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

United States v. Skelly Oil Co.

No. 280

Argued January 15, 1969
Decided April 21, 1969
394 U.S. 678

CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE TENTH CIRCUIT

Syllabus

Respondent, a natural gas producer, in 1958 refunded $505,536 to two customers for excess amounts it had collected during the previous six years under a minimum price order which this Court subsequently invalidated. In its tax returns for those years, respondent included that sum in its gross income and it also included that amount in its "gross income from the property," which § 613 of the Internal Revenue Code of 1954 makes the basis for the 27 1/2% depletion allowed upon the production of oil and natural gas. Respondent’s actual increase in taxable income attributable to the receipts in question was thus $36,513. However, in its tax return for 1958, respondent attempted to deduct the $505,536, claiming that § 1341 permitted it to deduct the full amount of the overcharges refunded to respondent’s customers. Under that section, income which a taxpayer receives under a claim of right is included as gross income in the year of receipt, and, under § 1341(a)(4) (on which respondent relies here), a deduction may be claimed in the year of repayment. Section 1341 applies if (1) "an item was included in gross income for a prior taxable year (or years)" under a claim of right: (2) "a deduction is allowable for the taxable year because it was established after the close of such prior taxable year (or years) that the taxpayer did not have an unrestricted right to such item", and (3) the deduction exceeds $3,000. The Commissioner reduced the amount of the deduction by the 2 1/2% depletion allowance which respondent had taken in its returns for the years 1952-1957. Respondent paid the deficiency, and, after disallowance of its claim, instituted this action for a refund. The District Court upheld the Commissioner, but the Court of Appeals reversed.

Held: Under § 1341 of the Internal Revenue Code of 1954, the deduction allowable in the year of repayment must be reduced by the percentage depletion allowance granted respondent in the years of receipt as a result of the inclusion of the later-refunded items in respondent’s "gross income from the property" in those years, since Congress did not intend to give taxpayers, and the Code should not be interpreted as allowing, a deduction for refunding money that was not taxed when received. Pp. 680-687.

32 F.2d 128, reversed and remanded.