Performing tax research is an important part of tax practice. As outlined in Chapter 2 of your

textbook, tax law is developed through a number of different governmental entities. Congress

enacts the tax Code as statutory law. The Treasury Department is tasked with the

implementation of the tax Code and, in the course of doing so, develops a number of

documents and materials to aid taxpayers in understanding the Treasury Department's

interpretation of the code, including the Regulations. In turn, the Internal Revenue Service

("IRS?) has the direct responsibility for implementing the tax Code and in assessing and

collecting the applicable tax from taxpayers. In the course of its duties, it also develops a

number of materials, including Revenue Rulings, Revenue Procedures, and Private Letter

Rulings, in which it sets forth its understanding of the tax laws. Finally, the federal courts

decide tax cases in which taxpayers contest the government's interpretation of the tax laws. In

deciding these cases, the federal courts set forth binding interpretation of what the tax laws

provide. All of these materials (often called primary resources) are important resources in

performing tax research. On top of these primary sources of tax law, there are a number of

secondary materials provided by various organizations and publishers. These secondary

materials offer editorial analysis of the tax laws (somewhat akin to a Cliffs? Notes on tax laws)

to help tax practitioners understand the tax laws and apply them in given situations.

The following assignment has three (3) different graded elements. Two of them require you to

prepare tax file memoranda, while the remaining element requires you to compose an essay

answering the question asked. AS SUCH, YOU WILL BE SUBMITTING THREE SEPARATE

DOCUMENTS FOR THIS ASSIGNMENT.

1. The first two assignments require you to compose tax file memoranda. In each of these

problems, you will be given a fact pattern or issue that requires you to decide or analyze

a particular issue of tax law. You will also be provided with a number of the primary

sources discussed above (e.g., Revenue Rulings, cases) on that issue of tax law. You will

then compose a tax file memoranda concerning that taxpayer. You can find details as to

how to compose such a memorandum in Chapter 2 of your text, including a sample text

file memorandum in Figure 2.6 on page 2-26 of your text. Use the materials provided to

determine the proper solution to the taxpayer?s issues. In particular, discuss the

materials in some detail in the ?Analysis? section of the tax file memorandum. THIS IS

IMPORTANT! The most important part of any tax file memorandum is the thoroughness

of the analysis defending the conclusion reached in the memorandum. Accordingly,

most of the points awarded on the assignment are allocated to the ?Analysis? section of

the memorandum. In assessing these assignments, consideration will be given to,

among other factors, (1) your accuracy in summarizing the relevant facts; (2) the

accuracy of your identification and statement of the ?Issue? presented by the problem;

(3) the accuracy of your ?Conclusion;? (4) the thoroughness and quality of your analysis

Week 3 Research Project (Set #1)

DeVry University Acct 429

offered in the ?Analysis? section of your memorandum; and (5) the overall

professionalism of your memorandum (e.g., presentation, use of proper grammar,

proper spelling, and quality of communication). EACH OF THE TAX MEMORANDA IS

WORTH 30 POINTS, FOR A TOTAL OF 60 POINTS.

2. The remaining assignment requires you to perform some research on the Internet to

find relevant materials and to analyze these materials. As previously noted, in

performing this research, you may not take advantage of any resources other than those

specifically permitted by the assignment, including assignments previously completed by

other students or other similar materials. You will then complete an essay answering

the question or questions presented by this assignment. Your submission will be graded

on a number of factors, including (1) your ability to locate relevant research and

materials on the Internet; (2) your ability to analyze these resources; (3) your ability to

draw conclusions from these resources and to defend these conclusions with analysis of

the research and materials located; and (4) the overall professionalism and content of

your essay (e.g., presentation, use of proper grammar, proper spelling, and quality of

communication). THIS ESSAY IS WORTH 20 POINTS.

Please note that these assignments are worth a significant portion of your grade. As such, you

should take them seriously, and leave yourself enough time to complete them. Do not wait

until the last weekend to begin these assignments. If you do, it will be very difficult for you to

submit quality responses to each of the four questions or problems posed. Please also note

that preparing these answers conscientiously will help you in preparing for the final

examination, given that you may be required to perform similar analyses on the exam. Should

you have a question, please ask your instructor. Good luck!

Week 3 Research Project (Set #1)

DeVry University Acct 429

TAX RESEARCH MEMORANDUM ASSIGNMENT 1

One of your clients is an incorporated funeral home, Peaceful Pastures Funeral Home, Inc.

(?Peaceful?). Peaceful, an accrual basis taxpayer, provides a full line of funeral services and sells

goods related to those services. Over the last few years, however, the cost of these goods and

services have risen dramatically. As a result, more of Peaceful?s customers have had difficulties

paying their bills or have selected goods and services that cost less, sharply impacting Peaceful's

bottom line.

As a result, Peaceful has attempted to design an approach that allows customers to prepay for

their funeral goods and services. Under this program, the customer pays in advance for the

goods and services that will be provided at the time of their death, often at a significant

discount. Under the terms of the contract, the payments are refundable at the contract

purchaser's request any time until the goods and services are provided to them. Given that it is

an accrual basis taxpayer, Peaceful has included these payments and income for the year the

funeral service is provided.

This year, the IRS sent Peaceful an audit notice. It contends that the amount prepaid under

Peaceful?s program constitutes prepaid income that must be included in Peaceful?s income (and

therefore subject to tax) in the year in which it is received. Peaceful has come to you for

advice. Is the IRS correct?

COMPOSE A TAX FILE MEMORANDUM CONCERNING THIS ISSUE USING THESE FACTS AND THE

RESEARCH MATERIALS PROVIDED TO YOU IN THE NEXT FEW PAGES (30 POINTS).

Checkpoint Contents

Federal Library

Federal Source Materials

Federal Tax Decisions

American Federal Tax Reports

American Federal Tax Reports (Prior Years)

1990

AFTR 2d Vol. 65

65 AFTR 2d 90-407 (888 F.2d 208) - 65 AFTR 2d 90-301 (19 Cl Ct 1)

COMM. v. INDIANAPOLIS POWER & LIGHT CO., 65 AFTR 2d 90-394 (110 S.Ct.589), Code Sec(s) 451;

61, (S Ct), 01/09/1990

American Federal Tax Reports

COMM. v. INDIANAPOLIS POWER & LIGHT CO., Cite as 65 AFTR 2d 90-394

(110 S.Ct.589), 01/09/1990 , Code Sec(s) 61

COMMISSIONER of Internal Revenue, PETITIONER v. INDIANAPOLIS POWER & LIGHT COMPANY, RESPONDENT

Case Information:

HEADNOTE

1. TIME FOR REPORTING INCOME?Prepaid income?receipt for future services or sale of personal property.

Customer deposits required by public utility to insure customer creditworthiness and bill payment weren't advance

payments for electricity and weren't taxable income to utility on receipt. Utility didn't have requisite "complete

dominion" over payments at time they were made, the crucial point for determining taxable income. 11th Circuit's

holding in City Gas Co. of Fla. v. Comm., 50 AFTR 2d 82-5959 ( 689 F2d 943), not followed. Utility's right to

keep deposits depended on events outside its control?customer's purchase of electricity, decision to have deposit

applied to future bills, or default. Utility's dominion over fund was far less complete than is ordinarily case in

advance-payment situation. Closest analogy is lease deposits.

