Commissioner of Internal Revenue v. Indianapolis Power Light Company

• Citation: 107 L.Ed.2d 591,493 U.S. 203,110 S.Ct. 589
• Decision Date: 09 January 1990
• Docket Number: No. 88-1319,88-1319
• Parties: COMMISSIONER OF INTERNAL REVENUE, Petitioner v. INDIANAPOLIS POWER & LIGHT COMPANY
• Court: United States Supreme Court

493 U.S. 203

110 S.Ct. 589

107 L.Ed.2d 591

COMMISSIONER OF INTERNAL REVENUE, Petitioner

v INDIANAPOLIS POWER & LIGHT COMPANY.

No. 88-1319.

Argued Oct. 31, 1989.

Decided Jan. 9, 1990.

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.

Respondent Indianapolis Power & Light Company (IPL) requires certain customers to make deposits with it to assure payment of future bills for electric service. Petitioner Commissioner of Internal Revenue contends that these deposits are advance payments for electricity and therefore constitute taxable income to IPL upon receipt. IPL contends otherwise.

I

IPL is a regulated Indiana corporation that generates and sells electricity in Indianapolis and its environs. It keeps its books on the accrual and calendar year basis. During the years 1974 through 1977, approximately 5% of IPL's residential and commercial customers were required to make deposits "to insure prompt payment," as the customers' receipts stated, of future utility bills. These customers were selected because their credit was suspect. Prior to March 10, 1976, the deposit requirement was imposed on a case-by-case basis. IPL relied on a credit test but employed no fixed formula. The amount of the required deposit ordinarily was twice the customer's estimated monthly bill. IPL paid 3% interest on a deposit held for six 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 cus- tomer could choose to have the amount applied against future bills.

In March 1976, IPL amended its rules governing the deposit program. See 170 Ind.Admin.Code § 4-1-15 (1988). Under the amended rules, the residential customers from whom deposits were required were selected on the basis of a fixed formula. The interest rate was raised to 6% but was payable only on deposits held for 12 months or more. A deposit was refunded when the customer made timely payments for either 9 consecutive months, or for 10 out of 12 consecutive months so long as the 2 delinquent months were not themselves consecutive. A customer could obtain a refund prior to that time by satisfying the credit test. As under the previous rules, the refund would be made in cash or by check, or, at the customer's option, applied against future bills. Any deposit unclaimed after seven years was to escheat to the State. See Ind.Code § 32-9-1-6(a) (1988).¹

IPL did not treat these deposits as income at the time of receipt. Rather, as required by state administrative regulations, the deposits were carried on its books as current liabilities. Under its accounting system, IPL recognized income when it mailed a monthly bill. If the deposit was used to offset a customer's bill, the utility 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 IPL's unfettered use and control. It is undisputed that IPL's treatment of the deposits was consistent with accepted accounting practice and applicable state regulations.

Upon audit of respondent's returns for the calendar years 1974 through 1977, the Commissioner asserted deficiencies. Although other items initially were in dispute, the parties were able to reach agreement on every issue except that of the proper treatment of customer deposits for the years 1975, 1976, and 1977. The Commissioner took the position that the deposits were advance payments for electricity and therefore were taxable to IPL in the year of receipt. He contended that the increase or decrease in customer deposits outstanding at the end of each year represented an increase or decrease in IPL's income for the year.² IPL disagreed and filed a petition in the United States Tax Court for redetermination of the asserted deficiencies.

In a reviewed decision, with one judge not participating, a unanimous Tax Court ruled in favor of IPL. 88 T.C. 964 (1987). The court followed the approach it had adopted in City Gas Co. of Florida v. Commissioner, 74 T.C. 386 (1980), rev'd, 689 F.2d 943 (CA11 1982). It found it necessary to "continue to examine all of the facts and circumstances," 88 T.C., at 976, and relied on several factors in concluding that the deposits in question were properly excluded from gross income. It noted, among other things, that only 5% of IPL's customers were required to make deposits; that the customer rather than the utility controlled the ultimate disposition of a deposit; and that IPL consistently treated the deposits as belonging to the customers, both by listing them as current liabilities for accounting purposes and by paying interest. Id., at 976-978.

The United States Court of Appeals for the Seventh Circuit affirmed the Tax Court's decision. 857 F.2d 1162 (1988). 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. . . ." Id., at 1167. The court appeared to place primary reliance, however, on IPL's obligation to pay interest on the deposits. It asserted that "as the interest rate paid on a deposit to secure income begins to approximate the return that the recipient would be expected to make from 'the use' of the deposit amount, the deposit begins to serve purposes that comport more squarely with a security deposit." Id., at 1169. Noting that IPL had paid interest on the customer deposits throughout the period in question, the court upheld, as not clearly erroneous, the Tax Court's determination that the principal purpose of these deposits was to serve as security rather than as prepayment of income. Id., at 1170.

Because the Seventh Circuit was in specific disagreement with the Eleventh Circuit's ruling in City Gas Co. of Florida, supra, we granted certiorari to resolve the conflict. 490 U.S. 1033, 109 S.Ct. 1929, 104 L.Ed.2d 401 (1989).

II

We begin with the common ground. IPL acknowledges that these customer deposits are taxable as income upon receipt if they constitute advance payments for electricity to be supplied.³ The Commissioner, on his part, concedes that customer deposits that secure the performance of non-income-producing covenants—such as a utility customer's obligation to ensure that meters will not be damaged—are not taxable income. And it is settled that receipt of a loan is not income to the borrower. See Commissioner v. Tufts, 461 U.S. 300, 307, 103 S.Ct. 1826, 1831, 75 L.Ed.2d 863 (1983) ("Because of [the repayment] ob- ligation, the loan proceeds do not qualify as income to the taxpayer"); James v. United States, 366 U.S. 213, 219, 81 S.Ct. 1052, 1055, 6 L.Ed.2d 246 (1961) (accepted definition of gross income "excludes loans"); Commissioner v. Wilcox, 327 U.S. 404, 408, 66 S.Ct. 546, 549, 90 L.Ed. 752 (1946). IPL, stressing its obligation to refund the deposits with interest, asserts that the payments are similar to loans. The Commissioner, however, contends that a deposit which serves to secure the payment of future income is properly analogized to an advance payment for goods or services. See Rev.Rul. 72-519, 1972-2 Cum.Bull. 32, 33 ("[W]hen the purpose of the deposit is to guarantee the customer's payment of amounts owed to the creditor, such a deposit is treated as an advance payment, but when the purpose of the deposit is to secure a property interest of the taxpayer the deposit is regarded as a true security deposit").

In economic terms, to be sure, the distinction between a loan and an advance payment is one of degree rather than of kind. A commercial loan, like an...