A gas utility had unexpected income from demand-side management programs.

People’s Gas System set up a number of energy conservation programs as required by Florida law with the aim of reducing electricity and oil consumption. For example, it paid builders to install gas appliances in new houses. It subsidized the purchase of new appliances that are more energy efficient than the ones they are replacing. The Florida Public Service Commission let the utility raise funds for the program by building an extra charge into utility rates. The utility was barred from separately stating the charge on customer bills. However, the utility collected the funds subject to a statutory obligation to spend them only for this purpose, and it was required to refund any money not used on the program to ratepayers. It kept separate records, but the funds were not physically segregated in separate bank accounts.

The utility argued it was merely a conduit for the receipts. The IRS said they were income. The US Tax Court agreed with the IRS in March.

The court said to avoid income, the utility would have had to put the money in a trust subject to a restriction that it be spent only for a particular purpose, and the utility would have had also to show that it did not profit, gain or benefit from the spending. People’s Gas failed on both counts. There was no trust, and the utility benefited from the spending since the program tended to increase its rate base, number of customers and sales.