Reference(s): PH Fed 2d 4515.191(90); 615.003(10). Code Sec. 61 ; Code Sec. 451 .

OPINION

On Writ of Certiorari to the United States Court of Appeals for the Seventh Circuit.

Syllabus

Respondent Indianapolis Power and Light Co. (IPL), a regulated Indiana utility and an accrual-basis taxpayer,

requires customers having suspect credit to make deposits with it to assure prompt payment of future electric bills.

Prior to termination of service, customers who satisfy a credit test can obtain a refund of their deposits or can

choose to have the amount applied against future bills. Although the deposits are at all times subject to the

company's unfettered use and control, IPL does not treat them as income at the time of receipt but carries them on

its books as current liabilities. Upon audit of IPL's returns for the tax years at issue, petitioner Commissioner of

Internal Revenue asserted deficiencies, claiming that the deposits are advance payments for electricity and

Code Sec(s): 61

Court Name: U.S. Supreme Court,

Docket No.: No. 88-1319,

Date

Decided:

01/09/1990

Prior History: Court of Appeals, 62 AFTR 2d 88-5708 ( 857 F.2d 1162), aff'g 88 TC 964

(No.52), affirmed.

Tax Year(s): Years 1974, 1975, 1976, 1977.

Disposition: Decision for Taxpayer.

Cites: 65 AFTR 2d 90-394, 493 US 203, 110 S Ct 589, 107 L Ed 2d 591, 90-1 USTC P 50007.

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 a prepayment of

income. The Court of Appeals affirmed.

Held: The customer deposits are not advance payments for electricity and therefore do not constitute taxable

income to IPL upon receipt. Although IPL derives some economic benefit from the deposits, it does not have the

requisite "complete dominion" over them at the time they are made, the crucial point for determining taxable

income. IPL has an obligation to repay the deposits upon termination of service or satisfaction of the credit test.

Moreover, a customer submitting a deposit makes no commitment to purchase any electricity at all. Thus, while

deposits eventually may be used to pay for electricity by virtue of customer default or choice, IPL's right to retain

them at the time they are made is contingent upon events outside its control. This construction is consistent with

the Tax Court's longstanding treatment of sums deposited to secure a tenant's performance of a lease agreement,

perhaps the closet analogy to the present situation.

857 F.2d 1162 [ 62 AFTR2d 88-5708], affirmed.

BLACKMUN, J., delivered the opinion for a unanimous Court.

Opinion

Justice BLACKMUN delivered the opinion of the Court.

Respondent Indianapolis Power & Light Company (IPL) requires certain customers to make deposits with it to assure

payment of future bills for electric service. Petitioner Commissioner of Internal Revenue contends that these deposits

are advance payments for electricity and therefore constitute taxable income to IPL upon receipt. IPL contends

otherwise.

I

IPL is a regulated Indiana corporation that generates and sells electricity in Indianapolis and its environs. It keeps its

books on the accrual and calendar year basis. [pg. 90-395] During the years 1974 through 1977, approximately 5%

of IPL's residential and commercial customers were required to make deposits "to insure prompt payment," as the

customers' receipts stated, of future utility bills. These customers were selected because their credit was suspect.

Prior to March 10, 1976, the deposit requirement was imposed on a case-by-case basis. IPL relied on a credit test

but employed no fixed formula. The amount of the required deposit ordinarily was twice the customer's estimated

monthly bill. IPL paid 3% interest on a deposit held for six months or more. A customer could obtain a refund of the

deposit prior to termination of service by requesting a review and demonstrating acceptable credit. The refund

usually was made in cash or by check, but the customer could choose to have the amount applied against future

bills.

In March 1976, IPL amended its rules governing the deposit program. See Title 170, Ind. Admin. Code 4-1-15 (1988).

Under the amended rules, the residential customers from whom deposits were required were selected on the basis of

a fixed formula. The interest rate was raised to 6% but was payable only on deposits held for 12 months or more. A

deposit was refunded when the customer made timely payments for either nine consecutive months, or for 10 out of

12 consecutive months so long as the two delinquent months were not themselves consecutive. A customer could

obtain a refund prior to that time by satisfying the credit test. As under the previous rules, the refund would be

made in cash or by check, or, at the customer's option, applied against future bills. Any deposit unclaimed after

seven years was to escheat to the State. See Ind. Code 32-9-1-6(a) (1988) 1

IPL did not treat these deposits as income at the time of receipt. Rather, as required by state administrative

regulations, the deposits were carried on its books as current liabilities. Under its accounting system, IPL recognized

income when it mailed a monthly bill. If the deposit was used to offset a customer's bill, the utility made the

necessary accounting adjustments. Customer deposits were not physically segregated in any way from the

company's general funds. They were commingled with other receipts and at all times were subject to IPL's

unfettered use and control. It is undisputed that IPL's treatment of the deposits was consistent with accepted

accounting practice and applicable state regulations.

Upon audit of respondent's returns for the calendar years 1974 through 1977, the Commissioner asserted

deficiencies. Although other items initially were in dispute, the parties were able to reach agreement on every issue

except that of the proper treatment of customer deposits for the years 1975, 1976, and 1977. The Commissioner

took the position that the deposits were advance payments for electricity and therefore were taxable to IPL in the

year of receipt. He contended that the increase or decrease in customer deposits outstanding at the end of each

year represented an increase or decrease in IPL's income for the year. 2 IPL disagreed and filed a petition in the

United States Tax Court for redetermination of the asserted deficiencies.

In a reviewed decision, with one judge not participating, a unanimous Tax Court ruled in favor of IPL. 88 T.C. 964

(1987). The court followed the approach it had adopted in City Gas Co. of Florida v. Commissioner of Internal

Revenue, 74 T.C. 386 (1980), rev'd, 689 F.2d 943 [ 50 AFTR2d 82-5959] (CA 11 1982). It found it

necessary to "continue to examine all of the circumstances," 88 T.C., at 976, and relied on several factors in

concluding that the deposits in question were properly excluded from gross income. It noted, among other things,

that only 5% of IPL's customers were required to make deposits; that the customer rather than the utility controlled

the ultimate disposition of a deposit; and that IPL consistently treated the deposits as belonging to the customers,

both by listing them as current liabilities for accounting purposes and by paying interest. Id., at 976-978.

