Pawn-contract option fee is not a retail sale by the pawnbroker

Plain-English summary

Chief Counsel reconsidered whether a customer's option fee under a pawn-like contract for purchase was payment for a retail sale by the pawnbroker. Under the applicable contract definition, the customer had sold the property to the pawnbroker and could pay the fee to rescind that sale. The fee therefore did not represent a repurchase of the property or a retail sale by the pawnbroker. Chief Counsel stated that earlier emailed advice reached the wrong result because it apparently did not consider the governing definition of “option.”

Ruling snapshot

• Question: Is an option fee paid to rescind a pawn-contract sale a retail sale by the pawnbroker for IRC § 6050I reporting?
• Outcome: Advice given, the option fee is not payment for a retail sale by the pawnbroker
• Key authorities: IRC § 6050I; Treas. Reg. § 1.6050I-1(c)(1)(iii)

Full text (IRS public release)

ID: CCA_2016030218243315
UILC: 6050I.00-00

Number: 201633033
Release Date: 8/12/2016
From: -------------------
Sent: Wednesday, March 02, 2016 6:24:33 PM
To:
Cc:

Bcc:
Subject: FW: Question - Pawn Contracts -------

The question raised is whether a pawnbroker located in---------------that accepts -----------
----------------- under a contract for purchase (which, in substance, is essentially a
contract for a pawn loan) has engaged in a retail sale of a consumer durable, for
purposes of Treas. Reg. section 1.6050I-1(c)(1)(iii), when the contracts are renewed
with the payment, by the customer, of an option fee. If the payment of the option fee by
the customer is considered to be payment for a retail sale by the pawnbroker, of a
consumer durable (--------------------, in this case), then the pawnbroker would be
required to treat the receipt of certain monetary instruments as the receipt of cash for
purposes of the section 6050I reporting requirement. The contracts entered into
between the pawnbroker and the customer are contracts for purchase, as defined in ----
---------------------- -----------------. For purposes of section ---------------, the customer is
treated as having sold ---------------------to the pawnbroker. Under the terms of the
contract, the customer may rescind the sale by paying an option fee.

The attached file contains e-mailed Chief Counsel advice, dated 8-4-15, that concluded,
for contracts that are contracts for purchase under section --------------, the payment of
an option fee in the context of a pawnshop business transaction constitutes a retail sale,
by the pawnbroker, for purposes of the section 6050I reporting requirement. Section ---
-------------------however, defines an option, in the context of a contract for purchase as
“the fixed time and the fixed price agreed upon by the customer and the pawnbroker in
which a contract for purchase may but does not have to be rescinded by the
customer.” That is, the customer is merely rescinding his sale of ---------------------to the
pawnbroker, not repurchasing --------------------, when he pays the option fee. The
payment of a fee by the customer to rescind a sale to the pawnbroker is not a retail sale
by the pawnbroker of -------------------------------------back to the customer.

The e-mailed advice correctly cited ------------------------------------------, which contains the
definition of “contract for purchase,” and correctly described the contract under ------------
------------ state law, but made no mention of section --------------------which contains the
2

definition of the term “option” in this context, indicating that this definition may not have
been taken into consideration. Had it been, I believe the conclusion in the e-mail, that
the “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” would
have been different.

It has been suggested that some of the pawnbroker’s customers may be entering into
contracts for purchase, and regularly paying option fees when renewing the contacts, as
an alternative to paying for ---------------------------------------------------. This would further
support the position that the payment of the option fee by the customer is not intended
as a payment for -----------------------------------------. Please contact me if you have any
questions. I apologize for the delay in responding.

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