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
Skelly argued that they had
reported too much ordinary income,
and now they were refunding it, so they should get an ordinary
The IRS argued that since
Skelly had only paid taxes on $366k, they could only take a deduction of
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.