COMMISSIONER OF INTERNAL REVENUE, PETITIONER V. INDIANAPOLIS POWER & LIGHT COMPANY No. 88-1319 In the Supreme Court of the United States October Term, 1988 On Petition for a Writ of Certiorari to the United States Court of Appeals for the Seventh Circuit Reply Brief for the Petitioner Respondent contends that the decision below does not warrant review by this Court because there is no "irreconcilable conflict" (Br. in Opp. 5) between this case and City Gas Co. v. Commissioner, 689 F.2d 943 (11th Cir. 1982). Respondent maintains that, because of "factual distinctions" (Br. in Opp. 5) between the two cases, the apparently contradictory results reached by the courts of appeals are in fact consistent. This contention is completely without merit, and, indeed, an almost identical contention has already been rejected by the Tax Court. Rather, as we maintained in the petition, the legal standards applied by the Seventh Circuit and the Eleventh Circuit to the question presented here are in direct conflict. Unless this Court grants certiorari, similarly situated taxpayers will receive different tax treatment on this significant issue depending upon the circuit in which they are located. As we explained in the petition (at 10-11), the legal principles relied upon by the Eleventh Circuit are flatly inconsistent with those adopted by the court below. The Eleventh Circuit held in City Gas that a deposit intended to secure the payment of future income must be treated as a prepayment of income; by contrast, a security deposit is not a prepayment of income if it is paid to secure the performance of nonincome-producing covenants. See 689 F.2d at 946, 948. The court below rejected this dichotomy and held that a deposit intended as security -- whether for an income item or a nonincome item -- should not be treated as income upon receipt (see Pet. App. 9a, 11a, 16a). Moreover, the court below found that the payment of interest on the deposit is an extremely strong indicator that it should not be treated as income upon receipt (Pet. App. 14a-15a, 17a n.12), whereas the Eleventh Circuit stated that the payment of interest is of little significance in this context (see 689 F.2d at 948 n.7). Indeed, both the court below (see Pet. App. 11a, 15a n.11, 18a n.13) and the Tax Court (id. at 33a-34a) recognized that it was necessary to reject the City Gas analysis in order to rule for respondent. Respondent argues that the result below and the result in City Gas are reconcilable because of the "(m)ajor factual distinctions" (Br. in Opp. 5) between the two cases. Respondents identify two distinctions -- (1) the deposits in City Gas were collected from all new customers, whereas the deposits in this case were collected only from customers whose creditworthiness was questioned; and (2) the deposits in City Gas were held until the customer terminated service and were then applied against final bills, whereas in this case the deposits were sometimes refunded prior to termination of service. See also Amicus Br. 1-3. /1/ These differences are not material to the analysis in City Gas, which turns on whether the deposit was intended to secure the payment of future income, and therefore there is no basis for suggesting that the Eleventh Circuit might have decided City Gas differently if the facts had been like those of the instant case in these two respects. Indeed, as we noted in the petition (at 6 n.4, 11), the Tax Court has already rejected an almost identical effort to distinguish City Gas, finding in a case appealable to the Eleventh Circuit that the factual differences identified by respondent are not material. Gas Light Co. v. Commissioner, 55 T.C.M. (P-H) Paragraph 86,118 (1986), involved the tax treatment of customer deposits made to a utility that provided natural gas to both commercial and residential customers in the Columbus, Georgia, area. Because the case was appealable to the Eleventh Circuit, the parties did not dispute that the Tax Court was bound to follow City Gas (55 T.C.M. (P-H) at 489). The taxpayer argued, however, that its case was factually distinguishable from City Gas because it required deposits only from customers whose creditworthiness was not established, not from all customers, and because in some cases the deposits were refunded before termination of service (see 55 T.C.M. (P-H) at 487, 489). These are precisely the same factual distinctions upon which respondent relies. The Tax Court, however, found that "(t)hese distinctions do not make a difference" (id. at 490) because they do not suggest that "the primary purpose of the customer deposits is as security against property damage or for performance of nonincome-producing covenants" (ibid.). Accordingly, the Tax Court held that City Gas required the deposits to be treated as advance payments of income (ibid.). /2/ Thus, the Tax Court's own decisions confirm that there is a direct conflict between the Seventh Circuit and the Eleventh Circuit, requiring the Tax Court to treat similarly situated taxpayers differently. Hence, a decision by this Court is necessary if there is to be a uniform nationwide rule of decision on the question presented in this case. For the foregoing reasons, and those stated in the petition, the petition for a writ of certiorari should be granted. Respectfully submitted. WILLIAM C. BRYSON Acting Solicitor General APRIL 1989 /1/ Respondent also notes (Br. in Opp. 5) that two of the three companies involved in the City Gas case did not pay interest when they refunded deposits, but this observation is manifestly irrelevant. The court of appeals in City Gas found that all of the companies -- including the one that paid interest -- were required to treat their deposit receipts as prepayment of income. Indeed, the Eleventh Circuit specifically addressed the question of interest, finding that it is of little importance in this context (689 F.2d at 948 n.7). /2/ The Tax Court has noted subsequently that it regards the Gas Light case as of little precedential value for cases not appealable to the Eleventh Circuit because the decision there was reached only under compulsion of the City Gas precedent, which the Tax Court rejected in its decision in the instant case. See American Telephone & Telegraph Co. v. Commissioner, Tax Ct. Mem. Dec. (P-H) Paragraph 88,035, at 209 & n.6 (Feb. 3, 1988).