United States v. Skelly Oil Co.
394 U.S. 678 (1969)

  • From 1952 to 1957, Skelly had been overcharging customers for oil. In 1958, after a court decision, they settled all the claims and repaid about $550k to their customers.
    • During those years, Skelly had claimed tax writeoffs due to depletion (under 26 U.S.C. 613), and so they only paid tax on the equivalent of $366k, not the full $550k.
  • When they filed their 1958 taxes, Skelly claimed a deduction of $550k for the repayment. The IRS disagreed.
    • Skelly argued that they had reported too much ordinary income, and now they were refunding it, so they should get an ordinary deduction.
    • The IRS argued that since Skelly had only paid taxes on $366k, they could only take a deduction of $366k.
      • Basically, Skelly's income was preferentially taxed, and when you refund preferentially taxed income, you should only get a deduction based that preferential rate.
  • The Trail Court found for the IRS. Skelly appealed.
  • The Appellate Court reversed. The IRS appealed.
  • The US Supreme Court reversed and found for the IRS.
    • The US Supreme Court looked to Arrowsmith v. Commissioner (344 U.S. 6 (1952)), which held that if money was taxed at a special lower rate when received, the taxpayer would get an unfair tax windfall if repayments were deductible from receipts taxable at the higher rate applicable to ordinary income.
    • The Court found that this case was identical. Skelly received a specially lower tax rate because of 613, and so when they had to repay the money they earned at that special lower tax rate, they could only claim a loss at the same lower tax rate.