City Gas Co. of Florida v. Comm'r of Internal Revenue, Docket Nos. 8808-73
| Decision Date | 27 May 1980 |
| Docket Number | Docket Nos. 8808-73,8809-73.,8807-73 |
| Citation | 74 T.C. 386 |
| Parties | CITY GAS COMPANY of FLORIDA, et al.,1 PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioners, a regulated public utility and two nonregulated companies all engaged in the business of selling gas to both residential and commercial customers, required new customers to deposit sums which were to be refunded upon customer termination of service or upon petitioners' prior election. These sums were generally credited against a customer's final bill and any balance refunded. Held, in the circumstances of this case, sums received by petitioners were security deposits subject to refund rather than income within the meaning of sec. 61, I.R.C. 1954. David W. Richmond and Charles J. Monahan, for the petitioners.
David M. Berman, for the respondent.
In these consolidated cases, respondent determined deficiencies in the following amounts:
+--------------------------------------------------+
¦FYE Mar. 31— ¦City Gas ¦Dri-Gas ¦Dade Gas ¦
+----------------+-----------+----------+----------¦
¦ ¦ ¦ ¦ ¦
+----------------+-----------+----------+----------¦
¦19631 ¦$111,458.64¦0 ¦0 ¦
+----------------+-----------+----------+----------¦
¦19641 ¦6,025.98 ¦$15,843.51¦0 ¦
+----------------+-----------+----------+----------¦
¦1966 ¦100,693.39 ¦919.46 ¦$79,096.24¦
+----------------+-----------+----------+----------¦
¦1967 ¦19,232.76 ¦0 ¦376.16 ¦
+----------------+-----------+----------+----------¦
¦1968 ¦19,072.12 ¦1,673.38 ¦0 ¦
+----------------+-----------+----------+----------¦
¦ ¦ ¦ ¦ ¦
+--------------------------------------------------+
Due to concessions by petitioners, the only issue for decision is whether amounts received from customers opening new accounts are includable in petitioners' gross income for the year of receipt.2
Petitioners City Gas Co. of Florida (City Gas), Dade Gas Co. (Dade Gas), and Dri-Gas Corp. (Dri-Gas) are Florida corporations with principal offices located in Hialeah, Fla. Dade Gas and Dri-Gas are wholly owned subsidiaries of City Gas. City Gas and Dri-Gas filed their Federal income tax returns for the fiscal year ended March 31, 1968, with the Southeast Service Center, Chamblee, Ga. Petitioners filed all other Federal income tax returns for each of the years in issue with the Office of the Internal Revenue Service, Jacksonville, Fla. During the years in issue, they reported taxable income according to the accrual method of accounting.
City Gas is a regulated public utility, under the jurisdiction of the Florida Public Service Commission (FPSC) for the years 1962 through 1968, and is engaged in the business of selling natural gas to both residential and commercial customers. Dade Gas and Dri-Gas are companies engaged in the business of selling liquid propane gas to both residential and commercial customers; they have always been nonregulated. Petitioners recorded all gas as sold, for Federal income tax and financial reporting purposes, at the end of the monthly accounting period, when they were billed by their suppliers for all gas delivered to them during the month. Some of the gas recognized as sold had not yet been billed to customers.3
During the years in issue, the rules of the FPSC included the following provisions:
Rule 310-7.54 Customer Deposits
(1) Each utility may require from any customer or prospective customer a cash deposit intended to guarantee payment of bills, such deposit not to exceed ten dollars ($10.00) or an amount necessary to cover charges for service for two billing periods, whichever is greater.
(4) The utility may provide for the return of the deposit after a reasonable period.
(5) Upon termination of service the deposit may be credited against the final account and the balance, if any, shall be returned to the customer.
The FPSC then required all electric and gas public utilities to pay a minimum of 4-percent interest on customer deposits. During the years 1962 through 1968, the FPSC prescribed the National Association of Regulatory Utility Commissioners (NARUC) Uniform System of Accounts for use by the gas utilities under its jurisdiction. The NARUC Uniform System of Accounts applicable during those years required that deposits received by a gas company be recorded in Account 235, Customer Deposits, a current liability account.