The United States Court of Appeals for the Seventh Circuit affirmed the Tax Court's decision. 857 F.2d 1162 [

62 AFTR2d 88-5708] (1988). The court stated that "the proper approach to determining the appropriate tax

treatment of a customer deposit is to look at the primary purpose of the deposit based on all the facts and

circumstances...." Id., at 1167. [pg. 90-396] The court appeared to place primary reliance, however, on IPL's

obligation to pay interest on the deposits. It asserted that " as the interest rate paid on a deposit to secure income

begins to approximate the return that the recipient would be expected to make from 'the use' of the deposit amount,

the deposit begins to serve purposes that comport more squarely with a security deposit." Id., at 1169. Noting that

IPL had paid interest on the customer deposits throughout the period in question, the court upheld, as not clearly

erroneous, the Tax Court's determination that the principal purpose of these deposits was to serve as security

rather than as prepayment of income. Id., at 1170.

Because the Seventh Circuit was in specific disagreement with the Eleventh Circuit's ruling in City Gas Co. of Florida,

supra, we granted certiorari to resolve the conflict. ?U.S. ? (1989).

II

We begin with the common ground. IPL acknowledges that these customer deposits are taxable as income upon

receipt if they constituteadvance payments for electricity to be supplied. 3 The Commissioner, on his part, concedes

that customer deposits that secure the performance of nonincome-producing covenants?such as a utility

customer's obligation to ensure that meters will not be damaged?are not taxable income. And it is settled that

receipt of a loan is not income to the borrower. See Commissioner v. Tufts, 461 U.S. 300, 307 [ 51 AFTR2d

83-1132] (1983) ("Because of [the repayment] obligation, the loan proceeds do not qualify as income to the

taxpayer"); James v. United States, 366 U.S. 213, 219 [ 7 AFTR2d 1361] (1961) (accepted definition of

gross income "excludes loans"); Commissioner v. Wilcox, 327 U.S. 404, 408 [ 34 AFTR 811] (1946). IPL,

stressing its obligation to refund the deposits with interest, asserts that the payments are similar to loans. The

Commissioner, however, contends that a deposit which serves to secure the payment of future income is properly

analogized to an advance payment for goods or services. See Rev. Rul. 72-519, 1972-2 Cum. Bull. 32, 33 ("[W]

hen the purpose of the deposit is to guarantee the customer's payment of amounts owed to the creditor, such a

deposit is treated as an advance payment, but when the purpose of the deposit is to secure a property interest of

the taxpayer the deposit is regarded as a true security deposit").

In economic terms, to be sure, the distinction between a loan and an advance payment is one of degree rather than

of kind. A commercial loan, like an advance payment, confers an economic benefit on the recipient: a business

presumably does not borrow money unless it believes that the income it can earn from its use of the borrowed funds

will be greater than its interest obligation. See Illinois Power Co. v. Commissioner of Internal Revenue, 792 F.2d

683, 690 [ 58 AFTR2d 86-5122] (CA7 1986). Even though receipt of the money is subject to a duty to repay,

the borrower must regard itself as better off after the loan than it was before. The economic benefit of a loan,

however, consists entirely of the opportunity to earn income on the use of the money prior to the time the loan

must be repaid. And in that context our system is content to tax these earnings as they are realized. The recipient

of an advance payment, in contrast, gains both immediate use of the money (with the chance to realize earnings

thereon) and the opportunity to make a profit by providing goods or services at a cost lower than the amount of the

payment.

The question, therefore, cannot be resolved simply by noting that respondent derives some economic benefit from

receipt of these deposits. 4 Rather, the issue turns upon the nature of the rights and obligations that IPL assumed

when the deposits were made. In determining what sort of economic benefits qualify as income, this Court has

invoked various formulations. It has referred, for example, to "undeniable accessions to wealth, clearly realized, and

over which the taxpayers have complete dominion." Commissioner v. Glenshaw Glass Co., [pg. 90-397] 348 U.S.

426, 431 [ 47 AFTR 162] (1955). It also has stated: "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....' " James v. United States, 366 U.S., at 219, quoting North American Oil

Consolidated v. Burnet, 286 U.S. 417, 424 [ 11 AFTR 16] (1932). IPL hardly enjoyed "complete dominion" over

the customer deposits entrusted to it. Rather, these deposits were acquired subject to an express "obligation to

repay," either at the time service was terminated or at the time a customer established good credit. So long as the

customer fulfills his legal obligation to make timely payments, his deposit ultimately is to be refunded, and both the

timing and method of that refund are largely within the control of the customer.

The Commissioner stresses the fact that these deposits were not placed in escrow or segregated from IPL's other

funds, and that IPL therefore enjoyed unrestricted use of the money. That circumstance, however, cannot be

dispositive. After all, the same might be said of a commercial loan; yet the Commissioner does not suggest that a

loan is taxable upon receipt simply because the borrower is free to use the funds in whatever fashion he chooses

until the time of repayment. In determining whether a taxpayer enjoys "complete dominion" over a given sum, the

crucial point is not whether his use of the funds is unconstrained during some interim period. The key is whether the

taxpayer has some guarantee that he will be allowed to keep the money. IPL's receipt of these deposits was

accompanied by no such guarantee.

Nor is it especially significant that these deposits could be expected to generate income greater than the modest

interest IPL was required to pay. Again, the same could be said of a commercial loan, since, as has been noted, a

business is unlikely to borrow unless it believes that it can realize benefits that exceed the cost of servicing the

debt. A bank could hardly operate profitably if its earnings on deposits did not surpass its interest obligations; but

the deposits themselves are not treated as income. 5 Any income that the utility may earn through use of the

deposit money of course is taxable, but the prospect that income will be generated provides no ground for taxing

the principal.

The Commissioner's advance payment analogy seems to us to rest upon a misconception of the value of an advance

payment to its recipient. An advance payment, like the deposits at issue here, concededly protects the seller

against the risk that it would be unable to collect money owed it after it has furnished goods or services. But an

advance payment does much more: it protects against the risk that the purchaser will back out of the deal before

the seller performs. From the moment an advance payment is made, the seller is assured that, so long as it fulfills its

contractual obligation, the money is its to keep. Here, in contrast, a customer submitting a deposit made no

commitment to purchase a specified quantity of electricity, or indeed to purchase any electricity at all. 6 IPL's right

to keep the money depends upon the customer's purchase of electricity, and upon his later decision to have the

deposit applied to future bills, not merely upon the utility's adherence to its contractual duties. Under these

circumstances, IPL's dominion over the fund is far less complete than is ordinarily the case in an advance-payment

situation.

