Law School Case Brief
Commissioner v. Indianapolis Power & Light Co. - 493 U.S. 203, 110 S. Ct. 589 (1990)
Undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion qualify as income. When a taxpayer acquires earnings, lawfully or unlawfully, without the consensual recognition, express or implied, of an obligation to repay and without restriction as to their disposition, he has received income.
Indianapolis Power & Light Co. (IPL), a regulated Indiana utility and an accrual-basis taxpayer, required customers having suspect credit to make deposits with it to assure prompt payment of future electric bills. Prior to termination of service, customers who satisfied a credit test could obtain a refund of their deposits or could choose to have the amount applied against future bills. Although the deposits were at all times subject to the company's unfettered use and control, IPL did not treat them as income at the time of receipt but carried them on its books as current liabilities. Upon audit of IPL's returns for the tax years at issue, the 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. On appeal, the Court of Appeals affirmed. The Commission sought further review by the United States Supreme Court.
Were the customer deposits to the electric company considered income and taxable?
The Court affirmed the decision of the Court of Appeals, holding that customer deposits paid to IPL were security and did not constitute prepayment of income taxable upon receipt as urged by the Internal Revenue Commissioner. The Court explained that the determination of what constituted income turned upon the nature of the rights and obligations that IPL assumed when the payments were made. The Court relied upon its "complete dominion" formulation to determine that the deposits did not constitute income. The Court explained that IPL did not enjoy complete dominion over customer deposits because they were acquired subject to an express obligation to repay them either at the time the customer terminated service or when the customer established good credit. Further, IPL's receipt of the deposits was not accompanied by a guarantee that it would be allowed to keep the money notwithstanding the fact that its use of the funds was unrestrained for a period of time. Finally, the Court explained that the deposits were not advance payments because the customer retained the right to insist upon repayment in cash.
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