Successive pawn loans are related for Form 8300 reporting

Plain-English summary

Chief Counsel considered repeated pawn loans between the same pawnbroker and borrower using the same collateral. Each new loan replaced the unpaid principal of the prior loan, allowing the borrower to keep the property pledged without repaying the principal or forfeiting the collateral. The advice concluded that the loans were connected transactions for section 6050I even if state law treated each loan as legally separate. The pawnbroker therefore had to aggregate cash payments received in connection with the series and file Form 8300 when the total exceeded $10,000 during a one-year period.

Ruling snapshot

• Question: Whether successive replacement pawn loans using the same collateral are related transactions for Form 8300
• Outcome: Advice given, the transactions are related and cash payments must be aggregated
• Key authorities: I.R.C. § 6050I; Treas. Reg. § 1.6050I-1

Full text (IRS public release)

           Office of Chief Counsel
           Internal Revenue Service
           Memorandum
           Number: 201540013
           Release Date: 10/2/2015
           CC:PA:B02:SDMurray                       Third Party Communication: None
           PRENO-104507-08                          Date of Communication: Not Applicable

 UILC:     6050I.00-00, 6050I.01-00

  date:    April 11, 2008

     to:   Associate Area Counsel (Manhattan, Group 2)
           (Small Business/Self-Employed)

  from:    Ashton P. Trice
           Chief, Branch 2
           (Procedure & Administration)
           CC:PA:B2


subject:   Form 8300 Reporting for Pawnbroker Transactions

           This Chief Counsel Advice responds to a request for assistance. This advice may not
           be used or cited as precedent.


           LEGEND


           Corporation X = -------------------


           ISSUE

           Whether two or more seriatim pawn loans between the same pawnbroker and pawnor
           (borrower), secured with the same collateral, are related transactions for purposes of
           information reporting on Form 8300, Report of Cash Payments Over $10,000 Received
           in a Trade or Business, when each succeeding loan is the basis to retire the preceding
           loan and the unpaid amount of the retired loan is the amount of the new loan.

           CONCLUSION

           Multiple, successive pawn loans between the same parties and collateralized with the
           same personal property are related transactions for purposes of Form 8300 reporting
           when the debt from one loan is, in practical terms, shifted to a subsequent loan, even if
PRENO-104507-08                                      2

the loans are separate transactions as a matter of state law. Thus, if the pawnor pays
the pawnbroker in the course of a one-year period more than $10,000 in “cash” in
connection with the related transactions, the pawnbroker must file Form 8300 reporting
the transactions.

FACTS

Corporation X is a licensed pawnbroker operating pawnshops in New York City. The
Service is conducting a Form 8300 compliance check of X. X, like pawnbrokers
generally, is in the business of lending money to persons who pawn (pledge) personal
property, which is deposited with the pawnbroker as security for the loan. When
collateral is deposited with a pawnbroker, the broker gives the customer a pawn ticket to
present later to reclaim the property. Pawn loans are relatively short-term, a few
months at most. The repayment and redemption period may be fixed by law, otherwise
by contract. In New York the period is four months. N.Y. Gen. Bus. Law § 48. In
addition, state and local laws often set a maximum rate of interest and regulate the
charging of service fees. The maximum interest rate in New York is four percent per
month. N.Y. Gen. Bus. Law § 46. If the borrower does not repay the debt, including
interest and other charges, by the end of the loan period, plus any statutory waiting
period, the broker may sell the property pawned. Pawn loans are nonrecourse,
meaning that the pawnbroker has no right to collect the debt from the borrower and
recovery is limited to the proceeds from a sale of the collateral.

In some instances, a customer with an existing loan from one of X’s pawnshops will
agree to a new loan with X because the customer cannot pay off or chooses not to pay
off the debt at maturity yet does not want to forfeit the collateral. The new loan is
secured with the same collateral as before, which remains in the pawnshop’s
possession. The amount of the new loan is the same as (or possibly more than) that of
the prior loan. The borrower will pay any remaining interest and finance charges not
already paid on the old obligation, and that loan ends. The borrower, however, does not
pay the principal of the first loan.

To illustrate with a modified example provided by X, a borrower enters into a pawn loan
at one of X’s pawnshops for $7,000 and pledges a piece of jewelry. Fees and interest
over the loan period total $1,250. At or before the end of the term, the borrower returns
to the pawnshop and pays $1,250 in cash but not the remaining $7,000. X and the
borrower make a new loan for $7,000 at the same terms, and the jewelry is again the
collateral. The first loan is extinguished, and X gives the borrower a new pawn ticket.
At the end of the repayment period for the second loan, the borrower again pays $1,250
and a third $7,000 loan is made. This event may repeat itself several times before the
underlying $7,000 of principal is eventually repaid (and the jewelry is released to the
debtor) or the property is forfeited.1 Each loan in the series has its own number and


1
 Conceivably there could also be some variation up or down in the amount borrowed from one loan to the
next, such as if the borrower repays a small portion (but not all) of the principal on one loan before it is
PRENO-104507-08                                      3

paperwork, in accordance with state law. See N.Y. Gen. Bus. Law § 44. By the time all
of these loans have concluded, the borrower may have paid, in principal, interest, and
fees, an aggregate of more than $10,000 in cash to X in the same year. X has
questioned whether transactions in the situation described above are related
transactions for Form 8300 reporting. X has taken the position that the transactions are
not related transactions because the loans are “legally separate” under state law.


