MEMORANDUM

CenterPoint Energy Corporation

TO:
Jennifer Brooks
FROM:
Adam Gajewski
DATE:May 2, 2016
RE:
CenterPoint Energy Corp./Deposit Proposal Tax Consequences
______________________________________________________________________________
FACTS
Like any shrewd corporation, CenterPoint Energys upper management is concerned about an
increase in the companys bad debt accounts. To combat this growing problem, management is
considering demanding a $100 cash deposit for every new customer before CenterPoint provides
them with electric service. However, after 12 months of making timely payments, the $100 deposit
would be returned to the customer, without interest. The deposit would help protect the company
from incurring bad debts, because if service is terminated before the deposit is returned, the deposit
will be applied against any outstanding balance still due. Additionally, a customer must anticipate
purchasing, at a minimum, $100 of electricity when they open up an account, otherwise they forfeit
the difference between the amount purchased and the $100 deposit. If a customer is owed a refund,
the company will conduct due diligence to find the customer, but the company may keep the refund if
the due diligence proves unsuccessful and two years have elapsed since the end of service.
ISSUE
Should these $100 payments be treated and accounted for as advance payments for services or just
simply deposits?
CONCLUSION
The specific facts and circumstances are of particular importance when the IRS is deciding how to
treat these initial deposits. In this case, the deposit is refundable back to the customers as long as they
make 12 consecutive payments. It is the customers, not the company, who control whether or not
their deposits will be returned, therefore, the deposit acts more like a loan than it does an advanced
payment. This control factor the customers have is the reason CenterPoint will be able to classify
these pre payments as deposits and not pay any tax on them.
ANALYSIS
Multiple utility companies have brought very similar cases against the IRS arguing about the
classification of these kinds of deposits, and it took a while for a clear rule to take hold. For example,
in the case of City Gas Co. of Florida v. Commissioner [82-2 ustc 9643 ], 689 F.2d 943 (11th Cir.
1982), City Gas Co. of Florida gave 4% interest plus the deposits back to its customers, but it still
needed to classify the initial payments from customers as advance payments. The court ruled this way

because they said primary purpose of the deposit was to secure the future payment for goods or
services to be provided by the deposit recipient.
However, in a later case of Commissioner v. Indianapolis Power & Light Co [90-1 USTC 50,007],
U.S. Supreme Court, (Jan. 9, 1990), the Supreme did not apply the same logic that the 11 th Circuit
used in the City Gas Co. case. The Supreme Court examined the facts and circumstances surrounding
the case to determine whether or not customer deposit was an advanced payment or security deposit.
In this case, if the customers paid their bill for either 9 consecutive months or 10 out of 12 months,
they would automatically receive their refund, plus interest. This refund could be in cash or applied
against any future bills. The Supreme Court affirmed the judgement of the Court of Appeals and
ruled in favor of Indianapolis Power & Light (IPL). They recognized that because the customer is
the one who is in control of if they receive the refund by satisfying the payment requirements, then
the deposit acts more like a loan than an advanced payment. IPLs right to retain the money was
outside of its control, and the refunds were guaranteed upon the payment contingencies. Therefore,
the customer deposits would not qualify as taxable income at the time they were made.
Having two contradicting case outcomes, the 11th Circuits rule in the City Gas case and the 7th
Circuits rule in the Indianapolis Power & Light Case, the Supreme Court granted certiorari to IPL,
as noted above. The Supremes ruling became the new precedent that all cases thereafter need to
follow. For CenterPoint Energy, it does not matter that the company neither pays any interest back on
the deposits, nor is it material that customers are contracting that they will purchase a minimum of
$100 of electricity. CenterPoints customers are the parties who are in control of whether they
receive their refund or not. Like the Supreme Court case above, CenterPoints right to retain the
deposit is contingent on events outside of its control (Commissioner v. Indianapolis Power &
Light Co). However, as stated in the facts, CenterPoint does have a right to retain the deposit when
two years have passed, should its due diligence efforts to locate the customer fail. In cases where that
happens, then the deposit may look more like a payment for service than a loan. Therefore,
CenterPoint should be able to follow the previous precedent set by the Supremes and classify the
customers initial $100 deposit as a security deposit rather than an advanced payment, which would
greatly reduce the companys tax burden. However, if two years have passed and CenterPoint retains
any deposit from customers it cannot find, then it will need to classify those deposits as income and
pay taxes on it. Revenue procedure 91-31, 1991-1 CB 566 should be referenced for any further
questions should CenterPoint need to modify any of its current treatment for customer deposits to
comply with the above Supreme Court decision.
Ts is the technical part of the memo where you discuss the relevant authority you are
relying on to reach your conclusion.
Use same general order of discussion as indicated above for the conclusion.
In longer memos, this part should be broken into subheadings. If more than a couple
of subheadings, should use an outline format for the subheadings.
You need to discuss the authorities in enough detail so the reader understands its
applicability to your conclusion. Not all authority will require the same level of discussion.