The Commissioner emphasizes that these deposits frequently will be used to pay for electricity, either because the

customer defaults on his obligation or because the customer, having established credit, chooses to apply the deposit

to future bills rather than to accept a refund. When this occurs, the Commissioner argues, the transaction, from a

cash-flow standpoint, is equivalent to an advance payment. In his view this economic equivalence mandates

identical tax treatment.

Whether these payments constitute income when received, however, depends upon the parties' rights and obligations at the time the

payments are made. The problem with petitioner's argument perhaps can best be understood if we imagine a loan between parties

involved in an ongoing commercial relationship. At the time the loan falls due, the lender may decide to apply the money owed him to

the purchase of goods or services rather than to accept repayment in cash. But this decision does not mean that the loan, when made,

was an advance payment after all. The lender in effect has taken repayment of his money (as was his contractual right) and has chosen

to use the proceeds for the purchase of goods or services from the borrower. Although, for the sake of convenience, the parties may

combine the two steps, that decision does not blind us to the fact that in substance two transactions are involved. 8 It is this element of

choice that distinguishes an advance payment from a loan. Whether these customer deposits are the economic equivalents of advance

payments, and therefore taxable upon receipt, must be determined by examining the relationship between the parties at the time of the

deposit. The individual who makes an advance payment retains no right to insist upon the return of the funds; so long as the recipient

fulfills the terms of the bargain, the money is its to keep. The customer who submits a deposit to the utility, like the lender in the

previous hypothetical, retains the right to insist upon repayment in cash; he may choose to apply the money to the purchase of

electricity, but he assumes no obligation to do so, and the utility therefore acquires no unfettered "dominion" over the money at the

time of receipt.

When the Commissioner examines privately structured transactions, the true understanding of the parties, of course, may not be

apparent. It may be that a transfer of funds, though nominally a loan, may conceal an unstated agreement that the money is to be

applied to the purchase of goods or services. We need not, and do not, attempt to devise a test for addressing those situations where

the nature of the parties' bargain is legitimately in dispute. This particular respondent, however, conducts its business in a heavily

regulated environment; its rights and obligations vis-a-vis its customers are largely determined by law and regulation rather than by

private negotiation. That the utility's customers, when they qualify for refunds of deposits, frequently choose to apply those refunds to

future bills rather than taking repayment in cash does not mean that any customer has made an unspoken commitment to do so.

Our decision is also consistent with the Tax Court's longstanding treatment of lease deposits?perhaps the closest analogy to the

present situation. The Tax Court traditionally has distinguished between a sum designated as a prepayment of rent?which is taxable

upon receipt?and a sum deposited to secure the tenant's performance of a lease agreement. See, e.g., J. & E. Enterprises, Inc. v.

Commissioner, 26 TCM 944 [ 67,191 PH Memo TC](1967). 9 In fact, the customer deposits at issue here are less plausibly

regarded as income than lease deposits would be. The [pg. 90-399] typical lease deposit secures the tenant's fulfillment of a contractual

obligation to pay a specified rent throughout the term of the lease. The utility customer, however, makes no commitment to purchase

any services at all at the time he tenders the deposit.

We recognize that IPL derives an economic benefit from these deposits. But a taxpayer does not realize taxable income from every

event that improves his economic condition. A customer who makes this deposit reflects no commitment to purchase services, and IPL's

right to retain the money is contingent upon events outside its control. We hold that such dominion as IPL has over these customer

deposits is insufficient for the deposits to qualify as taxable income at the time they are made.

The judgment of the Court of Appeals is affirmed.

It is so ordered.

1

During the years 1974 through 1977, the total amount that escheated to the State was less than $9,325. Stipulation of Facts 25.

2

The parties' stipulation sets forth the balance in IPL's customer-deposit account on December 31 of each of the years 1954, 1974,

1975, 1976, and 1977. In his notice of deficiency, the Commissioner concluded that IPL was required to include in income for 1975 the

increase in the account between December 31, 1954, and December 31, 1975. For 1976 and 1977, IPL was allowed to reflect in income

the respective decreases in the account during those years.

3

This Court has held that an accrual-basis taxpayer is required to treat advance payments as income in the year of receipt. See

Schlude v. Commissioner, 372 U.S. 128 [ 11 AFTR2d 751] (1963); American Automobile Assn. v. United States, 367 U.S.

687 [ 7 AFTR2d 1618] (1961); Automobile Club of Michigan v. Commissioner, 353 U.S. 180 [ 50 AFTR 1967] (1957). These

cases concerned payments?nonrefundable fees for services?that indisputably constituted income; the issue waswhen that income was

taxable. Here, in contrast, the issue is whether these deposits, as such, are income at all.

4

See Illinois Power Co., 792 F.2d, at 690. See also Burke & Friel, Recent Developments in the Income Taxation of Individuals, Tax-Free

Security: Reflections on Indianapolis Power & Light, 12 Rev. of Taxation of Individuals 157, 174 (1988) (arguing that economic-benefit

approach is superior in theory, but acknowledging that "an economic-benefit test has not been adopted, and it is unlikely that such an

approach will be pursued by the Service or the courts").

5

Cf. Rev. Rul. 71-189, 1971-1 Cum. Bull. 32 (inactive deposits are not income until bank asserts dominion over the accounts). See

also Fidelity-Philadelphia Trust Co. v. Commissioner, 23 T.C. 527 (1954).

6

A customer, for example, might terminate service the day after making the deposit. Also, IPL's dominion over a deposit remains

incomplete even after the customer begins buying electricity. As has been noted, the deposit typically is set at twice the customer's

estimated monthly bill. So long as the customer pays his bills in a timely fashion, the money he owes the utility (for electricity used but

not yet paid for) almost always will be less than the amount of the deposit. If this were not the case, the deposit would provide

inadequate protection. Thus, throughout the period the deposit is held, at least a portion is likely to be money that IPL has no real

assurance of ever retaining.

7

The Commissioner is unwilling, however, to pursue this line of reasoning to the limit of its logic. He concedes that these deposits would

not be taxable if they were placed in escrow, Tr. of Oral Arg. 4; but from a cash-flow standpoint it does not make much difference

whether the money is placed in escrow or commingled with the utility's other funds. In either case, the utility receives the money and

allocates it to subsequent purchases of electricity if the customer defaults or chooses to apply his refund to a future bill.