LAW AND ANALYSIS


Section 6050I Reporting Generally

Section 6050I(a) provides that any person engaged in a trade or business who, in the
course of that trade or business, receives more than $10,000 in cash in one transaction
or two or more related transactions, shall file a return, as described in section 6050I(b),
reporting the transaction(s). The return is due at the time prescribed by the Secretary in
regulations. Section 6050I(b) requires the information return to be made on whatever
form the Secretary designates and must include the name, address, and TIN of the
person or persons from whom the cash was received; the amount of cash received; the
date and nature of the transaction(s); and any other information as directed. The
Service (as the Secretary’s delegate) has prescribed the Form 8300 to report section
6050I transactions, and the return must be filed by the 15th day after the cash is
received. Treas. Reg. § 1.6050I-1(e)(1), (2). Multiple payments for one transaction (or
two or more related transactions) that are made with one year are aggregated for
purposes of the reporting requirements. Treas. Reg. § 1.6050I-1(b). Once an
aggregate of payments goes over $10,000 at any point during the year, the 15-day
period begins. Treas. Reg. § 1.6050I-1(b)(2)-(3).

Definitions

A “transaction” required to be reported is “the underlying event precipitating the payer’s
transfer of cash to the recipient” and includes a loan, payment on a loan or other debt,
and an exchange of cash for other cash. Treas. Reg. § 1.6050I-1(c)(7)(i). “Cash” is
defined as the coin and currency of the United States or a foreign country. I.R.C.
§ 6050I(d)(1); Treas. Reg. § 1.6050I-1(c)(1)(ii)(A). “Cash” also means a cashier’s
check, bank draft (but not a personal check from the account holder), traveler’s check,
or money order in an amount of $10,000 or less2 that is received in any transaction in
which the recipient knows that the instrument is being used in an attempt to avoid


subsumed by the next loan or if the collateral has sufficient value to secure a larger replacement loan. In
any case, the amount of the new loan is at least as much as the unpaid amount of the one it replaces.
2
  The total amount received from the transaction or related transactions must, of course, still exceed
$10,000 to trigger Form 8300 reporting (e.g., two cashier’s checks for $8,000 a piece, or a $6,000 money
order and $5,000 in currency).
PRENO-104507-08                                        4

reporting under section 6050I.3 I.R.C. § 6050I(d); Treas. Reg. § 1.6050I-1(c)(1)(ii)(B).
“Related transactions” are any transactions between a payer and a recipient of cash
occurring in a 24-hour period. Treas. Reg. § 1.6050I-1(c)(7)(ii). If the transactions are
more than 24 hours apart, they are related if the recipient “knows or has reason to know
that each transaction is one of a series of connected transactions.”4 Id.

Pawn Loans

Pawn loans in a series like the one described above are plainly related transactions.
The existence of the debt resulting from the first loan, which the debtor cannot or
chooses not to pay off by the maturity date, is the reason for the second loan, and that
debt is, in turn, the reason for the third loan, and so on. Beginning with the second loan,
the customer is incurring a new debt each time because of an earlier one, and both
parties arrive at the terms of the new loan—particularly the amount—in direct relation to
its predecessor. Each new loan, with the same lender,5 allows for the preceding one to
be retired without the debtor either paying it off or losing his or her interest in the
pawned property; one of those outcomes would necessarily happen without the fresh
loan. To conclude that the loans are other than related transactions would be
disregarding reality.

That the loans are separate transactions does not make them unrelated. Indeed,
related transactions must by definition be separate transactions from one another. If
multiple events are part of one overall transaction, the concept of two or more related
transactions does not apply. The sorts of transactions subject to reporting under
section 6050I will usually have their own separate paperwork and formalities, but such
facts are largely if not entirely immaterial to Form 8300 reporting. Rather, section 6050I
information reporting is determined on the basis of the criteria enumerated in the statute
and the regulations, namely, the fundamental character of the transactions and several
crucial facts like the timing and dollar amounts involved.

