Tax Legal Services · Primary-source case analysis

Indianapolis Power: Refundable Customer Deposits Were Not Income on Receipt

By Aneeta Mishra and Timothy Chan

Published May 4, 2026 · Updated October 18, 2026

Decision: Comm’r v. Indianapolis Power & Light Co., 493 U.S. 203 (1990).

Commissioner v. Indianapolis Power & Light focuses the income-timing inquiry on who controls whether the recipient may keep the money, not merely whether the recipient obtains an immediate economic benefit.

The utility required credit-security deposits

Indianapolis Power required certain customers to deposit roughly twice an estimated monthly bill. It paid interest, refunded deposits when service ended or credit improved, and could apply them to unpaid bills after default or at a customer’s election.

Economic benefit was not enough

The deposits were not segregated, and the utility could use the cash. Neither that immediate benefit nor interest paid to customers settled the question. Interest might support a loan comparison, but the controlling inquiry remained the rights and repayment obligations when the money arrived. Income earned from using the funds remained taxable even though the deposit principal was not income on receipt. Indianapolis Power, 493 U.S. at 207–210. The decisive question was whether the utility had complete dominion over the funds when paid.

The customers controlled the repayment condition

A depositor did not commit to buy electricity and could recover the principal by terminating service or satisfying the credit test. Because the customer retained the option to demand a refund by ending service, the utility’s right to keep or apply the money depended on events outside its control, making the deposits non-taxable security rather than advance payments.

Payment terms determine timing

The Court affirmed exclusion on receipt. A similar label does not control every transaction: contracts, refund rights, customer elections, restrictions, course of performance, and later application of funds must be examined to distinguish a deposit, loan, advance payment, or current income.

Key takeaways

• Ask who controls whether the recipient may keep the funds.
• Document refund obligations and customer elections.
• Distinguish security deposits from prepaid goods or services.
• Track when contingencies lapse and income recognition may occur.