Commissioner of Internal Revenue v. Indianapolis Power & Light Company

Syllabus Respondent Indianapolis Power & Light Co. (IPL), a regulated Indiana utility and an accrual-basis taxpayer, requires customers having suspect credit to make deposits with it to assure prompt payment of future electric bills. Prior to termination of service, customers who satisfy a credit test can obtain a refund of their deposits or can choose to have the amount applied against future bills. Although the deposits are at all times subject to the company's unfettered use and control, IPL does not treat them as income at the time of receipt but carries them on its books as current liabilities. Upon audit of IPL's returns for the tax years at issue, petitioner Commissioner of Internal Revenue asserted deficiencies, claiming that the deposits are advance payments for electricity and therefore are taxable to IPL in the year of receipt. The Tax Court ruled in favor of IPL on its petition for redetermination, holding that the deposits' principal purpose is to serve as security rather than as prepayment of income. The Court of Appeals affirmed. Held: The customer deposits are not advance payments for electricity and therefore do not constitute taxable income to IPL upon receipt. Although IPL derives some economic benefit from the deposits, it does not have the requisite "complete dominion" over them at the time they are made, the crucial point for determining taxable income. IPL has an obligation to repay the deposits upon termination of service or satisfaction of the credit test. Moreover, a customer submitting a deposit makes no commitment to purchase any electricity at all. Thus, while deposits eventually may be used to pay for electricity by virtue of customer default or choice, IPL's right to retain them at the time they are made is contingent upon events outside its control. This construction is consistent with the Tax Court's longstanding treatment of sums deposited to secure a tenant's performance of a lease agreement, perhaps the closest analogy to the present situation. Pp. 207-214. 857 F.2d 1162 (C.A.7 1988), affirmed. BLACKMUN, J., delivered the opinion for a unanimous Court. Lawrence G. Wallace, Washington, D.C. for petitioner. Larry J. Stroble, Indianapolis, Ind. for respondent. Justice BLACKMUN delivered the opinion of the Court.