TAX RESEARCH EXERCISE 3

ACCT 5135
Naples Spring 2016
General Introduction
The prior Research Exercises in this course have given you a general knowledge of some of the tax
authorities and resources available to the tax practitioner. Now were going to apply that knowledge
to try and answer a particular problem.
You have learned a number of ways to use the resources in CCH Intelliconnect and BNA Tax
Management Portfolios. Regrettably which resource and method is more efficient depends on the
research problem and comes largely from experience. If you dont feel comfortable with your
research/analysis using key word searching try an alternative method or the other resource.
Remember links to both CCH Intelliconnect and BNA Tax Management Portfolios are provided
through Moodle.
This research exercise requires you to write a short tax memo. It is targeted at 1 - 2 pages (but
could be slightly more or less). What makes a short memo is a limited number of authorities that
you need to discuss. In this case there is one key case that should be the focal point of the memo.
You should have sufficient background from this course to research and understand the issue.
Remember most issues (of which this is one) are factually-based, meaning that as you change
the particular facts of the problem the answer may change. Therefore the bottom-line
conclusion of a case isnt as important as the analysis and reasoning behind it to be applied to future
situations. The idea is to recognize both the key factual similarities and differences between the key
authority and your facts and try to determine if the court had your facts whether they would have
reached the same or a different conclusion based on its reasoning.
The memo should be written in the format you may download from the course site (there is both a
memo example and a memo format to help you). The memo should also be clear and concise. The
key case should be discussed in enough detail to enable the reader to see its significance and its
application to the facts as presented. Make sure you are citing correctly. See Guide to Proper
Citations on Moodle for proper citation form.
This last tax research exercise counts for 20 points toward final grade. If you have any questions,
email my teaching assistant (Joseph Birkett [birke070@umn.edu) or see him when he is in the
CSOM lab in L-112 (hours will be announced in class and posted on Moodle).

Working in Groups
You may work in groups to do the research and analysis portion of this assignment, provided that
each person makes a significant contribution to the assignment. However, each person must turn
in their own memorandum with their own writing and analysis. In other words, you may do the
research together and discuss what the correct answer is and why, but then each person must go
write their own memorandum. If you have any questions on this, see your instructor.

RESEARCH EXERCISE #3
ACCT 5135
Naples Spring 2016
MEMORANDUM
CENTERPOINT ENERGY CORPORATION
TO:
FROM:
DATE:
RE:

[Insert your name], Tax Analyst

Jennifer Brooks, Director of Tax
April 6, 2016
Deposit Proposal/Tax Consequences

Upper management has been concerned with an increase in the Corporation's bad debt accounts.
They are considering asking the rate commission for authority to require a $100 cash deposit for
every new customer before commencing electric service. The deposits will not be segregated or
placed in escrow, but will go into the Company's general funds. After one year of timely payments,
the deposit would be returned to the customer, either directly or by crediting their account to be
applied against future electricity use. No interest would be paid to customers on these deposits.
If service is terminated before a refund is made, the deposit will be applied against any outstanding
balance due. Any deposit amounts over the outstanding balance on a terminated account will be
refunded within 30 days. However, no refund will be due to the extent that total electricity
purchased was less than $100 from the opening of the account. In other words, customers contract
to purchase a minimum of $100 of electricity when opening an account, and if they dont, they
forfeit the difference (this is to offset the cost of setting up an account and hooking the customer
up). If a refund is due, the Company will conduct due diligence efforts to find former customers
who are owed some or all of their deposits. However, if such due diligence efforts are unsuccessful,
the Company will have all rights to such deposits after a period of two years from termination of
service.
An issue has been raised as to the tax treatment of these deposits. Specifically, would these
payments be treated as advance payments for services rather than deposits. I am aware of a long
line of cases (Schlude, AAA, etc.) that hold that advance payments for services are prepaid income
and currently taxable. On the other hand, I know that mere security deposits are not currently
taxable.
Please research this issue to determine if there is any authority which we can rely upon. Upper
management thought there were other utilities which had similar programs, but weren't sure how
they were treating any deposits for tax purposes. I will need an answer by May 2 in Memorandum
format from you to me that I can pass on to the VP of Finance.