Although X emphasizes that all of its loans “are legally distinct credit extensions” under
“other federal and state laws,”6 pawn loans are not unique in that way or so different

3
  Or, if one of these monetary instruments (in an amount less than $10,000) is received in a “designated
reporting transaction,” it is “cash.” Treas. Reg. § 1.6050I-1(c)(1)(ii)(B)(1). A “designated reporting
transaction” has its own particular meaning not relevant here.
4
    “Connected transactions” is not defined in the regulations.
5
 For this advice (and the sake of simplicity), we assume that the loans are always made at the same
pawnshop, and not two or more different pawnshops owned and operated by X. Each “store, division,
branch, department, headquarters, or office” of a person’s trade or business is subject to separate Form
8300 reporting unless a store or branch that receives cash payments, or “a central unit linking” the group,
has reason to know that the same payer is making cash payments at multiple places. Treas. Reg.
§ 1.6050I-1(c)(8).
6
    The Truth in Lending Act, 15 U.S.C. § 1601 et seq., is one.
PRENO-104507-08                              5

from other types of transactions that they should be treated differently for information
reporting purposes. When a person buys or rents real or personal property or takes out
a loan and some time later executes a new transaction of the same type and with the
same business, the business will normally use a separate sales contract, lease, or loan
document for each transaction. Additionally, each sale, loan, lease, or other transaction
will have its own existence (creating certain rights and obligations in the parties) under
statutory or common law, whether it be contract law, landlord-tenant, consumer credit,
etc. In promulgating the regulations, the Service and Treasury surely were aware of
those realities but did not intend for them to control or obscure reporting of cash
transactions over $10,000. This is reflected in two of the regulatory examples of related
transactions. In one of them:

       [A]n individual attends a one day auction and purchases for cash two
       items, at a cost of $9,240 and $1,732.50 respectively (tax and buyer’s
       premium included). Because the transactions are related transactions as
       defined in paragraph (c)(7)(ii) of this section, the auction house is required
       to report the aggregate amount of cash received from the related sales
       ($10,972.50), even though the auction house accounts separately on its
       books for each item sold and presents the purchaser with separate bills for
       each item purchased.

Treas. Reg. § 1.6050I-1(c)(7)(iii), Example (4) (emphasis added). In the second
example:

       [A] coin dealer, sells for cash $9,000 worth of gold coins to an individual
       on three successive days [, i.e., three separate sales, each presumably
       having its own documentation]. Under paragraph (c)(7)(ii) of this section
       the three $9,000 transactions are related transactions aggregating
       $27,000 if [the dealer] knows, or has reason to know, that each
       transaction is one of a series of connected transactions.

Treas. Reg. § 1.6050I-1(c)(7)(iii), Example (5).

The examples illustrate that if two or more transactions meet either the first or second
prong of the definition of “related,” then the cash amounts of the transactions are
aggregated to determine reporting, irrespective of transaction-by-transaction accounting
or paperwork. On that basis, the successive pawn loans addressed in this advice,
which fall under the second prong because the pawnbroker knows that “each
transaction is one of a series of connected transactions,” are to be treated as related
transactions even though the pawnbroker accounts separately for each loan as dictated
by state law and provides a separate pawn ticket to the borrower each time. The
pawnbroker obviously has knowledge of each of the serial transactions with the same
customer and, as we have explained, also knows that the transactions are connected to
one another (both parties understand that a subsequent loan is meant to replace the
immediately preceding loan, which may have replaced its own antecedent debt, so that
PRENO-104507-08                                    6

all of the transactions are linked). In point of fact, it is difficult to imagine the
transactions being any more connected without being the same transaction.

The overt connection that is absent from the second example quoted above is present
in the case of the serial pawn loans. The facts of the example—that all three sales are
between the same buyer and seller, in the same amount ($9,000), for the same
merchandise, and on three successive days—are suggestive of a connection between
the sales, but whether they are truly related transactions depends on whether there are
further facts forming a basis for the dealer to know of an actual connection. Similar to
the example, serial pawn loans involve the same customer and business operator,
equal or overlapping transactional amounts, and the same personal property (pledged
in exchange for, and redeemed with, cash). But unlike the example, an additional fact
true of serial pawn loans is that one loan is the cause of the next loan, which is a
reaction to, and has a direct effect on the disposition of, the prior loan. This
demonstrable connection is what makes the loans related transactions7

This writing may contain privileged information. Any unauthorized disclosure of this
writing may undermine our ability to protect the privileged information. If disclosure is
determined to be necessary, please contact this office for our views.

Please call (202) 622-4940 if you have any questions.


cc:




7
  Of course, if there were no connection between the borrowed amount of one loan and another, the
conclusion would be different. For instance, if one of X’s customers borrows $4,500 on one occasion,
repays it at the end of the term, and a week later borrows another $4,500 at the same pawnshop, using
the same collateral, the loans would seem, without more, to be unrelated transactions. While the two
loans may be factually identical, there is no apparent connection between them—the first $4,500 loan
does not beget the second one, and the second loan does not replace the first.