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.