United States v. Skelly Oil Company

PETITIONER: United States
RESPONDENT: Skelly Oil Company
LOCATION: Union Free School District No. 15

DECIDED BY: Warren Court (1967-1969)
LOWER COURT: United States Court of Appeals for the Tenth Circuit

CITATION: 394 US 678 (1969)
ARGUED: Jan 15, 1969
DECIDED: Apr 21, 1969

Facts of the case


Media for United States v. Skelly Oil Company

Audio Transcription for Oral Argument - January 15, 1969 in United States v. Skelly Oil Company

Earl Warren:

Number 280, United States, petitioner versus Skelly Oil Company.

Mr. Solicitor General.

Erwin N. Griswold:

Mr. Chief Justice and may it please the Court.

This is a federal tax case here on a writ of certiorari from the United States Court of Appeals for the Tenth Circuit.

Although it is a tax case, it is a sequel or consequence of a decision rendered by this Court in 1958 in Wisconsin Pipeline Company against the Corporation Commission of Oklahoma where this Court held that the Corporation Commission of Oklahoma had no power to fix minimum rates for the sale of gas.

The respondent taxpayer here produces and sells natural gas.

During the years 1952 through 1957, it charged its customers, those increased rates pursuant to the order of the Oklahoma Corporations Commission.

Naturally, the amounts which it received were income to it.

They entered into the computation of the “gross income from the property” against which it took in each of those years, 1952 to 1957 a deduction of 27.5% as percentage depletion pursuant to Section 613 of the Internal Revenue Code.

There's no doubt that it was entitled to this deduction for depletion as it clearly receive the gross income under a claim of right that the statute provided that where income is received from oil and gas, there is a depletion deduction.

A taxpayer has his option to take either cost depletion or percentage depletion.

In this case, percentage depletion was advantageous and that was what was taken.

Following this Court's decision in the Pipeline case, and the respondent was sued by several of its customers on the ground that they had been overcharged.

And it promptly having no defense to that case in 1958, it settled that controversy with two of them and paid to them an aggregate of $505,536.00 in 1958 and it is the company's tax year 1958 and only that year which is before the Court.

The question is the consequence or the way in which it should be treated of that repayment made in 1958.

The taxpayer deducted the repayment in full.

We say that the deduction allowed in 1958 should be reduced by the amounts previously allowed as deductions for percentage depletion in the years 1952 through 1957, that is by 27.5% and that is the issue to which I will return after the recess.

Earl Warren:

We'll recess now.

Erwin N. Griswold:

As I was saying before the recess, this case involves two payments aggregating $505,000.00 made by the respondent in 1958 which represented repayments of excess charges for gas which it had sold in the years 1952 through 1957 for which it had received payment and against which payments it had deducted the statutory percentage depletion in the amount of 27.5%.

Taxpayer's contention is that it is entitled to deduct the entire amount of the repayments made in 1958 despite the fact that depletion had already been deducted with respect to them.

There is some discussion in the briefs as to whether this deduction is under the deduction for a loss or the deduction for business expense as suggestion made that the Government has changed its ground on that.

I do not think that that is the case.

The stipulation in the matter on page 18, the last line of the page in the appendix simply says that they took a deduction but I spend no time on this because I do not think it is important or of any consequence in any event.

The District Court agreed with the Government's argument and entered judgment for the Government based on the position that the deduction for 1958 should be reduced by the amount of percentage depletion which had already been allowed as a deduction with respect to the payments.

On appeal, the Court of Appeals for the Tenth Circuit reversed.

It then granted the Government's petition for rehearing but after the rehearing, the Court adhered to its earlier decision by a two-to-one vote, Judge Hill writing an extensive dissenting opinion.

Now, with respect to the law, I think that it can fairly be said that what is really involved here is basic questions of proper tax accounting and it was because of the undesirability of having clear principles already established by this Court made confusing that we felt that it was important to seek a review here.

The case also involves Section 1341 of the Internal Revenue Code and I'll turn to that in a moment.

I think it's fair to say though that even though Section 1341 must be considered, the proper conclusion is that on consideration, one could come to the conclusion that Section 1341 is in fact bypassed in this case and that the case should be decided exactly as it would be decided if Section 1341 had never been enacted.

Now, the relevant portion of Section 1341 is set out on pages 10 and 11 of our brief.