## Facts

- Indianapolis Power & Light Company (IPL), a regulated Indiana electric utility, used the accrual and calendar-year method of accounting.
- IPL required certain residential and commercial customers with doubtful credit (about 5% of customers) to make refundable cash deposits to secure payment of future electric bills.
- Deposits were generally set at roughly twice the customer’s estimated monthly bill and accrued interest (3% if held at least six months).
- Customers could obtain a refund when they satisfied IPL’s credit requirements, before terminating service; alternatively, customers could elect to have the deposit applied to future bills.
- If service terminated, the deposit (with interest) was refunded or applied against any unpaid balance; unclaimed deposits escheated to the State after seven years.
- IPL had unrestricted interim use of the deposited funds, but it recorded them as current liabilities and did not include them in income when received.
- After auditing tax years 1974–1977, the Commissioner asserted deficiencies, treating the deposits as taxable advance payments for electricity.
- The Tax Court ruled for IPL, the Seventh Circuit affirmed, and the Supreme Court granted certiorari to resolve the proper tax treatment of such deposits.

## Issues

1. Whether refundable customer deposits paid to a public utility as security for future bills constitute taxable gross income upon receipt as “advance payments.”
2. Whether unrestricted use of received funds is sufficient to establish “complete dominion” for income recognition when the recipient has a repayment obligation contingent on future events.

## Decision

- The Supreme Court unanimously affirmed for IPL.
- The Court held the customer deposits were not advance payments for electricity and were not taxable income to IPL in the year received.
- The Court concluded IPL lacked “complete dominion” over the deposits at receipt because IPL’s right to retain them depended on events outside its control and IPL had an obligation to repay.

## Legal Principles

- Gross income generally requires a clearly realized accession to wealth over which the taxpayer has “complete dominion” at the time of receipt.
- Funds received subject to an obligation to repay, where the recipient’s right to keep the money is contingent on future events, are not income upon receipt.
- Unrestricted interim use or commingling of funds does not, by itself, establish taxable income if the recipient lacks a fixed right to retain the funds.
- Refundable security deposits are distinguishable from advance payments: advance payments typically involve a payer commitment to purchase goods or services and an essentially unconditional right of the payee to keep the funds, subject mainly to the payee’s performance.

## Conclusion

Because the utility’s customer deposits were refundable and the utility’s right to keep them depended on customer default or customer election rather than an unconditional entitlement at receipt, the deposits were not taxable gross income until the contingency ended and the right to retain the funds became fixed.


Commissioner v. Indianapolis Power & Light Co., 493 U.S. 203 (1990)