8

The Commissioner contends that a customer's decision to take his refund while making a separate payment for services, rather than

applying the deposit to his bill, would amount to nothing more than an economically meaningless "exchange of checks." But in our view

the "exchange of checks," while less convenient, more accurately reflects the economic substance of the transactions.

9

In J. & E. Enterprises the Tax Court stated: "If a sum is received by a lessor at the beginning of a lease, is subject to his unfettered

control, and is to be applied as rent for a subsequent period during the term of the lease, such sum is income in the year of receipt

even though in certain circumstances a refund thereof may be required.... If, on the other hand, a sum is deposited to secure the

lessee's performance under a lease, and is to be returned at the expiration thereof, it is not taxable income even though the fund is

deposited with the lessor instead of in escrow and the lessor has temporary use of the money.... In this situation the acknowledged

liability of the lessor to account for the deposited sum on the lessee's performance of the lease covenants prevents the sum from being

taxable in the year of receipt." 26 TCM, at 945-946.

In Rev. Rul. 72-519, 1972-2 Cum. Bull. 32, the Commissioner relied in part on J. & E. Enterprises as authority for the proposition

that deposits intended to secure income-producing covenants are advance payments taxable as income upon receipt, while deposits

intended to secure nonincome-producing covenants are not. Id., at 33. In our view, neither J. & E. Enterprises nor the other cases cited

in the Revenue Ruling support that distinction. See Hirsch Improvement Co. v. Commissioner of Internal Revenue, 143 F.2d 912 [

32 AFTR 1104] (CA2), cert. denied, 323 U.S. 750 (1944); Mantell v. Commissioner, 17 T.C. 1143 (1952); Gilken Corp. v.

Commissioner, 10 T.C. 445 (1948), aff'd, 176 F.2d 141 [ 38 AFTR 265] (CA6 1949). These cases all distinguish between

advance payments and security deposits, not between deposits that do and do not secure income-producing covenants.

2010 Thomson Reuters/RIA. All rights reserved.

Checkpoint Contents

Federal Library

Federal Source Materials

Federal Tax Decisions

Tax Court Memorandum Decisions

Tax Court & Board of Tax Appeals Memorandum Decisions (Prior Years)

2003

TC Memo 2003-348 - TC Memo 2003-309

Perry Funeral Home, Inc., TC Memo 2003-340, Code Sec(s). 451; 6662; 7491, 12/16/2003

Tax Court & Board of Tax Appeals Memorandum Decisions

Perry Funeral Home, Inc. v. Commissioner, TC Memo 2003-340 , Code Sec

(s) 451.

PERRY FUNERAL HOME, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

Case Information:

HEADNOTE

1. Time for reporting income?accrual method?refundable deposit vs. advance payments?pre-need

funeral contracts. Accrual-method funeral home corp. properly reported monies received for Massachusettsregulated

pre-need funeral service contracts in year services were actually rendered, rather than in payment year

as IRS contended: following Supreme Court precedent, payments were refundable deposits, not advance payments,

where contracts contained open-ended cancellation and refund rights that left taxpayer without complete dominion

and control over funds. Notably, under contracts' plain language and pursuant to Massachusetts regs], customers

controlled whether or when refund would be made; and fact that cancellation/refund rights were rarely exercised

was irrelevant.

Reference(s): 4515.191(22) Code Sec. 451

2. Accuracy-related penalties?burden of proof and production?substantial authority?reliance on return

preparer. Accuracy-related penalties for negligence and/or substantial understatement were upheld to extent

applicable after Rule 155 computations against funeral home corp. with respect to conceded items: IRS met its

burden of production as to subject items through presumptively correct deficiency notice and taxpayer's

concessions; taxpayer showed no substantial authority for or adequate disclosure of those items; and alleged

reliance on return preparer wasn't excuse absent proof that preparer was given all necessary information as to

subject items.

Reference(s): 66,625.01(20) ; 74,915.03(3) Code Sec. 6662 ; Code Sec. 7491

Syllabus

Official Tax Court Syllabus

P is a funeral home organized and operating in Massachusetts. During the years in issue, P entered into

preneed funeral contracts and received payments in advance of death for goods and services to be

provided later at the contract beneficiary's death. These payments were refundable at the contract

purchaser's request, pursuant to State law, at any time until the goods and services were furnished. P,

an accrual basis taxpayer, included these payments in income not in the year of receipt but in the year

in which the goods and services were provided.

Code Sec(s): 451

Docket: Dkt. No. 14722-02.

Date Issued: 12/16/2003.

Judge: Opinion by Wherry, J.

Tax Year(s): Years 1996, 1997.

Disposition: Decision for Taxpayer in part and for Commissioner in part.

Held: Payments received by P under its preneed funeral contracts are includable in gross income only

upon the provision of the subject goods and services.

Held, further, P is liable for the sec. 6662, I.R.C., accuracy-related penalty with respect to items

conceded by P, apart from the preneed accounting issue.

Counsel

Edward DeFranceschi, David Klemm, and Jason Bell, for petitioner.

Louise R. Forbes, for respondent.

WHERRY, Judge

MEMORANDUM FINDINGS OF FACT AND OPINION

Respondent determined the following deficiencies and penalty with respect to petitioner's Federal income taxes for

the calendar years 1996 and 1997:

Penalty

Year Deficiency I.R.C. Sec. 6662

---- ---------- ----------------

1996 $1,044,037 $106,877.80

1997 1,817 ?

After concessions by the parties, the principal issues for decision are: [pg. 1968]

(1) Whether payments received by petitioner under preneed funeral contracts are includable in gross income during

the year of receipt or during the year in which the goods and services are provided by petitioner; and

(2) whether petitioner is liable for the section 6662 accuracy-related penalty. 1

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulations of the parties, with accompanying

exhibits, are incorporated herein by this reference.

Petitioner is a funeral home located at all relevant times in New Bedford, Massachusetts. Petitioner began operations

in 1963 as a partnership and was incorporated under the laws of the Commonwealth of Massachusetts on September

19, 1967. Brothers Thomas Perry and William Perry each own a 50-percent interest in petitioner and are funeral

directors licensed by the Commonwealth of Massachusetts.

Petitioner's Operations

Prior to and during the years in issue, petitioner entered into preneed funeral contracts. Under these arrangements,

the contract purchaser selected, on a prospective basis, the goods and services to be provided by petitioner at the

contract beneficiary's death. Petitioner would designate the selected items and applicable charges on a written

form.

If the resultant balance was then paid in advance of death, either in a lump sum or in installments, petitioner agreed

to honor the contract at death as written, without additional cost to the purchaser or family. If the resultant

balance was to be paid through the proceeds of an insurance policy or was left unfunded, the amount due would be

recalculated in accordance with the prices in effect at the time of death.

