

Ruling snapshot

• Question: Does an option fee paid in a pawnshop contract for purchase arise from a retail sale for section 6050I cash-reporting purposes?
• Outcome: Advice given
• Key authorities: IRC § 6050I; Treas. Reg. § 1.6050I-1(c); Commissioner v. Brown, 380 U.S. 563 (1965)

Full text (IRS public release)

ID: CCA_2015082514312741 Third Party Communication: None

UILC: 6050I.00-00 Date of Communication: Not Applicable

Number: 201536022
Release Date: 9/4/2015
From:
Sent: Tuesday, August 25, 2015 2:31:27 PM
To:
Cc:
Bcc:
Subject: FW: 6050I question

Hi --------;

It is our view that payment of an option fee in the context of a pawnshop business transaction
constitutes a “retail sale” for purposes of defining “cash” under I.R.C. § 6050I which requires
reporting of “cash” receipts of more than $10,000.

As we understand the transaction, under Colorado law, pawnshop transactions are
structured as either as a “purchase transaction” or a “contract for purchase” with the
customer as the seller and the pawnbroker as the buyer. Purchase transactions are
outright sales to the pawnbroker with no later right to recover the item. The Colorado
pawnbroker statute defines a “contract for purchase” as a “contract entered into
between a pawnbroker and a customer pursuant to which money is advanced to the
customer by the pawnbroker on the delivery of tangible personal property by the
customer on the condition that the customer, for a fixed price and within a fixed period
of time, to be no less than thirty days, has the option to cancel such contract.” COLO.
REV. STAT. § 12-56-101(1) (2014). We understand, however, that in some cases, the
consumer delivers title to the vehicle to the pawnbroker rather than deliver the vehicle itself.
See Colorado Office of the Attorney General, Administrative Interpretation No. 1.202-9401
(August 31, 1994).

Under I.R.C. § 6050I and its regulations, the term cash includes:

coin and currency of the United States (Treas. Reg. § 1.6050I-1(c)(1)(ii)(A)), or of any foreign
country (I.R.C. § 6050I(d)(1),
which circulate in and are customarily used and accepted as money in the country of issue
(Treas. Reg. § 1.6050I-1(c)(1)(ii)(A)), and;

whether or not in bearer form (I.R.C. § 1.6050I(d)(2)), a cashier’s check, (by whatever named
called, including “treasurer’s check or “bank check”), bank draft, traveler’s check or money
order (Treas. Reg. § 1.6050I-1(c)(1)(ii)(B)),
2

      (1) With a face amount of $10,000 (I.R.C. § 1.6050I-1(d)(2)), and
      (2) Which is received in a designated reporting transaction, or any transaction in which the
          recipient knows that the specified monetary instrument is being used in an attempt to avoid
          these reporting requirements.

Specified monetary transactions are treated as cash if they are received in a designated
reporting transaction. A designated reporting transaction is a “retail sale”, or the receipt of
funds by a broker or other intermediary in connection with a “retail sale” of a consumer
durable, a collectible or a travel or entertainment activity. (Treas. Reg. § 1.6050I-1(c)(1)(iii)).

For purposes of the definition of a “designated reporting transaction,” a “retail sale” is any sale,
whether for resale or for any other purpose, made in the course of a trade or business if that
trade or business principally consists of making sales in the course of such trade or business of
items that will be resold. See Publication 1544, Reporting Cash Payments of Over $10,000
(Received in a Trade or Business), at 2 (September 2014). We believe this definition is broad
enough to encompass option payments made with respect to a “contract for purchase” in
the course of a pawn business subject to Colorado law. The definition of a contract for
purchase under Section 12-56-101(1) appears to describe a sales contract that may be
cancelled. For purposes of the Internal Revenue Code, the term “sale” is given its
ordinary meaning and is generally defined as a transfer of property or a promise to pay
money. See Commissioner v. Brown, 380 U.S. 563, 571 (1965) Sollberger v.
Commissioner, 691 F.3d 1119, 1123 (9th Cir. 2012); Anschultz Co. v. Commissioner,
664 F.3d 313 (10th Cir. 2011). In the case of a contract for purchase, the customer is
transferring the automobile or title document in exchange of a cashier’s check, (by
whatever named called, including “treasurer’s check or “bank check”), bank draft, traveler’s
check or money order, with an ability to later cancel the contract.

Moreover, Publication 1544 on page 1 states “For example, you may have to file Form 8300 if
you are … a pawnbroker.”

Although IRS Publications are not authoritative, Bobrow v. Commissioner, Docket No. 7022-11,
Order on Motion for Reconsideration (IRS publication is not binding precedent and does not
constitute substantial authority for any position), we believe it is instructive for purposes of
setting forth IRS policies and interpretation of tax law.

We hope this has been helpful. Please contact this office if we can be of further assistance.

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