United States v. Skelly Oil Co.
22 L. Ed. 2d 642, 1969 U.S. LEXIS 3276, 394 U.S. 678 (1969)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
When a taxpayer repays an item of income that was included in gross income in a prior year under the claim-of-right doctrine, and on which a percentage depletion deduction was taken, the deduction allowable in the year of repayment must be reduced by the amount of the depletion deduction attributable to the refunded income.
Facts:
- Skelly Oil Co. is an Oklahoma producer of natural gas.
- Between 1952 and 1957, Skelly Oil Co. set its prices in accordance with a minimum price order from the Oklahoma Corporation Commission.
- During these years, Skelly Oil Co. included the receipts from these sales in its gross income.
- On this gross income, Skelly Oil Co. claimed and was allowed a 27.5% percentage depletion deduction, which reduced its taxable income.
- In 1958, a Supreme Court decision vacated the state price order, causing Skelly Oil Co. to be subject to claims from its customers for overcharges.
- As a result, in 1958, Skelly Oil Co. refunded $505,536.54 to two of its customers to settle these claims.
Procedural Posture:
- Skelly Oil Co. deducted the full refund amount on its 1958 tax return.
- The Commissioner of Internal Revenue disallowed the portion of the deduction corresponding to the prior depletion allowance and assessed a tax deficiency.
- Skelly Oil Co. paid the deficiency and filed a claim for a refund, which was disallowed.
- Skelly Oil Co. sued the United States for a refund in the U.S. District Court for the Northern District of Oklahoma (a federal trial court).
- The District Court entered judgment for the United States.
- Skelly Oil Co., as appellant, appealed to the U.S. Court of Appeals for the Tenth Circuit.
- The Court of Appeals, with Skelly Oil Co. as appellee, reversed the trial court's decision.
- The United States, as petitioner, was granted a writ of certiorari by the U.S. Supreme Court.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does the annual accounting principle require that a taxpayer, who must refund income on which it previously took a percentage depletion deduction, be allowed to deduct the full amount of the refund in the year of repayment, even though a portion of that income was effectively untaxed?
Opinions:
Majority - Mr. Justice Marshall
No. The annual accounting concept does not require allowing a deduction for refunding money that was not taxed when received. The Internal Revenue Code should not be interpreted to allow the practical equivalent of a double deduction. The taxpayer, Skelly Oil, received a tax benefit in the years of receipt through the 27.5% percentage depletion allowance, which effectively exempted that portion of the income from tax. Allowing a full deduction in the year of repayment for the entire amount refunded would mean the taxpayer gets a deduction for repaying money on which it never paid taxes. Citing the principle from Arrowsmith v. Commissioner, the court must look at the nature of the prior transaction to determine the tax consequences of the later one. Therefore, the deduction allowable in the year of repayment must be reduced by the percentage depletion allowance claimed in the years of receipt to prevent an inequitable tax windfall.
Dissenting - Mr. Justice Douglas
Yes. The court should not engage in judicial tax reform to correct perceived inequities in the tax code. The tax laws are inherently complex and often arbitrary, and it is the role of Congress, not the judiciary, to correct them. The language of Section 1341 is plain, and the taxpayer followed it literally. The Court of Appeals' straightforward interpretation of the statute was correct, and any resulting 'inequity' is a matter for the legislative branch, specifically the Joint Committee on Internal Revenue Taxation, which is designed to oversee and propose revisions to the tax system.
Dissenting - Mr. Justice Stewart
Yes. The majority's decision violates the settled principles of annual accounting specifically codified by Congress in Section 1341. The statute allows a deduction for an item previously included in 'gross income,' not 'taxable income.' The percentage depletion taken in prior years is a separate, statutorily granted deduction, wholly unrelated to the business loss deduction for the refund in the current year. The Court's 'double deduction' theory is misapplied and creates a new rule requiring the re-computation of past tax consequences, which is precisely what the annual accounting principle is meant to prevent. This logic could be extended to wrongly reduce refund deductions for any taxpayer who had previously taken income-based deductions like the standard deduction or charitable contributions.
Analysis:
This decision establishes an important limitation on the annual accounting principle in the context of the claim-of-right doctrine. It prioritizes preventing a tax windfall over a rigid, formalist application of year-by-year accounting. The Court extended the transactional approach of Arrowsmith, which linked the character of a repayment to the original transaction, to also affect the amount of the deduction. The ruling ensures that a deduction for a repayment cannot include income that was effectively tax-exempt when received due to a specific provision like percentage depletion, thus preventing what the court viewed as a 'double benefit'.
