Multiple Pawn Transactions Must Be Combined for Cash Reporting Rules

In Chief Counsel Advice 201540013 the IRS was asked to rule on a situation involving a pawnbroker and whether or not the pawnbroker would be required to file a report under IRC §6050I for cash transactions under a specific situation.

As the advice notes:

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).

The question was whether the pawnbroker could treat a series of loans as separate transactions or not if the dollar limits would be exceeded if treated as one.  The IRS was concerned with the following situation:

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.

More specifically, the CCA considered the following example situation:

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 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.

The IRS concludes that, in fact, the pawnbroker must treat these as a single transaction and if the $10,000 limit is exceeded report the transaction.

When determining if transaction must be aggregated, a “related transaction” rule is triggered.  As the Advice explains this:

"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."

While the transactions in question won’t generally occur within 24 hours, the IRS position is that they meet the connected transactions test.

As the Advice concludes:

...[T]he 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 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.