Page 295 - DCOM508_CORPORATE_TAX_PLANNING

Corporate Tax Planning

Notes

Case Study Commissioner v. Indianapolis Power & Light Co.

ndianapolis Power & Light Company (IPL) required customers with suspect credit to
make deposits with it to assure payment of future bills for electric service. IPL paid
Iinterest on deposits held for a certain period of time. A customer could obtain a refund
prior to termination of service by making on time payments or by demonstrating acceptable
credit. The refunds were normally made in cash or by check but a customer could also
choose to have the deposit amount applied against future bills. Any deposit unclaimed
after seven years would escheat to the State. At the time of receipt, IPL did not treat the
deposits as income for tax purposes. The Internal Revenue Service (IRS) audited the utility
and assessed a tax deficiency. IPL appealed this assessment to the United States Tax Court,

which sided with IPL. This decision was then appealed, eventually reaching the Supreme
Court.
In front of the Supreme Court, the IRS argued that the deposits were advance payments
for electricity and therefore taxable to IPL in the year of receipt. In response, the utility
stressed its obligation to refund the deposits with interest. IPL argued the payments were
not taxable income because they were similar to loans.
To determine whether the deposits were income, the Supreme Court noted that
“undeniable accessions to wealth, clearly realized, and over which the taxpayers have
complete dominion” constitute income in Commissioner v. Glenshaw Glass Co. The Court
found that IPL did not enjoy “complete dominion” over the customer deposits; rather, the
IPL had an express obligation to repay a deposit when a customer established good credit
or terminated service. IPL’s right to keep the money thus depended upon the customer’s
subsequent decision to have the deposit applied to future bills, not merely upon the utility’s
adherence to its contractual duties. As such IPL’s dominion over the funds was far less
than is ordinarily present in an advance payment situation.
The Court, in a unanimous decision, held that whether a payment constitutes income when
received depends upon the rights and obligations of the parties at the time the payments
are made. The ability to choose what happens to the deposit distinguishes a loan from
an advance payment. An individual who makes an advance payment retains no right to
insist upon the return of the funds. In contrast, the IPL utility customers retained the right
to repayment. While a customer might apply the money to the purchase of electricity,
he or she assumed no obligation to do so. Because the utility did not acquire unfettered
“dominion” over the money, the deposits did not constitute income for tax purposes at the
time of receipt.

Questions
1. Study and analyze the case.
2. Write down the case facts.
3. What do you infer from it?
Source: Adapted from http://en.wikipedia.org/wiki/Commissioner_v._Indianapolis_Power_%26_Light_Co.

12.5 Summary

Advance Payment of tax is another method of collection of tax by the Central Government
in the Form of ‘Prepaid Taxes’.
Advance Tax can be deposited through Challan No. 280 in the Government Treasury (RBI)
or any of the authorised branches of nationalised banks.

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