Under Florida law as in effect during the taxable years involved, any unclaimed deposit4 which cannot be refunded to a customer of a utility within 15 years after termination of service escheats to the State.5
In order to open a new account during the years in issue, new customers of any of petitioners were required to deposit an amount of money. Petitioners issued a receipt for each deposit which stated:
To be held as a deposit to secure payment of all bills for service rendered above customer. Upon discontinuance of service, or at the election of the company prior thereto, the amount of this deposit will be returned to the depositor after deducting any amounts owed to the company.
During fiscal 1966, 1967, and 1968, a residential customer was required to deposit $15, and a commercial or industrial customer was required to deposit twice the customer's estimated monthly bill. Customers were billed, and petitioners' income computed, without regard to the security deposits.
A customer could terminate service at any time. When a customer terminated service, petitioners billed the customer for the amount of gas used since his last billing, taxes, and for such items as turnon and turnoff charges, and charges for repairs to meters or to customer's appliances. They then applied the customer's deposit. If a credit to the customer resulted, petitioners issued a check to the customer refunding all or part of the deposit. If the customer owed a balance, the bill was then forwarded to the customer for payment.
When a customer terminated service but intended to return to the service area, he might request that petitioners retain his deposit pending his return. In such a case, the customer was required to pay all charges against his account. When a customer who terminated service had instructed petitioners to hold his deposit as a convenience because he intended to return to the service area, and subsequently requested a refund, the deposit was refunded. When a customer paid his bill in full, without application of his deposit, and did not request that petitioners retain the deposit, the deposit was refunded. Generally, deposits were credited against the final bill of the customer.
City Gas paid interest on customer deposits at a rate of 4 percent or higher in March 1966, July 1967, and July 1968, by computing the interest for each individual customer and applying it to the customer's bill. Not being subject to the jurisdiction of the FPSC, Dade Gas and Dri-Gas did not pay interest on customer deposits.
Petitioners have always treated the customer deposits received in the course of business as current liabilities for both tax reporting and financial reporting purposes. During fiscal 1966, 1967, and 1968, petitioners treated customer deposits of residential customers and of commercial and industrial customers in the same manner for all financial purposes. The deposits held by petitioners during the years in issue were not physically segregated from general corporate funds.
Before 1978, petitioners made no escheat payments because the escheat period had not expired. On March 31, 1968, petitioners held the following amounts of deposits for inactive customer accounts: City Gas—$6,357.52; Dade Gas—$5,073.24; and Dri-Gas—$1,975.06. On July 18, 1978, City Gas paid to the Florida State Comptroller $20,700.05. This amount represents the total payments made by all three petitioners, to date, under the Florida escheat statute.
A portion of the customer deposits listed on the books of account of City Gas in fiscal 1966 were not received directly by City Gas in cash, but were liabilities incurred during the early 1960's by other gas companies and acquired and assumed by City Gas through the acquisition of these companies. Dade Gas and Dri-Gas also received deposits during the fiscal years 1961 and 1962, and 1961, 1962, and 1963, respectively, by acquisition. These customer deposits were treated in all material respects the same as the deposits received directly by petitioners.
In notices of deficiency dated September 14, 1973, respondent determined that customer deposits received by petitioners were advance payments for gas. Accordingly, he included in the income of petitioners the following amounts:
+---------------------------------------------+
¦ ¦1966 ¦1967 ¦1968 ¦
+--------+--------------+----------+----------¦
¦ ¦ ¦ ¦ ¦
+--------+--------------+----------+----------¦
¦City Gas¦1 $598,033.94¦$72,500.52¦$71,887.46¦
+--------+--------------+----------+----------¦
¦Dade Gas¦2 158,604.84 ¦1,604.43 ¦0 ¦
+--------+--------------+----------+----------¦
¦Dri-Gas ¦2 42,180.76 ¦4,543.96 ¦3,445.41 ¦
+--------+--------------+----------+----------¦
¦ ¦ ¦ ¦ ¦
+---------------------------------------------+
1 Respondent's determination that deposits are included in income reduced net operating losses for fiscal 1966 and 1967 which had been carried back to fiscal 1963 and 1964 and thus triggered the determined deficiencies in the earlier years.
1 This amount represents the difference between the balances in the customer deposits accounts on Mar. 31, 1966, and on Mar. 31, 1955.
2 These amounts represent the balances in the customer deposit accounts on Mar. 31, 1966.
OPINIONPetitioners provided their customers with gas...
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