The written form used by petitioner for these purposes was not specific to prearranged funerals and contained no

express provisions regarding the use or refundability of amounts received thereunder. A handwritten notation that

the contract was irrevocable was added to certain of the forms, allegedly for reasons related to Medicaid eligibility.

Regardless of such language, however, it was petitioner's practice to indicate to purchasers that they had the right

to cancel at any time and would receive their money back. 2

The experience of petitioner has been that only a very small percentage of preneed contracts are in fact canceled.

The record indicates that during the period from approximately 1997 through the time of trial in 2003, six contracts

were canceled. 3 The amounts paid thereon were refunded, and on certain occasions the refunds also included an

interest component based on ?kind of a guess? about prevailing rates.

During the years in issue, petitioner maintained a business checking account and the following investments: A

Putnam Investments mutual fund account, a Merrill Lynch ready asset account, Fleet Financial shares,

Massachusetts Savings Investments certificates of deposit, a BayBank money market account, a BayBrokerage

account (for 1996 only), and a BayBank escrow account. Moneys received pursuant to preneed contracts were

placed by petitioner in one of the investment vehicles. Upon petitioner's provision of goods and services at the

death of a preneed contract beneficiary, an amount equal to the purchase price of the contract was transferred

from the investment accounts to petitioner's checking account.

The BayBank escrow account is a compilation of accounts, opened before 1996, each in the name of an individual

contract beneficiary. Petitioner's accountant advised establishment of the escrow account in the early 1990s. This

account was used for the deposit of preneed receipts for a period prior to the years in issue, until the resultant

administrative burden caused petitioner to discontinue the practice. The balance of the BayBank escrow account as

of January [pg. 1969] 1, 1996, was $106,579.16, and those funds are not at issue in this proceeding. The

investments other than the Baybank escrow account are held solely in petitioner's name and list petitioner's tax

identification number.

Petitioner's Accounting and Tax Reporting

Petitioner is an accrual basis taxpayer. For accounting purposes, petitioner records payments received pursuant to

preneed contracts as liabilities under the designation prearranged funerals. Petitioner does not recognize as income

payments recorded on its books and records as prearranged funerals until the tax year in which the goods and

services are provided. Petitioner does recognize interest and dividend income earned on the investments, exclusive

of the BayBank escrow account, into which the preneed funds are deposited.

Petitioner filed Forms 1120, U.S. Corporation Income Tax Return, for 1996, 1997, and 1998 consistent with the

foregoing approach. Attached to each return is a Schedule L, Balance Sheets per Books. These Schedules L reflect

as ?Other investments? the following balances in petitioner's investment vehicles, including the BayBank escrow

account:

Year As of Jan. 1 As of Dec. 31

---- ------------ -------------

1996 $2,270,655 $2,431,946

1997 2,431,946 2,515,217

1998 2,515,217 2,503,934

Also on the Schedules L, petitioner included in ?Other current liabilities? the following amounts for prearranged

funerals:

Year As of Jan. 1 As of Dec. 31

---- ------------ -------------

1996 $1,587,416 $1,612,272

1997 1,612,272 1,614,929

1998 1,614,929 1,543,284

Respondent on June 26, 2002, issued to petitioner the statutory notice of deficiency underlying the present

litigation. Therein, respondent determined, inter alia, that moneys received under preneed contracts are to be

characterized as income to petitioner in the year of receipt.

OPINION

I. Preliminary Matters

A. Burden of Proof

In general, the Commissioner's determinations are presumed correct, and the taxpayer bears the burden of proving

otherwise. Rule 142(a). Section 7491, effective for court proceedings that arise in connection with examinations

commencing after July 22, 1998, may operate, however, in specified circumstances to place the burden on the

Commissioner. Internal Revenue Restructuring & Reform Act of 1998, Pub. L. 105-206, sec. 3001(c), 112 Stat.

727. With respect to factual issues and subject to enumerated limitations, section 7491(a) may shift the burden

of proof to the Commissioner in instances where the taxpayer has introduced credible evidence. Concerning penalties

and additions to tax, section 7491(c) places the burden of production on the Commissioner.

The record in this case is not explicit as to when the underlying examination began. 4 As regards the substantive

accounting issues, however, the Court finds it unnecessary to decide whether the burden should be shifted under

section 7491(a). Few facts concerning how petitioner conducted the preneed transactions are in dispute. Given

this circumstance, the record is not evenly weighted and is more than sufficient to render a decision on the merits

based upon a preponderance of the evidence. With respect to the penalty, because respondent on brief assumes

that section 7491(c) is applicable, the Court will do likewise.

B. Evidentiary Motion

After the trial in this case, petitioner filed a motion for the Court to take judicial notice of the consent judgment

rendered in Commonwealth v. Deschene-Costa, C.A. [pg. 1970] No. C03-0647 (Mass. Super. Ct. June 4, 2003). The

motion is made pursuant to rule 201 of the Federal Rules of Evidence, which provides in relevant part as follows:

Rule 201. Judicial Notice of Adjudicative Facts

(a) Scope of rule.?This rule governs only judicial notice of adjudicative facts.

(b) Kinds of facts.?A judicially noticed fact must be one not subject to reasonable dispute in that it is

either (1) generally known within the territorial jurisdiction of the trial court or (2) capable of accurate

and ready determination by resort to sources whose accuracy cannot reasonably be questioned.

This Court has previously noted that ?under rule 201, records of a particular court in one proceeding commonly are

the subject of judicial notice by the same and other courts in other proceedings?, and ?Also generally subject to

judicial notice under rule 201 is the fact that a decision or judgment was entered in a case, that an opinion was

filed, as well as the language of a particular opinion.? Estate of Reis v. Commissioner, 87 T.C. 1016, 1027 (1986).

In the judgment that is the subject of petitioner's motion, the defendant funeral home operator, when confronted by

the Commonwealth of Massachusetts, consented to a permanent injunction and to payment of restitution for misuse

of funeral trust funds. Commonwealth v. Deschene-Costa, supra. Respondent agrees that the Court may take

judicial notice of the judgment under the above-quoted standards of rule 201 but questions the relevance of the

material. Accordingly, the Court will take judicial notice of the existence and content of the judgment pursuant to

rule 201 but will give it only such consideration as is warranted by its pertinence to the Court's analysis of

petitioner's case.

II. General Rules

A. Federal Taxation Principles

The Internal Revenue Code imposes a Federal tax on the taxable income of every corporation. Sec. 11(a).

