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Washington Law Review

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Abstract

In the years 1952 through 1957 the Skelly Oil Company received $505,536.54 from two customers due to a raise in the minimum price for natural gas by the Oklahoma Corporation Commission. In 1958 the Company was required to refund this money due to a vacation of the increased rates by an order of the United States Supreme Court. The Company had included the amounts received in gross income for income tax purposes during the years of receipt in conformance with the claim of right doctrine, whereby amounts received by a taxpayer who claims an unrestricted right to them must be reported as income in the year received. The entire amounts had qualified for the 27 ½% oil depletion deduction authorized by section 613, which had been taken in prior years. In 1958, when it was determined that the receipts had to be returned to the two customers, Skelly Oil Company deducted from gross income the full amount refunded on its 1958 income tax return, stipulating that it was using the deduction available under I.R.C. section 1341 (a) (4). The commissioner determined that the proper amount of the deduction in 1958 should have been $366,513.99, the amount refunded less the amounts previously deducted as percentage depletion, instead of the full $505,536.54. The commissioner was upheld by the District Court, but the Tenth Circuit reversed. The Supreme Court granted certiorari. Held: Where the taxpayer has overcharged its customers and has taken depletion deductions on the overcharges, then any deduction for a subsequent refund of the overcharges must be reduced by the amount of the depletion previously taken. United States v. Skelly Oil Company, 394 U.S. 678 (1969).

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