Indianapolis Power & Light Co. v. Comm'r of Internal Revenue
| Decision Date | 20 April 1987 |
| Docket Number | Docket No. 925-82 |
| Citation | 88 T.C. No. 52,88 T.C. 964 |
| Parties | INDIANAPOLIS POWER AND LIGHT COMPANY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
P, a regulated utility primarily engaged in the business of selling electricity to residential and commercial customers, required uncreditworthy customers to deposit funds which were refunded upon termination of service or upon P's determination that the customer met certain credit worthiness standards. A customer generally retained the right to determine whether his deposit would be returned to him or credited against his account. The deposits were in fact generally credited against an account, and the remainder was returned by check. HELD, the deposits received by P were security deposits, not advance payments, in which customers retained substantial rights and therefore were not income within the meaning of sec. 61, I.R.C. 1954, upon receipt by P. City Gas Co. of Florida v. Larry J. Stroble, Lester M. Ponder, and Kenneth H. Inskeep, for the petitioner.*
Rodney J. Bartlett, for the respondent.
The Commissioner determined the following deficiencies in the petitioner's Federal income taxes: $134,073 for 1974, $553,254 for 1975, $174,668 for 1976, and $18,446 for 1977. After concessions by the parties, the only issue for decision is whether, in the circumstances of this case, customer deposits received by a public utility are includable in income upon receipt as advance payments.
To the credit of both parties, many of the facts have been stipulated, and those facts are so found.
The petitioner, Indianapolis Power and Light Company, maintained its principal offices in Indianapolis, Indiana, at the time its petition in this case was filed. The petitioner filed its Federal income tax returns for the years 1974, 1975, 1976, and 1977 with the District Director of Internal Revenue, Indianapolis, Indiana.
The petitioner is an operating public utility which was incorporated under the laws of the State of Indiana on October 27, 1926. Since the date of its incorporation, the petitioner has been primarily engaged in generating, transmitting, distributing, and selling electrical energy in Indianapolis and in neighboring areas within the State of Indiana. It also produces, distributes, and sells steam within a limited area of Indianapolis.
As an Indiana public utility, the petitioner has always been subject to regulation by the Public Service Commission of Indiana (PSCI), which has promulgated Rules and Regulations of Service for Electrical Utilities in Indiana (the rules of service). The rules of service include, among other things, a rule concerning customer deposits collected by electrical utilities in Indiana. Ind. Admin. Rules and Regs. tit. 8, r. (8-1-2-4)-A42 (Burns Supp. 1978). Such rule was amended by the PSCI on March 10, 1976. The amendments primarily affected the policies for deposits collected from residential customers and not the policies for deposits from commercial customers.
As part of its customary method of conducting business during the years in issue, the petitioner required deposits from certain of its commercial and residential customers. Such deposits were intended to insure the payment of such customers' utility bills. The charge for electrical service was usually the largest item on a customer's utility bill; however, such a bill could also contain charges for disconnection, for reconnection, for late payments, for returned checks, and for meter tapering. Approximately 95 percent of the petitioner's customers never had to make such a deposit. Commercial customers often made different arrangements, including the submission of letters of credit or the pledge of assets.
While the collection of customer deposits from the petitioner's residential customers was not normally a condition for obtaining or continuing service, a deposit would occasionally be a condition for providing service to a nonresidential customer. For example, if the customer requesting service was a transient merchant who was previously a delinquent customer, the petitioner might require a security deposit prior to connection of service. The fact that the petitioner received a customer's deposit did not create an obligation on the part of the petitioner to provide service to the customer.
Under the rules of service during the years at issue, the petitioner was required to issue a receipt to every customer who was required to make a security deposit. Such receipt stated that the deposit was to ‘insure prompt payment for electric service, steam service, or both‘ and that such deposit would be refunded ‘after Service has been disconnected and all bills due have been paid.‘
Prior to the amendments of the rules of service, the petitioner made the determination that a customer deposit was required on a case-by-case basis. The determination was based on a creditworthiness analysis made by the petitioner, but no fixed or prescribed formula was followed in making such determination. The amount of such deposit was ordinarily twice the customer's estimated monthly bill, and the petitioner was required to pay interest at the rate of 3 percent per year on every deposit held at least 6 months. Accumulated interest was payable upon return of the deposit or annually upon demand in writing by the customer. 1
Prior to the amendments of the rules of service, the petitioner refunded customer deposits prior to termination of service if the customer requested a refund and met the petitioner's creditworthiness standards. Such a refund was usually made in cash or by check, but was sometimes made by a credit to the customer's utility bill. The manner in which such a refund was made was usually determined by the customer; the petitioner asked the customer how he wanted the security deposit refunded. Upon termination of service, the petitioner refunded customer deposits by cash or check, if the customer requested it and paid his final bill. The petitioner refunded customer deposits by a credit to the customer's final bill when requested to do so by the customer, or when the customer had no preference as to the manner of refund and there was an unpaid balance in the customer's account; any surplus was returned to the customer by cash or check.
After the amendments of the rules of service, the petitioner was required to determine the creditworthiness of each residential applicant or existing residential customer, and customer deposits could be required only of those new customers who failed the creditworthiness test supplied by PSCI or those existing customers who had a history of late payments. The amount of such deposits could not exceed one-sixth of the annual billings of the customer, and deposits held more than 12 months earned interest at the rate of 6 percent per year. If a deposit was greater than $70, a residential customer was entitled to pay such deposit in equal installments over a period of no less than 8 weeks, with service starting upon receipt of the first installment. Commercial customers continued to be evaluated for creditworthiness on a case-by-case basis.
The amended rules of service required the petitioner to refund any residential customer deposit ‘upon satisfactory payment by the customer for a period of either nine successive months or ten out of any twelve consecutive months (provided that the customer did not make late payments for any two consecutive months), or upon the customer demonstrating his creditworthiness by any other means.‘ After the amendments of the rules of service, the petitioner automatically refunded residential customer deposits prior to termination of service if the customer satisfied the new creditworthiness criteria. Such a refund was made in cash or by check, or it was made as a credit to the customer's bill, if the customer specifically asked for that treatment. Customers were informed of their rights regarding such refunds in a pamphlet the petitioner was required to provide to all of its customers.
When a customer requested termination of service after the amendments of the rules of service, the petitioner usually applied the deposit as a credit to the customer's final bill. However, upon specific request from the customer, the petitioner had to refund directly the deposit within 15 days after payment of the final bill by the customer. In the event of an involuntary termination of service, the customer deposit was used by the petitioner to cover any unpaid balance of the customer's account, and any surplus was returned to the customer. In general, an involuntary termination of service occurred about 90 days after a customer bill was sent and no payment had been received from the customer for charges included on such bill or a subsequent bill.
For each of the years in issue, the petitioner reported its income by use of the accrual method of accounting, and for financial, regulatory, and tax-reporting purposes, the petitioner always treated the customer deposits as current liabilities and not as gross income. Customer deposits were not physically segregated from the petitioner's general funds and were subject to the petitioner's unfettered use and control. However, the petitioner always recognized the customer's right to a refund of his deposit until and unless the customer failed to pay his bill and service was disconnected; it never intended the customer deposits to represent advance payments for electric or steam service.
The rules of service required the petitioner to treat customer deposits as current liabilities in maintaining its books and records and preparing its reports for regulatory accounting purposes. Ind. Admin. Rules and Regs. tit. 8, r. (8-1-2-10)-Cl1 (Burns Supp. 1978). Such treatment of customer deposits was in accordance with generally accepted accounting principles and clearly reflects income for financial accounting purposes. Consequently, the...
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