Commissioner v. Indianapolis Power & Light Company

493 U.S. 203 (1990)

Purchase the Printed Copy at bsmsphd.com

Nature of the Case

To access this section all you need to do is click here and register.

Facts

D requires certain customers to make security deposits to assure payment of future bills for electric service. These customers were selected because their credit was suspect. The amount of the required deposit ordinarily was twice the customer's estimated monthly bill. D paid interest on a deposit held for six months or more and later for 12 months or more. A customer could obtain a refund of the deposit prior to termination of service by requesting a review and demonstrating acceptable credit. The refund usually was made in cash or by check, but the customer could choose to have the amount applied against future bills. D did not treat these deposits as income at the time of receipt. As required by state administrative regulations, the deposits were carried on its books as current liabilities. D recognized income when it mailed a monthly bill. If the deposit was used to offset a customer's bill, D made the necessary accounting adjustments. Customer deposits were not physically segregated in any way from the company's general funds. They were commingled with other receipts and at all times were subject to D's unfettered use and control. It is undisputed that D's treatment of the deposits was consistent with accepted accounting practice and applicable state regulations. P asserted deficiencies. P took the position that the deposits were advance payments for electricity and therefore were taxable in the year of receipt. D disagreed and filed a petition in Tax Court for redetermination of the asserted deficiencies. A unanimous Tax Court ruled in favor of D. It noted, among other things, that only 5% of D's customers were required to make deposits; that the customer rather than the utility controlled the ultimate disposition of a deposit; and that D consistently treated the deposits as belonging to the customers, both by listing them as current liabilities for accounting purposes and by paying interest. The Court of Appeals affirmed the Tax Court's decision. The court stated that 'the proper approach to determining the appropriate tax treatment of a customer deposit is to look at the primary purpose of the deposit based on all the facts and circumstances. It held because D was paying interest, the principal purpose of these deposits was to serve as security rather than as prepayment of income. P appealed.