Section 61(a) specifies that gross income for purposes of calculating such taxable income means ?all income from

whatever source derived?. Encompassed within this broad pronouncement are all ?undeniable accessions to wealth,

clearly realized, and over which the taxpayers have complete dominion.? Commissioner v. Glenshaw Glass Co.,

348 U.S. 426, 431 [47 AFTR 162] (1955). Stated otherwise, gross income includes earnings unaccompanied by an

obligation to repay and without restriction as to their disposition. James v. United States, 366 U.S. 213, 219 [7

AFTR 2d 1361] (1961).

Section 451(a) provides the following general rule regarding the year in which items of gross income should be

included in taxable income:

The amount of any item of gross income shall be included in the gross income for the taxable year in

which received by the taxpayer, unless, under the method of accounting used in computing taxable

income, such amount is to be properly accounted for as of a different period.

Consistent with the principle of section 451, section 446(a) and (b) directs that taxpayers are to

compute taxable income using the method of accounting regularly employed for keeping their books, with the

exception that ?if the method used does not clearly reflect income, the computation of taxable income shall be made

under such method as, in the opinion of the Secretary, does clearly reflect income.? In general, the accrual method

is designated a permissible method of accounting for purposes of section 446. Sec. 446(c)(2).

Under the accrual method, income is to be included for the taxable year when all events have occurred that fix the

right to receive the income and the amount of the income can be determined with reasonable accuracy. Secs.

1.446-1(c)(1)(ii), 1.451- 1(a), Income Tax Regs. Typically, all events that fix the right to receive income have

occurred upon the earliest of the following to take place: The income is (1) actually or constructively received; (2)

due; or (3) earned by performance. Schlude v. Commissioner, 372 U.S. 128, 133 [11 AFTR 2d 751] (1963);

Johnson v. Commissioner, 108 T.C. 448, 459 (1997), affd. in part, revd. in part and remanded on another ground

184 F.3d 786 [84 AFTR 2d 99-5306] (8th Cir. 1999). [pg. 1971]

As caselaw applying the above standards has evolved, it has become well established that amounts constituting

advance payments for goods or services are includable in gross income in the year received. Schlude v.

Commissioner, supra; AAA v. United States, 367 U.S. 687 [7 AFTR 2d 1618] (1961); Auto. Club of Mich. v.

Commissioner, 353 U.S. 180 [50 AFTR 1967] (1957); RCA Corp. v. United States, 664 F.2d 881 [48 AFTR 2d

81-6164] (2d Cir. 1981); see also Commissioner v. Indianapolis Power & Light Co., 493 U.S. 203, 207 & n.3 [65

AFTR 2d 90-394] (1990).

In contrast, amounts properly characterized as loans, deposits, or trust funds are not includable upon receipt.

Commissioner v. Indianapolis Power & Light Co., supra at 207-208; Johnson v. Commissioner, supra at 467-475; Oak

Indus., Inc. v. Commissioner, 96 T.C. 559, 563-564 (1991); Angelus Funeral Home v. Commissioner, 47 T.C.

391, 397 (1967), affd. 407 F.2d 210 [23 AFTR 2d 69-673] (9th Cir. 1969). The rationale underlying this

distinction is that money received in the capacity solely of a borrower, depository, agent, or fiduciary, because it is

accompanied by an obligation to repay or restriction as to disposition, is not income at all. See Commissioner v.

Indianapolis Power & Light Co., supra at 208 n.3; Johnson v. Commissioner, supra at 474-475. Hence, no question of

the timing of income accrual is presented. See Commissioner v. Indianapolis Power & Light Co., supra at 208 n.3;

Johnson v. Commissioner, supra at 474-475.

B. State Funeral Services Regulation

Preneed contracts and arrangements in the Commonwealth of Massachusetts are governed by the regulations of the

Board of Registration in Embalming and Funeral Directing. Mass. Regs. Code tit. 239, secs. 4.01-4.10 (2003); see

also Mass. Gen. Laws Ann. ch. 112, sec. 85 (West 2003) (authorizing the board to adopt, promulgate, and

enforce regulations). For purposes of these regulations, a ?pre-need funeral contract? is defined as ?any pre- need

funeral services contract or pre-need funeral arrangements contract, entered into in advance of death?. Mass. Regs.

Code tit. 239, sec. 4.01 (2003). A ?pre-need funeral services contract?, in turn, is:

any written agreement whereby a licensed funeral establishment agrees, prior to the death of a named

person, to provide specifically-identified funeral goods and/or services to that named person upon

his/her death, and which is signed by both the buyer and a duly authorized representative of the

licensed funeral establishment. [Id.]

Similarly, ?pre-need funeral arrangements contract? means:

any written arrangement between a licensed funeral establishment and another person which establishes

a source of funds to be used solely for the purpose of paying for funeral goods and/or services for a

named person, but which does not identify the specific funeral goods and/or services to be furnished to

that person. [Id.]

The regulations set forth the required contents of ?pre-need funeral contracts?. Mass. Regs. Code tit. 239, sec.

4.03 (2003). As pertains to funding, contracts are to contain the following:

A written acknowledgement, signed by the buyer, which indicates that:

1. The buyer has established a funeral trust fund pursuant to 239 CMR 4.00 and has received all

disclosures required by 239 CMR 4.06(3); or

2. The buyer has elected to purchase a pre-need insurance policy or annuity and has received all

disclosures required by 239 CMR 4.07(2); or

3. The buyer has tendered payment in full for all funeral goods and services specified in the contract and

has received satisfactory written evidence that those goods or services will be furnished at time of

death; or

4. The buyer has declined to select a funding method and has paid no money to the funeral

establishment; [Mass. Regs. Code tit. 239, sec. 4.03(1)(d) (2003).]

A ?funeral trust? within the meaning of the foregoing provision is ?a written [pg. 1972] agreement of trust whereby

funds are transferred to a named trustee with the intention that the trustee will manage and administer those funds

for the benefit of a named beneficiary and use those funds to pay for funeral goods and/or services to be furnished

to that named beneficiary.? Mass. Regs. Code tit. 239, sec. 4.01 (2003).

Cancellation rights likewise are specified in the regulations, as follows:

Any buyer of a pre-need funeral contract may cancel that contract and receive a full refund of all

monies paid, without penalty, at any time within ten days after signing said contract. After the

expiration of this ten-day ?cooling off period? a pre-need funeral contract may be canceled in

accordance with 239 CMR 4.06(8). [Mass. Regs. Code tit. 239, sec. 4.05(1) (2003).]

The referenced Mass. Regs. Code tit. 239, sec. 4.06(8) (2003) reads, in pertinent part:

The buyer who signed a pre-need funeral contract, or his/her legal representative, may cancel a preneed

funeral contract with a licensed funeral establishment at any time by sending written notice of

such cancellation, via certified mail, return receipt requested, to said funeral establishment. If a funeral

trust has been established to fund said pre-need funeral contract, and the licensed funeral

establishment is not the trustee, the buyer shall forward a copy of said notice of cancellation to the

named trustee of said funeral trust.

III. Contentions of the Parties

We turn now to the parties' contentions regarding application of the foregoing rules to petitioner's situation.

Petitioner contends that the payments received pursuant to preneed contracts are not includable in gross income

until the underlying funeral goods and services are provided. In support of this assertion, petitioner references three

alternative theories for exclusion. Petitioner's primary argument is that the payments constitute nontaxable deposits

under the reasoning of Commissioner v. Indianapolis Power & Light Co., supra. Additionally, petitioner maintains that

the amounts at issue should be characterized as trust funds akin to those excluded from income in cases such as

Angelus Funeral Home v. Commissioner, supra. Petitioner's third basis for its treatment of the payments is that even

if the amounts are found to be advance payments of income, rather than deposits or trust funds, their deferral is

appropriate under the exception established in Artnell Co. v. Commissioner, 400 F.2d 981 [22 AFTR 2d 5590] (7th

Cir. 1968), revg. and remanding 48 T.C. 411 (1967), to the general rule requiring immediate inclusion of

advances.

With respect to the section 6662 penalty, petitioner argues that the lines of cases cited above provide

substantial authority and reasonable cause for taking the position that the funds received for preneed contracts

were not income or property of petitioner.

In contrast, respondent contends that petitioner obtained dominion and control over the preneed funds at the time

of receipt such that the amounts are properly included in income as advance payments under the all events test.

Respondent further argues that each of the exceptions relied upon by petitioner is inapplicable on these facts.

Specifically, it is respondent's position that advance payments for services to be rendered by the taxpayer are not

the equivalent of a refundable security deposit or loan and, hence, are not controlled by the standards set forth in

Commissioner v. Indianapolis Power & Light Co., supra. Second, respondent emphasizes that petitioner's control over

the funds and the absence of any contractual or legal restrictions preclude treating the moneys as in trust. 5 Finally,

respondent alleges that petitioner cannot qualify for the limited Artnell Co. v. Commissioner, supra, exception to the

all events test where there exists no certainty as to when or whether petitioner will perform under the contracts.

In connection with the section 6662 penalty, respondent disputes petitioner's assertions of substantial authority

and reasonable cause. Respondent points particularly [pg. 1973] to the reporting by petitioner of interest on the

preneed payments, the choice to invest the funds in petitioner's name rather than in regulated trust accounts, and

the advice petitioner received from its accountant pertaining to the BayBank escrow account.

IV. Preneed Accounting

We first consider whether the preneed payments at issue should be treated as deposits governed by Commissioner

v. Indianapolis Power & Light Co., 493 U.S. 203 [65 AFTR 2d 90-394] (1990). The Supreme Court in Commissioner

v. Indianapolis Power & Light Co., supra at 210, established what is referred to as the ?complete dominion? test for

identifying those payments over which the taxpayer has such control as to render them income:

In determining whether a taxpayer enjoys ?complete dominion? over a given sum, the crucial point is not

whether his use of the funds is unconstrained during some interim period. The key is whether the

taxpayer has some guarantee that he will be allowed to keep the money. ***

Further, the answer to this inquiry ?depends upon the parties' rights and obligations at the time the payments are

made .? Id. at 211.

With respect to distinguishing between taxable advance payments and nontaxable deposits, the Supreme Court

further explained:

An advance payment, like the deposits at issue here, concededly protects the seller against the risk

that it would be unable to collect money owed it after it has furnished goods or services. But an

advance payment does much more: it protects against the risk that the purchaser will back out of the

deal before the seller performs. From the moment an advance payment is made, the seller is assured

that, so long as it fulfills its contractual obligation, the money is its to keep. Here, in contrast, a

customer submitting a deposit made no commitment to purchase a specified quantity of electricity, or

indeed to purchase any electricity at all. IPL's right to keep the money depends upon the customer's

purchase of electricity, and upon his later decision to have the deposit applied to future bills, not merely

upon the utility's adherence to its contractual duties. ***

***

It is this element of choice that distinguishes an advance payment * * * The individual who makes an

advance payment retains no right to insist upon the return of the funds; so long as the recipient fulfills

the terms of the bargain, the money is its to keep. The customer who submits a deposit to the utility

*** retains the right to insist upon repayment in cash; he may choose to apply the money to the

purchase of electricity, but he assumes no obligation to do so, and the utility therefore acquires no

unfettered ?dominion? over the money at the time of receipt. [Id. at 210- 212; fn. ref. omitted.]

This Court, in applying the reasoning of Commissioner v. Indianapolis Power & Light Co., supra, has similarly

emphasized the importance of which party controls the conditions under which repayment or refund of the disputed

amounts will be made. See, e.g., Herbel v. Commissioner, 106 T.C. 392, 413-414 (1996), affd. 129 F.3d 788

[80 AFTR 2d 97-8172] (5th Cir. 1997); Highland Farms, Inc. v. Commissioner, 106 T.C. 237, 251-252 (1996);

Kansas City S. Indus., Inc. v. Commissioner, 98 T.C. 242, 262 (1992); Michaelis Nursery,

WEEK 3 RESEARCH PROJECT (Set #1) ACCT 429 DeVry University IMPORTANT NOTE TO STUDENTS This assignment is being distributed solely for your use in completing the Week 3 project in DeVry University's online Accounting 429 class. This assignment is an individual assignment, and you are to complete it without any outside assistance by any other student, individual, or outside materials, other than those specifically permitted by the problem. Any violations of these requirements will be addressed as an academic integrity violation. Similarly, this assignment may not be shared with any other student at any time, even after your completion of the course. Students to do so may be subject to sanctions pursuant to DeVry's academic integrity policy, even though they may no longer be enrolled in Accounting 429. Week 3 Research Project (Set #1) DeVry University Acct 429 Performing tax research is an important part of tax practice. As outlined in Chapter 2 of your textbook, tax law is developed through a number of different governmental entities. Congress enacts the tax Code as statutory law. The Treasury Department is tasked with the implementation of the tax Code and, in the course of doing so, develops a number of documents and materials to aid taxpayers in understanding the Treasury Department's interpretation of the code, including the Regulations. In turn, the Internal Revenue Service ("IRS\") has the direct responsibility for implementing the tax Code and in assessing and collecting the applicable tax from taxpayers. In the course of its duties, it also develops a number of materials, including Revenue Rulings, Revenue Procedures, and Private Letter Rulings, in which